14 February 2012

Is Servitization for You?

Andy Neely, Director Cambridge Service Alliance

There’s much talk of the servitization of manufacturing – supplementing products with services. The most recent data suggests that some 70% of economic activity lies in the service sector. Yet this figure ignores the significant proportion of service within the traditional manufacturing sector. Capital intense manufacturing firms, like BAE Systems and Rolls Royce, now generate over 50% of their revenues from service and support. Others, such as the oil majors have vertically integrated, offering downstream retail services, as well as upstream extraction operations. The shift to services seems inexorable and pervades many walks of life, but is it for you?

In answering this question there are some basic issues to consider. The first is quite simply are you selling a product that people want or need to own? Some products are consumed during use – think of food or fireworks. Your customer has to take ownership of these products, as they are used during the consumption process and have no resale value after they have been used. Other products are aspirational – products that customers don't need to own, but that they choose to own because of the value the product confers. We don’t need expensive cars to take us from A to B, or expensive watches to tell the time, but some people choose to spend their money on these luxury purchases because of the status ownership of the product confers.

Clearly there is scope to offer services associated with both consumed products and aspirational products. Restaurants are service and they use food as an input. Suppliers can offer to automatically restock restaurant supplies, an inventory management service, associated with food stocks. Some businesses choose to rent or lease aspirational products – luxury cars and even designer watches. In fact it is almost impossible to define a product that cannot be accompanied by a service. The question is where does the value lie. And can the service be delivered efficiently enough to generate a decent return.

For more detail on the shift to services see the Cambridge Service Alliance report – The Servitization of Manufacturing: Further Evidence

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