Digital Servitization: The Next Competitive Frontier
May 09, 2019 • Features • Management • Servitization
The barriers between industry verticals are coming crashing down as we no longer compete with those companies within our competitive sphere, but against the best service our customers have experienced. Dr. Wolfgang Ulaga and Dr. Christian Kowalkowski outline how you can adapt to the new frontier we find ourselves in as we embrace digitalisation...
The growing digital transformation is blurring industry boundaries and altering established positions of firms. While manufacturers are investing strategically in data collection, analytics capabilities, and in cloud-based platforms, many firms remain concerned about how to best address digital disruption and enable digitalization.
Last year, General Electric cut expenses by more than 25% at its digital unit responsible for Predix, its software platform for data collection and analysis, 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 p84 strategies, we have seen both highly successful and unsuccessful cases of what we call ‘digital servitization.’ Why do firms with a proven track record of running successful field service organizations struggle with implementing digitallyenabled 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 digitization, which means turning analog data into digital data, and digitalization, 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 digitization, 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 utilization of digital technologies for shifting altogether from a product-centric to a service-centric business model. Of course, digitally-enabled services are not new; for example, Rolls- Royce’s archetypal solution TotalCare began in 1997 and BT Industries (since 2000 part of Toyota Material Handling) created its software system BT Compass in 1993, to help its customers improve their performance.
Likewise, leading bearings manufacturer SKF started early on remote monitoring bearings usage data flowing 24/7 from industrial customer’s equipment installed around the globe. Digital technology, however, can be a double-edged sword. 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 technologycentric approach. First, as the connected installed base grows and the costs of collecting and managing data increase year over year, it becomes more and more difficult to defend the model unless service sales start to materialize. 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 thoroughly analyze data collected and take appropriate corrective actions. The real value of data and analytics lies in a company’s ability to identify and implement adequate changes. By collecting and analyzing data across multiple customers, a supplier may know more about the customers’ equipment and operations then they know themselves.
Benchmarking performance across industry applications and customers thus provides attractive 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 standardization, services require increased local responsiveness and closer customer relationships. During digital servitization, however, the central organization 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. Viewing data as “the new oil” is a frequent claim these days. Like oil, data is a source of power. It is a resource used to fuel 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 utilization of data. If a customer is generating massive amounts of data collected by a supplier, then once processed, it can be used for better serving also the customer’s competitors. In other cases, we are seeing completely new entrants emerging and collecting data on behalf of their clients.
Digitalization is beginning to have a profound impact on even the most stable businesses. Customers increasingly expect a single provider to integrate individual components and products into a system, 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, often does not matter to customers. 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 roadmap for service growth. To conclude, no firm can afford avoid strategically investing in digitalization.
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, digitalization is the poster child 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 back-end and front-end interactions, 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 on www.ServiceStrategyInAction.com.
Dr. h.c. Wolfgang Ulaga is Senior Affiliate Professor of Marketing at INSEAD, Fontainebleau, France. He is the author of Service Strategy in Action: A Practical Guide for Growing Your B2B Service and Solution Business. He also authored Data Monetization: A Practical Roadmap for Framing, Pricing, and Selling Your B2B Digital Offers.
The growing digital transformation is blurring industry boundaries and altering established positions of firms. While manufacturers are investing strategically in data collection, analytics capabilities, and in cloud-based platforms, many firms remain concerned about how to best address digital disruption and enable digitalization.
Last year, General Electric cut expenses by more than 25% at its digital unit responsible for Predix, its software platform for data collection and analysis, 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 p84 strategies, we have seen both highly successful and unsuccessful cases of what we call ‘digital servitization.’ Why do firms with a proven track record of running successful field service organizations struggle with implementing digitallyenabled 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 digitization, which means turning analog data into digital data, and digitalization, 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 digitization, 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 utilization of digital technologies for shifting altogether from a product-centric to a service-centric business model. Of course, digitally-enabled services are not new; for example, Rolls- Royce’s archetypal solution TotalCare began in 1997 and BT Industries (since 2000 part of Toyota Material Handling) created its software system BT Compass in 1993, to help its customers improve their performance.
Likewise, leading bearings manufacturer SKF started early on remote monitoring bearings usage data flowing 24/7 from industrial customer’s equipment installed around the globe. Digital technology, however, can be a double-edged sword. 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 technologycentric approach. First, as the connected installed base grows and the costs of collecting and managing data increase year over year, it becomes more and more difficult to defend the model unless service sales start to materialize. 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?
"The growing digital transformation is blurring industry boundaries and altering established positions of firms..."
Third, customers typically do not have the time nor the skills to thoroughly analyze data collected and take appropriate corrective actions. The real value of data and analytics lies in a company’s ability to identify and implement adequate changes. By collecting and analyzing data across multiple customers, a supplier may know more about the customers’ equipment and operations then they know themselves.
Benchmarking performance across industry applications and customers thus provides attractive 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 standardization, services require increased local responsiveness and closer customer relationships. During digital servitization, however, the central organization 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. Viewing data as “the new oil” is a frequent claim these days. Like oil, data is a source of power. It is a resource used to fuel 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 utilization of data. If a customer is generating massive amounts of data collected by a supplier, then once processed, it can be used for better serving also the customer’s competitors. In other cases, we are seeing completely new entrants emerging and collecting data on behalf of their clients.
Digitalization is beginning to have a profound impact on even the most stable businesses. Customers increasingly expect a single provider to integrate individual components and products into a system, 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, often does not matter to customers. 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 roadmap for service growth. To conclude, no firm can afford avoid strategically investing in digitalization.
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, digitalization is the poster child 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 back-end and front-end interactions, 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 on www.ServiceStrategyInAction.com.
Dr. h.c. Wolfgang Ulaga is Senior Affiliate Professor of Marketing at INSEAD, Fontainebleau, France. He is the author of Service Strategy in Action: A Practical Guide for Growing Your B2B Service and Solution Business. He also authored Data Monetization: A Practical Roadmap for Framing, Pricing, and Selling Your B2B Digital Offers.
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