70% of manufacturing companies that were on the Fortune 1000 list ten years ago have vanished. Survivors include IBM, Boeing, General Motors, John Deere, Rolls Royce, and Philips – they are market leaders because they continuously renew offerings, recharge capabilities and redesign their organisations.
Radically changing markets, with profits eroding and competition increasing, are driving organisations to offer more to their customers, extra services beyond physical products. This means industrial companies are engaging more with their customers' operations – this is a fast-growing concept within manufacturing.
According to Oxford Economics/PTC research, 44% of companies seen as high performers in services have seen an increase in profit margin of over 20%. We're uncovering critical insights like this one and finding out about best practice in servitization through a survey of senior management in over 60 large European manufacturing companies. While more than 80% of companies sell products today, over 90% are moving towards value adding services. That means pure product selling will fall by 40% – this is a major shift in the market offerings of manufacturing companies.
Our full report, including key barriers for servitization, reveals the specific characteristics businesses need to deliver growth in revenue and profit based on servitization.
Traditionally, the manufacturing industry used to focus on products, not taking into account the value they could add for their customers. Companies that derive significant revenue from services think through the needs of their B2B customers, or even their customers' customer. This means they can gear their offerings as well as their organisational and financial model to services. They can create an excellent customer experience with value-add and financial returns.
Philips Healthcare, for example, moved from selling MRI scanners to selling the scans and are close to selling the diagnoses based on the scans.
This diagram shows an ideal route to servitization – where you can balance what you're able to offer with your customers´ demand. Servitization means increasingly taking over parts of your customers´ operations: maintenance or monitoring for example. This will require increasing engagement with your customers, towards output and final outcome. This opens up new opportunities that only you can leverage, using insights of the equipment you sell and its use – ultimately raising the bar for competition.
The transformation from a ´product-out´ manufacturer to a ´customer-in´ service provider requires a different mind-set and capabilities. Getting closer to your customers and really interacting with them will mean rethinking internal processes and external relationships.
Getting new customer insight might require new technology and new people with different capabilities. You'll need to be able to price the services you'll offer which will impact your financial and business model of your original product. New stakeholders and relationships will emerge. You won't just deal with the procurement team. Operations and marketing directors may become your most important connections. And you may find yourself working with third parties to provide capabilities you need to provide your customers with the right offering.
If you want to pro-actively provide services, data is critical. It will help you understand your customers' needs and allows you to provide those services:
To provide value-add offerings you'll need to be able to capture, organise and interpret this data so you can ensure compatibility of spare parts and monitor changes more accurately.
You'll need to have an agreement with customers about how you'll exchange data and make sure you can continue to learn from the data you collect – so that over time, you can deliver predictive maintenance or improve your uptime guarantee for example.
We could employ a thousand more people in service if we could find them. However, the fewer people we need to do the job the better it is – clever use of data and digital capabilities are essential.
Executive VP at a machine building firm
Technological capabilities no longer guarantee revenue, as they are no longer a differentiator from competitors. Instead, they've become the enabler and starting point for building service offerings.
For example, a company that builds engines for ships needs sensors, remote monitoring and on-board 3D printing so they can offer 'machine uptime' as a differentiator.
At the same time more and more IP that used to be in the product is now in the embedded software or apps. A microscope manufacturer could embed intelligent software and algorithms to accurately analyse imagery to add value for end-users. The original hardware product becomes only part of the entire solution, causing a major shift in manufacturers' focus.
We often over-engineer our products due to safety factors. If we could be more involved in product maintenance and operations, we would be able to reduce production costs.
Global R&D manager
Our results show that 80% of companies have less than 50% service maturity in place while 75% of companies that use data and technology to service their customer have profit margins of >15%.
While most companies start working on servitization at the level of its individual aspects (i.e. technology, data, and customer), some make a radical change and implement servitization in one major programme. This is challenging, but moving quickly may provide a real competitive advantage.
Companies that have done well engaged their customers on multiple levels, used imagination, and weren't risk-averse.
We know barriers to overcome – senior management may be reluctant to change, silos within your organisation may hinder new ways of working and you may not have the skills you need in-house. We advise large manufacturing clients to transform their business towards a service company. We combine strategic thinking and practical action, gathering insights by engaging with their trusted and potential clients. We've developed a servitization framework, based on in-depth capabilities in data, technology, customer service, business design and digital.
We are not the market leaders in the areas of either technology or data, and probably not even in the area of customer centric. But we combine the three areas in such a way that we outperform the entire market.
Global Managing Director at a large conglomerate