AUTHOR ARCHIVES: Christian Kowalkowski

Dr Christian Kowalkowski, Professor Of Industrial Marketing at Linköping University outlines how two of the biggest trends amongst manufacturers, digitalisation and servitization, are in essence two sides of the same coin and why digitalisation requires more, not less, service and customer centricity than ever before. 

The growing digital disruption is blurring industry boundaries and altering established positions of firms. While manufacturers are investing strategically in data gathering and analytics capabilities and in cloud-based platforms, many firms remain concerned about how to best address digital disruption and enable digitalisation.

Last year, General Electric cut expenses by more than 25% at its digital unit responsible for Predix, its software platform for the collection and analysis of data, which previously has been hailed as a revolutionary driver for Industry 4.0. This move highlights the difficulties involved in adopting digital technology in an industrial business. Having worked with B2B firms in diverse industries on designing and implementing service-growth strategies, I have seen both highly successful and unsuccessful cases of what I call ‘digital servitization.’

Why is it so that even many firms that run a profitable field service organisation struggle to implement digitally-enabled services?

Before looking at some key challenges, let us first define what we mean by digital servitization. As a start, we need to distinguish between digitisation, which means turning analogue into digital, and digitalisation, which refers to the use of digital technology to change the business model. A tech-savvy firm with a product-centric mindset may have little difficulty in implementing digitisation, as when record companies moved from selling LPs to CDs.

However, rather than embracing the new digital opportunities that changed the way we interact with music, most record companies then clung on to a product-centric business logic of selling CDs.

Instead of developing business models based on Internet distribution they promoted new physical media like the Super Audio CD. Ironically, their defensive stance—manifested in such things as copy protected CDs—forced many people to illegal downloading in order to conveniently access MP3 music, thereby undermining their product-centric model even further. Digital servitization, then, refers to the utilisation of digital technologies for the transformation whereby a company shifts from a productcentric to a service-centric business model.

Of course, digitally-enabled services are not new; for example, Rolls-Royce’s archetypal solution TotalCare begun in 1997 and BT Rolatruc (since 2000 part of Toyota Material Handling) created its software system BT Compass in 1993, to help its customers improve their performance. Digital technology can be a double-edged sword however. For example, many manufacturers have been carried away by the technical possibilities of telematics without having a clear service business model in mind.

Rather than crafting a compelling value proposition based on enhanced customer performance, it was tempting to give the service away for free with the hope that customers eventually would discover the value of data access and be willing to pay for it.

There are however at least three problems with such a technology-centric approach. First, as the connected installed base grows and the costs of collecting and managing data increase year by year, it becomes increasingly difficult to defend the model unless service sales start to materialise. Second, giving services away for free always reduce the perceived value of the offering in the eyes of the customer. Why should they pay for something that was previously free of charge and that competitors may still be treating as a commodity and giving away?

Third, customers typically do not have the time nor the skills to interpret and act on the data collected. The real value of Big Data only comes once it is processed. By collecting and analysing data from multiple customers, a supplier may know more about the customers’ equipment and operations then they know themselves, which creates opportunities for new advanced advisory services.

The digital dimension of service growth requires purposeful and coordinated effort. As we know, while manufacturing and conventional R&D activities can be centrally managed to achieve efficiency and standardisation, services require increased local responsiveness and closer customer relationships.

"The real value of Big Data only comes once it is processed..."

 

During digital servitization, however, the central organisation must take a more proactive leading role to ensure platform consistency and data quality, to provide the requisite data science skills, to support local units, and to address cyber security issues. The 2017 large-scale cyberattack (NotPetya) on Danish shipping giant Møller-Maersk, which shut down offices worldwide, illustrates the dangers of inadequately managing the latter issue.

A service manager at Toyota pointed out over ten years ago that service development “is very much IS/IT. Instead of sitting and discussing how to be able to quickly change oil in the truck, there has become very much focus on data.”

Viewing data as “the new oil” is a claim oftentimes heard. Like oil, data is a source of power. It is a resource used to power transformative technologies such as automation, artificial intelligence, and predictive analytics.

However, unlike oil, data also has other properties. We are currently seeing a shift from scarcity of information (data) to abundance of it. Data can be replicated and distributed as marginal cost, and competitive advantage can be achieved by bringing together new datasets, enabling new services. But this also creates new tensions between companies regarding the issues of generation, collection, and utilisation of data. If a customer is generating massive amounts of data that the supplier is collecting, once processed, it can be used for better serving also the customer’s competitors. In other cases, we are seeing completely new companies emerging and collecting data on behalf of their clients.

Digitalisation is beginning to have a profound impact on even the most stable businesses. Customers increasingly expect that a single provider will integrate the system of which the products are part, and that they will do so through one digital interface. Whether the platform provider is one of the established OEMs or a new software entrant might not matter. Competition may come from unexpected sources, as for example when one of the leading international standards organizations in the marine industry recently moved into platform-based services.

Oftentimes, the most formidable threat comes from disruptive innovators outside the traditional industry boundaries. An executive in a leading incumbent firm stressed that her main concern was not the competition from any established player. Instead, what kept her awake at night was the prospect of Amazon entering—and reshaping—the market. While many share the concerns of being overrun by new competitors, the threat is most imminent to those firms that lack service leadership and a clear road map for service growth.

To conclude, no firm can afford not to strategically invest in digitalisation. However, as firms compete in the digital arena, there is a risk that focus shifts too much away from service and customer centricity to new digital initiatives and units. Ten years ago, many executives sang the praises of servitization.

Today, digitalisation is the poster boy for business transformation. Given the rapid pace of innovation, it may be tempting to launch new concepts as soon as the technology is available, rather than waiting until the they have been properly piloted and customer insights gained. To reap the benefits, firms also need to understand the interplay between back end and front end, investing in both back-end development for enhanced efficiency and better-informed decision-making, and front-end initiatives to enable new services and closer customer integration.

Correctly designed and implemented, digital servitization provides benefits for companies, networks, and society at large. Successfully seizing digital opportunities, however, requires more, not less, service and customer centricity than before.

Dr Christian Kowalkowski is professor of industrial marketing at Linköping University, Sweden, and the author of Service Strategy in Action: A Practical Guide for Growing Your B2B Service and Solution Business. Find out more here. 

Servitization has been an increasingly widely discussed topic amongst the Manufacturing sector for some time now, but whilst an understanding of the why is becoming widely accepted, the how still remains a mystery for many.

Here Christian Kowalkowski and Wolfgang Ulaga coauthors of the book Service Strategy in Action go some way towards demystifying the path to servitization...

With growing digital disruption across industries, the emergence of new business models, and the mounting pressure to deliver better business outcomes for customers, much has been written about what servitization of industries means and why firms need to move into the service space.

Yet, in times where increasingly ‘everything’ is considered as a service, decision makers still need to understand how to master this profound transformation and decide which concrete actions they must take to carry out this change.

Roadmap for service growth

In our new book, Service Strategy in Action (S2iA), we show how to shift your business from a goods-centric model to a service-savvy one.

For over a decade, we have accompanied numerous firms on their journeys from focusing on manufacturing and selling products to providing services and customer solutions in a broad array of industries and markets. We distilled what we learned into a 12-step roadmap which provides clear directions for crafting a competitive service strategy and putting it into practice. We recognize that all companies have different starting points and goals for their service businesses, so we tailored the roadmap to make it possible for managers to focus on the most pressing issues.

When service-growth strategies work, the payoffs are impressive, and firms often discover that their new activities make more money than productsWhen service-growth strategies work, the payoffs are impressive, and firms often discover that their new activities make more money than products. But for every success story, numerous cautionary tales remind us that this move involves more than a few cosmetic adjustments.

Without giving this strategic initiative serious thought, and without methodologically managing the change process, our research has found that the transition is doomed to fail and companies struggle to turn a profit from their service growth initiative.

Our intention in this book is, therefore, to provide decision-makers with the tools they need to craft a competitive service strategy and put it into practice.

Readers can employ our proprietary 12-step roadmap and use methods and frameworks for each step in their own firms to navigate the transformation.

The first part of the roadmap tackles the very foundations of a service business: why to move into services and how to embed a true service-centric culture in your organisation.

The second part deals with strategic issues: how to drive change and align your service strategy with corporate goals, and determine if your company is “fit-for-service.” Then we discuss how to come to grips with implementation: how to make the most of your existing services, innovate and create value-added services and solutions beyond your products, and build the service factory.

Finally, we show how to build the structure needed: transforming your product-centric sales force into a service-savvy sales organization, designing an organizational structure that promotes service growth, and aligning your interests with distributors and partners.

Many firms profited from our hands-on approach.

For example, in one project with a forklift manufacturer, we worked on transforming short-term opportunities in revenues and profits.

Together with the company, we reviewed more than 80 “low-hanging fruits.”

In one project with a forklift manufacturer, we worked on transforming short-term opportunities in revenues and profits.During the project, we identified 22 service activities that the firm had been providing free of charge, but that offered notable opportunities for revenue generation.

Over a period of several months, the company moved 14 of these activities along the journey from free to fee. For example, the manufacturer started invoicing for on-site equipment diagnostics, an activity previously provided free of charge by service technicians during customer visits.

The diagnostic fees for each customer were relatively small, so customers were widely willing to pay. In one test market, 80 percent of customers accepted the fees, resulting in substantial additional revenues in the first year in which this single initiative was implemented in just one country.

The various free-to-fee initiatives that the forklift manufacturer adopted after attending our workshop collectively led to millions of euros in added revenues.

Building a true service culture

Once you understand why to move into service and what the main roadblocks are, consider the culture that supports successful service enterprises and how to venture into the service space. In working with managers in industrial and professional services companies, we have seen over the years that a strong service culture serves as a powerful enabler of successful service growth.

Product firms that neglect to assess culture often struggle to implement services, and sometimes abandon the effort.Product firms that neglect to assess culture often struggle to implement services, and sometimes abandon the effort. A company can burn a lot of energy trying to move forward with services if its culture is product-centric, because culture underpins the organization.

We have identified six misconceptions that are hurdles to transitioning from a product-centric to a service-savvy culture. Here are the hurdles, and the signs that you still need to jump over them:

1. A product-centric mind-set — Your marketing efforts focus on things that come in boxes. Your accounting system is designed for physical resources. R&D works on solutions that are objects. You compensate your sales team based on boxes moved.
2. An absence of deep customer insights — You are using a distributer network, and those channels – not you — have the close and valuable relationships with your customers.
3. A lack of understanding and using the co-creation concept. You still think value is created in your factory and you can’t see how customers can partner with you to co-create a service product.
4. The right rules are factory rules — You are uncomfortable with the new rules of service production that upset traditional factory values like standardization and quality control.
5. It’s all about CAPEX — You are focused on capital expenditures and selling customers equipment, rather than helping them solve operational challenges.
6. Working through channels — You have built a strong channel network, and you don’t want to think that it may be necessary to assume more control over channels – even owning them outright.

Making the move to services, then, is a process that starts with the culture at the very core of your business.

Changing culture is never easy, and understanding that fact improves a company’s chances of transforming their product-centric culture to service-focused culture.

Four stages mark the way. Not every company starts at the same point, so it’s useful to figure out where your firm is on the map, and what actions and initiatives will be required to move to the next step.

• Step One: The Service Desert – Many firms are what we call services-myopic. They are aware of service, but they see it as an after-sale addon.Firms deeply grounded in the service desert often consider providing spare parts or repairing equipment as a substantial part of their service business. This is a narrow focus view that obscures opportunities that could result in double-digit revenue growth.
• Step Two: The Dark Tunnel – A company ramps up investment in service, but results are slow. It’s a “bitter pill” experienced by many companies going through this transition. Decision makers must understand that a critical mass of services is needed before reaping benefits. A short-term focus only can lead to sacrificing long-term growth.
• Step Three: Promising Light – In this stage, companies that seized service opportunities early on are experiencing quick wins.Some firms emerge into this stage without even going through the dark tunnel. When it happens, welcome revenues turn up, and the proponents of the services transition have powerful evidence to persuade others across the organization.
• Step Four: Bright Landscape – This is the destination! The company has devoted sufficient resources and people top its cultural transformation, and the new service business is a source of profit and growth.

Would you like to know more? Please visit us on www.ServiceStrategyInAction.com To find out more and continue the conversation.

We are sincerely interested in your comments and reactions and hope that our book will initiate a fruitful dialogue among our community on this topic we all are so passionate about!

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