Servitization: the new manufacturing strategy

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Firms operating in the manufacturing sector are changing their strategies and are moving towards the services sector: firms sell products that are combinations of manufactured goods and services. For example, a firm that has always produced fridges now sells its products with a guarantee, i.e. a service. This new approach, called servitization, has several advantages, such as the possibility to differentiate products thanks to the supply of personalized services. Moreover, although the manufacturing sector is shrinking in the EU, the service sector shows great potential for growth and this strategy enables manufacturing firms to take advantage of the latter (see the previous article about servitization for data). I will shed further light on these aspects by examining several examples.

Let’s analyze Alstom, a well-known French group operating in the energy and transport industries. This company operates in around 100 countries and has a turnover of more than €20 billion. The Alstom Transport division undertakes train and signaling system design, manufacturing and aftercare services. Since the mid-1990s, it has been evolving from traditional manufacturer to services provider. Even though Alstom outsources up to 90% of components in rolling stock products, it continues to design and produce critical subsystems such as traction systems. In the last years, new activities linked to the services sector have become more relevant as they create high value added, such as systems integration and after-sales services. In 1998, Alstom created a Service Business as it wanted to take advantage of the huge potential of the rolling stock maintenance market. Today, Alstom Transport offers a package, called “TrainLife Services”, that provides services such as maintenance of the fleet, support for managerial and technical operations, improvement of performance and the extension of the life time of trains. If we have a look at the share of revenue generated by services, we can see that it is stable over time: 29% in 2001 and 26% in 2009. This means that services play an important role, but remain a secondary activity for Alstom.

Another key example is Rolls-Royce, a multinational company, based in England, and operating in four sectors: civil and defense aerospace, marine, energy and power systems. Rolls-Royce produces aircraft engines for more than 600 airlines worldwide. These are complex and expensive products containing 10,000 parts and costing several million euros. To avoid expensive unplanned maintenance due to engine problems, Rolls-Royce offers a package, called TotalCare®: it rents its engines to users, who pay according to the time span the engine is in flight. While the aircraft engines are used, Rolls-Royce collects and analyzes data. It allows the company to predict potential problems and to improve maintenance and the current production. A key element is that data can be collected during a flight, allowing Rolls-Royce to provide safety advice to pilots in case of danger. Thanks to this system, it is possible to check if it is safe to pursue the activity of an engine, saving costs on unnecessary maintenance. The impact of this strategic change is obvious if we analyze revenues from aftermarket sales: they rose from 20% in 1981 to 60% of revenues by 2007. Moreover, in 2010, 65% of all engines were covered by this package. However, selling TotalCare® is time consuming and requires a complex process because the contract is implemented at different levels in the customer organization. At the beginning, the costs related to this program were quite high, whereas nowadays they have decreased thanks to its success (learning economies). Concerning the importance of services, the share of revenues generated by them was 53% in 2006 and 49% in 2009. The role of services played in Rolls-Royce is significant despite a slight decline in terms of share of revenue.

Let’s have a look at Xerox, a multinational company that operates in the document services sector and offers related consulting services. Xerox changed its strategy when customers obviously diversified their demand in printing equipment. Hence, the firm started looking at the printing environment from a holistic viewpoint, providing services that would gain control over all aspects of printing and creating Managed Print Services. Xerox is still developing expertise on know-how in document management, business process and information technology outsourcing. In 2010, it acquired Affiliated Computer Services, a large business outsourcer, letting it focus on back-office operations such as HR, customer care and finance. This strategy has been a success for the company as services revenue grew by 6% from 2011 to 2012. Xerox provides several services to its customers, such as Hertz, an American car rental company. In this case, Xerox provides learning process solutions that include curriculum content, administration, learner care and support services. Another customer is Siemens Italy, a large multinational. Xerox removed old and inefficient printers and copiers and created a digital archive with a new interface, improving document control and reducing paper and energy wastage. Xerox also operates with public institutions, such as the European Patent Office that manages the application procedure to protect patents in 38 European countries. The results of this operation have been the installations of multifunctional printing devices, continuous remote monitoring and the setting up of a centralized online help desk providing multinational support.

The final example of a servitized firm is IBM, a large company producing computers, microelectronic technology, data storage devices, software, networking and related services. At the beginning of 1990, while IBM was collapsing, it changed its strategy by focusing on services. IBM started providing integrated solutions to business’s IT needs increasing the networked computing and transactions. This change was difficult to implement as it entailed to work on different platforms and company systems and this raised costs. However, thanks to its diversity and size, IBM became a one-stop service provider in all IT areas, giving it a strong competitive advantage. The company continued to bet on services, creating its Global Services division in 1995, which boosted expansion in services sector. By analyzing revenue distribution, we can see that in 1992 services made up 11%, whereas in 1997 it was 25%. In contrast, revenues from the sales of hardware, the previous core activity, were 53% in 1992 and 46% in 1997. In terms of profits, the share of services went up from 4% in 1992 to 13% in 1997, whereas the share of hardware decreased from 49% in 1992 to 41% in 1997. Moreover, in 2001, services and software were $35 billion while business $13 billion respectively, which accounted for 58% of the total revenues of IBM. This services-oriented trend has continued, as revenue in 2011 was $107 billion, with more than 90% coming from software, services and financing.

In conclusion, the firms, analyzed in this article, changed their strategies having understood the decline of their activities, manufacturing, and potential opportunities coming from a stronger inter-linkage with services. In fact, the companies have set services divisions in order to offer integrated combinations of products and services. Moreover, servitization allows firms to customize products in a better way through the implementation of new technologies and the provision of differentiated services-goods products.

Picture Copyright: Eddy Van 3000, Flickr

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