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You might have heard about servitization as one of the upcoming trends in manufacturing. Together with Industry 4.0/Smart Industry, it is considered a crucial element in a changing industry dynamic, and especially in a changing economy. The term "servitization" dates back to 1988, but it really started gaining traction around 2006.
In this blog, we will talk about what servitization is, provide some examples of companies that transformed into service-oriented businesses, and show the importance of the process. We will elaborate more on the advantages and challenges of servitization in the second blog.
According to Andy Neely (University of Cambridge), servitization is defined as "the tendency of manufacturing firms to sell services and solutions rather than just products." Another definition, by Tim Baines (Aston Business School), describes servitization as ‘the transformation of a business to compete through a combination of services and products, rather than products alone. It doesn’t apply only to manufacturers, but it’s here where the term is used most frequently at the moment."
In short, servitization refers to the transformation process of shifting from selling products to delivering services. The service component becomes increasingly important in business models, with services like maintenance and logistics being more frequently integrated with manufactured products.
The servitization process places increasing emphasis on relationships with clients, rather than just selling products. In some countries, servitization has already developed rapidly (e.g., the UK), while in the Netherlands, it is primarily large manufacturers that are engaged in the process. However, SMEs are starting to gain traction as well.
In 1988, the term "servitization" was first introduced in an article by Vandermerwe & Rada. They defined servitization as ‘the provision of client-oriented goods, services, support, self-service, and knowledge with the purpose of adding value to the core product.’ This is a broad definition, emphasizing the distinctive combination of products and services in servitization. The end result of the servitization process is a product combined with a service—commonly known as Product-as-a-Service (PaaS) or a Product-Service System (PSS).
Some companies that have implemented servitization include Tarkett, Signify (Philips Lighting), Rolls-Royce, Xerox, Caterpillar, KUKA, and Smart Robotics.
Tarkett is a flooring company with a business model where it retains ownership of the flooring and manages care after use. The company adopted this approach after noticing that flooring rarely reaches its full lifespan, as customers often replace it prematurely. It is wasteful to produce a long-lasting product only for it to be discarded halfway through its intended lifespan
Flooring-as-a-Service, which involves retaining ownership and providing a second lifetime for the product, can thus be an outcome of this approach. Signify (Philips Lighting) is an example of Light-as-a-Service, where customers pay for lux or light intensity. The data collected on provided light can also be used to identify areas where light sources have burned out, enabling more effective scheduling for cleaning certain rooms. This, in turn, can lead to cost savings.
These are good examples of how to add value to a relatively simple product by providing additional services. Companies can distinguish themselves by offering specific subscriptions alongside their products. For instance, a printing company can proactively send new toner cartridges to clients when they run low. This approach not only alleviates the burden on customers but also helps build a strong and loyal client relationship.
Rolls-Royce offers a "power-by-the-hour" model (selling "thrust") to enhance the service component. By using sensors, it can provide preventative maintenance, which consequently increases uptime. Xerox began with a pay-per-print business model, while Caterpillar has incorporated machinery-as-a-service components that allows it to monitor product usage. This enables the company to offer valuable customer feedback and maintenance services, extending the product's lifespan and maintaining performance over time.
The final example is KUKA, a robotic automation company that sells robotic services to automotive manufacturers, such as automated welding. KUKA proactively provides maintenance, resulting in fewer malfunctions and reduced overall downtime for production facilities. This is especially crucial in high-volume, high-cost production lines, where a single faulty weld can lead to rejected products. Thus, servitization can lead to significant efficiency gains and cost savings. Another example in this field is Smart Robotics, an employment agency for robots that delivers (temporary) automated robotic services.
We can learn a great deal from companies that have already embarked on the servitization journey. They demonstrate the importance of proactive maintenance, advanced services, and a well-organized customer journey. However, this success relies heavily on an efficiently organized supply chain. All key players in this supply chain should have access to real-time data to ensure optimal performance.
Strangely enough, the manufacturing process itself is one of the least value-adding activities a manufacturing company can perform. Stan Shih, the founder of Acer, demonstrated that most opportunities for value creation lie in the first and last phases of production. This concept is illustrated by the Smiling Curve:
This curve illustrates that most value is added at the beginning and the end of the production chain. On one side, we have concept development, R&D, branding, and design. On the other side, we have distribution, marketing, sales, and after-sales services. Manufacturing itself adds little value, as it often becomes a race to the bottom, with companies competing to produce the same product more cheaply and efficiently than others. In European markets, this is often not where companies excel. For manufacturing firms, this can be a significant reason to pursue servitization.
It becomes clear that within the manufacturing industry, servitization and, consequently, Product-as-a-Service (PaaS) are becoming more relevant than ever. One reason for this shift is the decreasing added value of production activities. A possible explanation is that, due to the ability to replicate products and production processes from competing businesses worldwide, the distinctiveness of these products lasts for an increasingly shorter period of time.
Unfortunately, price remains the primary deciding factor in many cases. However, most manufacturers and suppliers no longer wish to participate in this race to the bottom. Instead, they are seeking alternative ways to create value, with service becoming the main distinguishing factor.
Servitization is one of the answers to the growing demands that clients have for their suppliers and products. There is an increasing need for (mass) customization, support, and after-sales services that ensure the uptime of products.
The service element will increasingly become the defining characteristic. In cases of malfunctions, unusual situations, or specific customizations, service is the key way to differentiate in the market.
At first glance, servitization seems primarily appealing to large manufacturing firms, as they possess the resources, international networks, and financial power to transition to a service-based business model. However, this isn’t the case; it is entirely feasible for SMEs to adopt servitization as well.
Thanks to advancements in software, platforms like Firmhouse, and the connectivity of machines, it has become easier for SMEs to launch and develop their Product-as-a-Service propositions.
Furthermore, SMEs have the advantage over larger corporations of being more agile and able to respond to changing environments more rapidly. The main challenges of transitioning to servitization and a Product-as-a-Service model include not only significant investments in technology but also the need for a cultural shift and greater flexibility within the organization.
To conclude, servitization and Product-as-a-Service offer several advantages. It is scalable across companies of all sizes (small, medium, and large), can strengthen customer relationships, and can create and grow recurring revenue streams. Furthermore, it can help lock out competitors on bases other than price, provide environmental benefits by promoting dematerialization, and enable the adoption of cleaner technologies.
Are you interested in launching a servitization trajectory or a Product-as-a-Service proposition? At Firmhouse, we can help you get started on our platform. We fully automate all back-end processes, enabling you to launch quickly and efficiently. Contact us to schedule a demo!
