Avoid the Commodity Trap to Drive Service Growth

Many manufacturers invest a lot of time and resources in developing new (digital) capabilities and service offerings. However, they struggle to generate extra revenue from these. Clients are not willing to pay more for the latest offerings, and many competitors launch similar offerings.

Of course, this is frustrating. On top of that, executive stakeholders expect a return on investment and lose interest in service innovation. The successful industry leaders have transformed the way they innovate their service offerings. They escape from business-as-usual and create new customer value way beyond uptime and condition of the equipment.

The Problem: The Commodity Trap
Many manufacturers are looking for ways to thrive during the rapid and disruptive changes in their industries. One challenge is to embed new digital technologies, develop new digital capabilities and offer advanced service offerings.Too many manufacturers only develop advanced predictive and condition-based maintenance offerings. They struggle to increase revenues from these more advanced services. They are falling into the Commodity Trap. If you recognise this, you are not alone! This is one of the main concerns for many service leaders. So, what exactly is the Commodity Trap? (See image below).

In every industry, there is a long-lasting pattern of gradually and continuously improving performance like higher reliability, more features, easier to use and lower cost. A few common examples are:

1. The software on our laptops regularly gets a software update with new features and functions. We do not pay extra for these enhancements;
2. Cars become increasingly fuel-efficient every year, without becoming more expensive;
3. Reliability and uptime of machinery improves every year.

Although many of these ongoing improvements may protect your market position, they will not drive growth or secure future success in the longer run. Pretty much all suppliers in your industry develop and offer the same expected new improvements, features and benefits, without any differentiation in the eyes of clients. So why pay more for the solution?

The solution: Innovate Business-as-usual
It does not have to be like that. There are proven strategies to escape from the commodity-trap. The key of the solution is to innovate more radical, for new value beyond business-as-usual. The challenge is to identify and solve other problems and challenges of your clients, which have a higher impact and potential for your clients’ success than higher uptime of their equipment. Keep in mind that in most industries the total cost of financing, installing, insuring and maintaining equipment is only 5-15% of the total operating cost. The majority of the cost lay in human resources, energy and materials.

So, what are the most important “jobs to do” for your clients? What makes the difference between their success or failure? Think beyond uptime or equipment condition. For example, how can you help your clients to:

1. Improve overall efficiency and labour costs by improving the layout of their factories and the flow of products and staff;
2. Improve the quality of work by always choosing the right tools for the job;
3. Secure compliance of for example medical laboratories by developing processes, information systems and skills to make the chain of custody more robust;
4. Reduce energy consumption, like some truck manufacturers do by changing the way truck drivers operate the trucks; Reduce waste of raw materials by improving consistency and predictability of quality and hence reducing the volume of scrapped products.

How to do this?

Expand Customer Insight
Key is to expand your insights into your customers’ business and jobs with a broad perspective and deep understanding. This will help to reveal opportunities you otherwise would not have discovered, and your competitors will not easily recognise. What are their visions, strategies, critical success factors, obstacles and concerns? What are their cost structures and their biggest drivers for performance? Also, include other stakeholders of your clients' organisations than you usually interact with. (See image below).

Once you know more than your clients and competitors, you can enhance your service innovation and start differentiating.

Solve Other Problems for New Value
The real opportunity for adding new value is in solving essential problems your clients have in their business or operations which they have not addressed that well yet. Be aware of any objections from (defensive) perspectives based on business-as-usual.

The matrix below can help you to think about different service propositions along two dimensions:

The vertical axis differentiates service offerings in which you commit to a specific effort from those where you commit to a particular performance. Do your clients pay for delivery or performance? The horizontal axis differentiates services which target the condition of equipment and maybe also the use of the equipment from advanced services which focus on the (broader) processes of your clients.

A quick overview:

1. Most services of manufactures are in the bottom left quadrant: these are service level agreements where manufacturers commit to do maintenance and agree on certain response times and other KPI’s.
2. At the top-left quadrant, you will see service contracts where the manufacturer commits to a level up-time or availability. They will not be paid in full when the performance is below a certain minimum level.
3. At the bottom-right quadrant, you will see benchmarking, consulting or training on processes and operations to improve the overall outcome of the clients’ processes.
4. At the top-right quadrant, you may see ongoing operational support or outsourcing services. An example is a printer manufacturer offering a service to print all salary slips every month and send them directly to the employees, without their clients even having the printers in their office.

The challenge to escape from the commodity trap in most industries is to move to the right column.

Test, Experiment, Test, Learn, Test, Develop
Every innovation or idea is based on a few critical assumptions for its success. These assumptions are about:
1. The customers’ problems
2. The envisioned solution
3. The commercial or business model (will you get enough revenue)
4. The ability to deliver

It is mission-critical to test these critical assumptions in an early stage before significant investments take place. I have already elaborated on this in my article Reduce Risks of Service Innovation by Experiments which you can read here.

Conclusion:

Manufacturers need to change the way they innovate and need to focus more on broader value propositions for their clients. Failing to do so will keep you stuck in business-as-usual. You will:

1. Miss the big growth opportunities
2. Fall behind the leading players in your industry who are moving beyond business-as-usual
3. Allow new entrants in your industry and 3rd party system-integrators to drive a wedge between your business and your clients and push you down in the food chain.

If you recognise the challenge, want to escape from business-as-usual and to transform the way you innovate, I would recommend the following:

1.Download the eBook How to transform the way you innovate and avoid 5 common mistakes.
2. Read it and share it with your colleagues
3. Get on the same pages with your stakeholders, first about the concern.
4. Gradually transform the way you innovate and change.

Features Management Jan Van Veen moreMomentum

About the Author: Jan Van Veen

Jan has over 15 years experience in various manufacturing industries, either as business leader or as consultant. He has worked for Fortune500 business and many other – smaller manufacturers. We have seen many manufacturers struggle with business innovation and change, despite great ideas. visions and business strategies. In 2015, this has inspired Jan to start his ongoing research into what sets the leaders apart from the laggards. This research is the basis of the 4 Winning Habits and the foundation of moreMomentum. moreMomentum has a team of experienced business leaders and experts to support customers.