Requirements to be successful in the service industry

In a world where ‘servitization of manufacturing’ has become a growing trend, interesting questions arise. In our Servitization Research Stories you will find out how students have managed to answer them. This time: Floris Coenen master’s thesis about the lack of understanding on the capabilities that manufacturing firms need to transition to different levels of servitization.

Many manufacturing firms make the transition from selling products to selling so-called product-service systems, a combination of products and services. This transition, known as servitization, is partially driven by the emergence of new digital technologies such as Internet of Things (IoT), declining product margins and a greater demand for customization.

Where it started

Many firms fail to successfully make the transition to a servitized business model and fail to establish a profitable business. One of the reasons why firms fail to transition successfully is the lack of understanding of the required dynamic capabilities. These capabilities are required to reconfigure existing business models and to change a firm’s ‘regular’ product-oriented capabilities. Because of the lack of understanding, many firms move into servitization without the right preparation and without possessing the right capabilities. This results in many failed attempts to make the transition to selling product-service systems. For many firms this is a problem because often the failed investment to pursue servitization is money they could have invested in their core product-oriented business instead, to strengthen their competitive position. Moreover, not being able to a successfully transition to servitization could harm a firm’s competitive position, especially if competitors are able to make the transition. Therefore, it was Floris’s job to tackle the lack of understanding and come up with a solution for the manufacturing firms.

Findings

Based on literature research Floris developed a framework that depicts the different stages of servitization and their characteristics. It also led to a list of dynamic capabilities that manufacturing firms need to transition to a more service-oriented business model.

Moreover, Floris conducted interviews at ten manufacturing firms that were in the process of servitization. From these interviews it became clear that servitization is pursued for several reasons, but most notable for the potential financial rewards, the prospect of a longer-term relationship with the client and the differentiative power that services offer. In addition, based on the answers of the interview, the dynamic capabilities were ranked and mapped against the different states of servitization.

What now?

In his research Floris offers companies a framework which they can use to understand which capabilities are important at what stage of the servitization process. The manufacturing companies can benchmark themselves against these capabilities and understand where they need to develop themselves further. It allows them to understand in which category they need to invest to increase their chances of success with servitization. The framework also supports managers in understanding the position of their firm in relation to the servitization process, and it highlights which dynamic capabilities are necessary at what stage of this transition.

To increase the chances of success, Floris advises manufacturing firms to move into servitization in an incremental and stepwise approach. First, they should establish themselves in one stage of servitization before moving to the next stage of servitization, so they can develop the right dynamic capabilities.