Looking at the future of business models for global manufacturing companies as they make the switch to services in an age of digital disruption

September 2016

Professor Andy Neely answers some key questions about the Cambridge Service Alliance business partners and its recent research. [PODCAST interview available here]

• Who are your partners in industry and how have you been working with them on that all important ‘shift to services’ for manufacturing industries?

We have a variety of partners in industry. Our two founding partners are BAE systems and IBM and we also work with Caterpillar, Rolls-Royce, Pearson and Zoetis. Zoetis is an animal health company which used to be part of Pfizer. It is interested in services because it wants to build links with its end customers. Caterpillar is a big construction and mining Equipment Company and it is interested in services because it wants to maintain links with its customers over the 30 year life of the product. It is important for its business model.

• What kind of changes are manufacturing firms making to ensure they are in tune with their customers’ needs in what is an increasingly technologically driven global market place?

The changes manufacturing firms are making are really varied. Caterpillar has traditionally made most of its money on spare parts and servicing equipment but increasingly its customers are saying ‘we want to work with you to contract for outcome or capability’. It is no longer about just making sure the equipment works, its customers want help to minimize the cost per ton of earth extracted in a quarry.  These days the manufacturing firm is helping its customers to deliver the outcome the customer wants. In some cases, it is helping the customer deliver the outcome the customer’s customer wants. It is all about helping your customer do a better job.

•  How is technology changing how manufacturing firms operate?

Technology is fundamentally changing how manufacturing firms operate. What you see is more and more devices getting connected to the internet. The data coming back from those devices and machines is then being used to work out what is going on.

For example if Caterpillar has the GPS position of a truck, and you know the weight of the material and the weight of the bed of the truck, then you can tell when the truck has been filled at the rock face. If the truck doesn’t start to move straight away you are losing production time, and if it sits at the rock face for a minute once it has been filled, that would be a minute of lost production and in a quarry and it is a big deal. If you can use the data to improve the efficiency of the operation, you can in turn minimize the cost per ton.

• The Cambridge Service Alliance puts emphasis on knowing what your end customers’ needs are. Why is that and can you give us an example?

We talk a lot about getting inside the minds of your customer, or the customer’s customer. The reason we use that language is because most organizations have to think about how to provide for their customers. You can use the equipment to allow your customer to do a better job to service their customer. If you understand what the customer’s customer wants then you can think about changing the design of your equipment or service to help ensure your immediate customer does a better job. If they are more successful and their business grows then yours does too, it is in your interest.  Technology helps this relationship in all sorts of ways by monitoring the equipment so you can now see remotely what is happening and you can track where assets are in the world.

We have also been doing some work on customer analytics. We are looking at both quantitative and qualitative data, things like customers’ comments, to understand what those comments actually mean and say. You can then see what advice they are giving you about improving your organization. Lots of firms use a Net Promoters Score as a measure of customer loyalty, and that is really the difference between the number of customers who say they would promote your business and recommend it to friends versus the numbers who say they wouldn’t. But that is just a numerical number. If you look at the customer survey forms, often you get statements from customers where they might say there is something wrong, like the technician turned up late in scruffy overalls. We have been working on a methodology of taking those sentences, deconstructing them and understanding the statements in them to better inform firms about how they can deliver a better quality of service to their customers.

• Your CSA members are some of the largest companies operating in the world today, how do they begin to make change happen?

We believe that detail matters when it comes to making change in a large global company. We have a research project which is looking at unmasking the important hidden detail in making services work. You have to understand the detail but you also have to understand the bigger picture about how to make that change and make that shift to services.

In another research project we have completed recently we have looked at the Seven Critical Success Factors or CSFs for making the shift to services. Number one in that list is the readiness of the organization. Is it ready and are its customers ready to make that change? Unless you get both sides in place there is no way you will make the shift to services.

• How important is this interface of academics and managers working together in the CSA?

The Cambridge Service Alliance really does three things for our partners:

1. We provide an environment where there is an interface between academics and industry managers. We have deliberately chosen non-competing firms as partners, and we have very open and honest conversations about the way you might design your organization, the business model you use, how you design contracts for services and so on. The reality is that firms learn an enormous amount from each other.
2. We also hold events and forums where we can communicate ideas to the partners and the wider public. This year we are running a Service Week conference on how you successfully grow your service business in the digital economy.
3.  As well as the broader knowledge exchange we also carry out individual research projects that are designed to unpack and explore topics that matter to the partners in the Service Alliance. Caterpillar has been very involved in a programme called: ‘Across the Table’. A major part of it was about looking at the future of its customer service needs and how Caterpillar might meet them. We had direct input into the change programme in that organization. We are keen for our partners to pick up and adopt these results.  With BAE Systems we have been talking a lot about eco-systems in order to understand the Defense eco-system and how that is changing. For each individual firm in the Service Alliance there are specific projects we are working on with topics that are of general interest and also producing results that are directly relevant to that firm.

• Is the CSA helping to map the future out for others too in the manufacturing sector?

Yes. If I go back five years or so and I talked about servitization people would say they had never heard of that, it was relatively small scale. Now more and more organizations are talking about the importance of servitization and what it might mean for the future of their business and how they have to change their business model and what role technology might play. There is a general take up of the ideas to try and influence the way manufacturing firms think.   

• Is the link between products, services, technology and the need to innovate creating better products and services? 

One of the changes you see is a shift from supply chains to network partners. Increasingly it is not a question of how to configure the supply chain but these days firms need to think about who they want to partner with and what skills and capabilities they bring together to deliver a particular outcome. Often you can find that people are collaborating on one contract but competing on another. BAE systems in Portsmouth works very closely with Babcock to run the naval base but just down the road they compete on other contracts. You end up with very complicated organizational relationships. Learning when and how to partner and also when and how you are going to compete is crucial if you want to get the balance right.    

•  Are new collaborations and partnerships developing?

We see a lot of new collaborations and partnerships amongst all sorts of organizations, not just old rivals. One of the interesting things is the way that barriers between different sectors of the economy are changing. If you look at the IOT (Internet of Things) we can see that more and more devices are getting connected to the internet, and that the data that comes off those is giving real insight into how your products and services operate. New technology is playing a key part in this shift to services.

You then have to ask who else to involve? AT&T and GE have said they want to work together; Siemens is working with Atos; IBM is also working in this area. You have equipment manufacturers a software consultancy firm, a broader consultancy firm, and a telephone company all competing for the IOT space. Some of these organizations are coming together and building new capability, and some are finding they have new competitors too, like Google or Amazon. The small start-up Trackunit, which monitors the stress and strain put on assets, has been taken over by Goldman Sachs, an investment bank now working in asset management. There are some interesting dynamics at work.  

• How helpful has it been to identify seven Critical Success Factors or CSFs in the switch to services. You have called it a road map?

We looked at Pearson, Zoetis, and Greer, and we mapped out the steps they had gone on as they changed their business models in the switch to services. We then built a framework with these Seven Critical Success Factors, CSFs. The full report is on our website http://cambridgeservicealliance.eng.cam.ac.uk/news/SevenCSFBriefing

We mentioned the readiness of an organization and how outcome focused it is. There are issues around how you get the right mindset in an organization, and it is also about people and how you get them ready, not just technology and data. There are issues about processes and design, but sometimes there is not enough focus on designing services. The CSFs really do outline a road map for thinking about the steps you need to go through if you are going to transform your business.

• When others talk about manufacturing they wistfully harp back to the past and production lines but are the criteria by which we measure the success of firms and the sector changing? 

It is still important to optimize what goes on inside a factory.  People get quite excited about the digital economy and they say it is all going to be virtual but you still need your iPhone to access your laptop, so we are still going to make things. You still have to optimize the factory but that is a relatively small part of the overall ecosystem you are operating in. We are now looking beyond the boundary of the factory to optimize the end to end enterprise. Productivity still matters and organizations need to make sure the things they are doing are as efficient as possible to ensure they are not wasting resources, whether that is material or the time of people.

The data allows you to identify where you might improve productivity. It is still a valid measure for part of the agenda but you also have to think about the outcomes that you are delivering for the customer. Productivity can be more an efficiency type measure, to see if you are using your assets well, but you also have to think about effectiveness, and if you are doing the right things with those assets. Balancing both efficiency and effectiveness is central in manufacturing these days.

• In today’s fast moving world what is your ultimate goal at the Cambridge Service Alliance? 

People always say the pace of change is fast, if you go back to when there were buggy whips it still probably felt quite fast in those days so I think that at any point in time there is lots of change going on in the World. One of the challenges for leaders of organizations is to understand what change is both happening today and what change is coming in the future. You then have to think of the best way to respond and configure your organization to respond to that change. The boundary of your organization is undoubtedly changing; it is much more about networks and collaborations. People get too excited about some of these changes; things like the IOT or Industry 4.0 are not going to change the World in the next six months. These things take a long time to do. Undoubtedly the direction of travel is more connected devices, more data coming off them, and making smarter decisions. You do need to think about how you optimize systems rather than individual machines or individual supply chains so undoubtedly that is the way the World is going but there is a lot of work to do to get there.

Firms are spending a lot of time trying to get data from different devices, and they then have to try to reconcile that data, so there is an enormous amount of effort that needs to go into some of these things. I think it is a fascinating time to be involved in this because in many ways the foundations of what some have termed a new fourth industrial revolution are being laid now and being involved in that is just a wonderful privilege.    

• Is it best to be the first or the last in the sector to make a new innovation or change, presumably you can learn a lot from the success and failures of others? 

Organisations have to take different views and think about where they want to position themselves. It is rarely about being the first or the last to make a change or innovation because incremental change in all sorts of organization is going on at the same time. As one organisation pushes forward with one type of innovation another organization will be pushing forward with a slightly different kind of innovation. You can’t afford to fall too far behind because if you do you will end up losing your place in the market, However, organizations can’t afford to stay still, they have to constantly think about how to adapt to the changing World and the changing circumstances. You need that continuous process of innovation going on, it is not about first or last it is about what is the right innovation for us in the evolution of our organisation at this point in time.

If you look at Uber in the taxi business, or some of the low cost airlines, or if you think about what is happening in newspapers with all of the online content, or with Google and Amazon and Facebook, these are organisations that are babies really but they have grown up incredibly rapidly and changed the way organisations work. It would be very dangerous to sit there and say ‘it’s OK we will be safe and immune from these changes’, because you have to watch what is going on.

In October our Alliance conference is discussing: Growing your Service Business in an age of digital disruption. Uber is going to speak about the way they are growing and how they expand. Trackunit which is now part of Goldman Sachs is going to talk about developing technology and why they are getting involved in the asset monitoring business. Siemens is going to discuss the digital factory, and the whole industrial internet Industry 4.0 and how that is changing the Siemens business model. These are all themes around platforms, services, data and the way the World is changing.

In research you need to be a specialist but as you drill down into a specific area you find there is enormous breath to that area and a lot of the changes that are going on in the world influence the way we think about things.

On Tuesday 11 October the Alliance will be holding its Industry conference on ‘Growing your service business in an age ofdigital disruption’ at the Moller Centre, Cambridge, UK. 

The Productivity Paradox: Is There a Measurement Problem?

There's been much debate in recent months about the productivity paradox - put simply there's a long standing concern that technology, particularly information technology, does not seem to deliver the productivity gains that might be expected. This concern has resurfaced in the UK, with the Government raising questions about why the UK's productivity has not grown as much as other countries. In fact George Osborne recently called the UK's low productivity growth "the challenge of our time".

This same topic came up in a recent email discussion with colleagues from ISSIP - the International Society for Service Innovation Professionals. This time prompted by an article in the Wall Street Journal entitled "Silicon Valley Doesn't Believe US Productivity is Down". In essence the Wall Street Journal argument was that developments in technology are not captured in the Government's productivity figures - apps that help people find restaurants more quickly or hail cabs from their phones clearly improve the efficiency with which we can do things. Doing more with less is a classic definition of productivity - so these apps must be improving productivity argues the Wall Street Journal (and those it quotes - including Hal Varian, Google's Chief Economist).

While I accept the argument that apps and associated technologies allow us to do more with less, I think there's a need to unpack the relationship between these developments and measures of productivity more carefully. Traditionally governments have measured labour productivity - in terms of GDP per hour worked. As technology replaces labour, GDP stays the same or increases, while labour hours go down - hence productivity increases.

However, there's an interesting new phenomenon which complicates the picture. Take, for example, Uber. I'm a fan of Uber - the app is great. Its convenient. I've never had a bad service from an Uber driver. I love the fact that I can rate drivers and they can rate customers at the end of journeys. I love the fact that the cost of the ride gets charged to my credit card and the receipt automatically emailed to me. But I also love Uber because it is cheaper - I pay less for a Uber car than I do for a black cab in London. Better service, pleasant drivers, lower prices - what's not to like. Other firms have similar business models - think Amazon or Airbnb. Still others provide me a service for free - Google and TripAdvisor - don't charge me for the information they provide, instead making their money through third parties.

When talking about productivity - or the lack of productivity - we need to think about the economic impact of these cheaper and/or free services. Lower prices to consumers must mean lower GDP. The efficiency gains are there, but they are not being captured in productivity gains because the benefits are being passed on to consumers in the form of lower prices, rather than captured in the official GDP statistics. Maybe a more nuanced discussion about productivity is needed - where we look at both sides of the equation - increases in value and hence GDP - and increases in efficiency reflected in lower costs to consumers.

A capability-based view of service transitions

by Ornella Benedettini

Exploiting service opportunities often requires manufacturing firms to shift to new service-centric business models, logics, processes, values – in other terms to transition into what sometimes is a very different organisational setting. This transition must be supported by appropriate firm-level capabilities, this meaning that the firm has to possess the abilities, skills, knowledge and resources that underpin the development and delivery of the services that it decides to offer. While some capabilities can be leveraged from the product domain (which is a substantial advantage of manufacturing over pure service firms), others are service-specific, and hence need to be developed or acquired on purpose. It is therefore particularly important for manufacturers to have a clear understanding of what service-related capabilities they need in order to generate value and performance from their service strategy efforts.

Despite this background, the issue of capabilities has been rarely addressed directly in existing academic and practitioner studies of service transitions. For this reason, we decided to conduct a research project that analyses the service-relevant capabilities of a sample of servitized companies on the basis of the types of services that they offer and the financial performance that they achieve. In practice, with this project we would like to show three things: (i) how manufacturers orchestrate service-relevant capabilities in practice, (ii) how different services require different capabilities, (iii) how/if greater service capabilities lead to greater firm performance. The study is based on the cases of 138 companies from the aerospace and defence sector. We map the levels and sets of capabilities of these companies using the Alliance ‘Service Capability Audit’ tool. Developed by Alliance Director Andy Neely through case studies and in-depth interviews with senior managers at 12 leading servitized firms, the tool identifies 12 bundles and over 70 individual capabilities along 4 key categories: value proposition, ecosystem awareness, value delivery, and accountability spread. We draw the information regarding service capabilities from the companies’ annual report narratives using the content analysis technique and Wordstat software. We further consider 15 categories of services that aerospace and defence companies may offer and content analyse the Capital IQ long business descriptions searching for evidence of these service categories.

The study is currently in progress. The data collected so far suggest that different companies have different levels and sets of service-relevant capabilities. Intriguingly, while the literature tends to assume that all service-relevant capabilities are equally important, our empirical investigation reveals a difference in emphasis among categories and bundles of capabilities. For example, within the value delivery category, we found rich evidence of internal capabilities that enable the delivery of the value proposition but much less evidence of capabilities related to the coordination of multi-party delivery, suggesting that perhaps the sample companies tend to rely on an internal delivery system rather than on a networked one. Similarly, evidence related to the accountability spread category is focused on acknowledging that the companies are aware of business risks rather than that they have mechanisms in place to control, share or mitigate such risks. Although we haven’t yet examined the relationship between capabilities and performance, some performance differences have already emerged among the sample companies that can be potentially explained by nature and extent of the shift to services. Notably, we found an inverse U-shaped relationship between number of services offered and both firm profitability and market value. Specifically, more services mean better performance, but only until when the companies offer 8-9 services, i.e. there is a limit to the amount of service diversification that can be proficiently engaged.

The aim of the project is to contribute to the research stream of the service infusion in manufacturing, furthering the understanding of the capabilities that influence the ability to transition to services for different companies. Nevertheless, from a managerial standpoint, we seek to develop practical insights on how manufacturers could align the configuration of service strategy and organisational capabilities. For more information on this research please read this paper

Servitization and Service Innovation in China: Reflections from Shanghai

I’ve just spent a week in China, visiting the Southern China University of Technology (Guangzhou) and Ceibs, the international business school in Shanghai. While at Ceibs I participated in the first seminar on “Servitization and Service Innovation”. Attended by around 100 people, industrial speakers at the seminar included eCoal (an online coal purchasing platform), HP, Sevalo (a construction and mining equipment services business) and SKF. While Professors Marjorie Lyles (Indiana University), Chris Voss (Warwick Business School), Xiande Zhao (Ceibs) and I delivered academic presentations. It was a great trip, fascinating in so many ways, but I thought I might write a short blog about some of the themes that came out for me at the seminar. These include:

1.     The importance of technology to China - all the speakers talked about the way technology is changing China’s approach to business. They talked about all the traditional topics - cloud computing, big data, mobile, the need for better security. But they also talked about internet plus, China’s equivalent to Germany’s industrie 4.0 and the rest of the world’s internet of things. They recognise that as more and more devices are connected to the net, ever greater volumes of data will be created and these data can potentially deliver new and valuable business insights if analysed and interpreted correctly.

2.     Platforms were also a major theme - many of the firms that spoke, including many of those in the audience, were looking to create platforms, often to combine buying power and/or to utilize spare capacity. eCoal, for example, has created a coal buying platform which allows it to drive significant cost savings by pooling purchasing across multiple organisations. HP claimed to be the world’s biggest retailer of paper. With their print on demand services, where you pay per page rather than for the printer, HP is forced to buy large volumes of paper. But with large volumes comes the opportunity to negotiate discounts for bulk purchasing.

3.     One reason so many firms were interested in platforms was the massive success of China’s three stars of eBusiness - Baidu, Alibaba and Tencent (the Chinese refer to them as BAT). These three firms dominate China’s discussion of eBusiness and have all successfully created platforms, which in turn create multi-sided markets. Tencent, for example, offers users access to free online games, sells the eyeballs to advertisers, but also sells the players of games equipment upgrades. A dominant question underlying many of the comments at the forum, was how do we create platforms that will allows us to capture multiple, complementary sources of revenue for our businesses.

4.     We also talked about challenges of servitizing - the fact that having a strong product heritage or brand sometimes makes it more difficult to offer services. Interestingly a number of the speakers referred back to the roots of their organisations, obviously product of their firm’s history, but I wondered whether history also constrained their thinking about the future. SKF asked some fantastic questions about servitization. How do we persuade our customers to buy solutions from us before we have proved their value? Who buys services and solutions? Procurement is typically not structured that way. It thinks about products and categories, yet services and solutions often cross multiple products and categories.

5.     And finally we talked about enablers of servitization - what would make the transition to services easier. Through the course of the seminar I heard five key themes: (i) get inside the mind of your customer’s customer. Understand what is value to them, so you can better help your customer create value for their customer; (ii) to understand you need deep relationships - ask yourself are we really close enough to our customers; (iii) seek to balance control and collaboration in the ecosystem - not everyone needs to control or create a ecosystem. Sometimes you have to accept you are part of one and the best you can do is seek to influence it. Think about creating win-win-win across the ecosystem to drive change; (iv) learn from your experience, codify it and share it; and (v) think about solutions - SKF has created solutions factories where they can work with customers to solve their problems. Using your own ideas and technology collaboratively with the customer is a great way of getting inside their minds and building a deep relationship with them.

One of the great privileges of life as an academic is the opportunity to travel, to experience different countries and cultures. I never fail to be inspired when I go somewhere different and meet someone new. My latest trip to China was no exception.

Rethinking Competition and Collaboration in Ecosystems: Who Should You Work With?

One of the themes that keeps emerging in the work of the Cambridge Service Alliance is the importance of the ecosystem. We define an ecosystem as the wider network of firms and organisations that can or could influence the way the focal firm creates and captures value through the provision of its products and services. Members of this wider network might include, but are not limited to: collaborators, regulators, clients, customers and consumers, their stakeholders, suppliers and competitors.

Why does an ecosystem perspective matter? The first reason is that thinking about ecosystems encourages executives to take a broader view on the opportunities they face. This argument was first made by Moore in his Harvard Business Review article - "Predators and Prey: A New Ecology of Competition". As the boundaries between traditional industrial sectors break down organisations change the way the create value for their customers. Take a simple example - airlines. Are they in the travel business? After all their primary function is to transport people from A to B? Are they in the entertainment and catering business - they feed and entertain people while on their planes. Are they in the holiday business? Witness the emergence of BA and Virgin holidays. Are they in the telecoms business - think about in flight telecoms and wireless services. Even more extreme examples are seen in electronics and telecommunications. Phone companies now double as internet service providers. They offer on demand TV and video services. They are debating what else they can do given the cables they have running into your house. Utilities companies in general are blurring - water companies will provide gas and electricity. Gas companies will reduce the price you pay if you buy electricity from them as well. An even more radical example is provided by electric vehicles - some are exploring how they might be used as energy storage devices when not being driven. Boundaries between sectors are blurring and disappearing. As they do new opportunities emerge. Being constrained by a logic which says "we are an automotive firm" or "we are a pharmaceutical firm" simply limits innovation and creativity.

This theme of innovation and creativity is a second reason why ecosystems thinking is so important. Firms define often themselves in terms of their markets, customers and competitors. Yet one thing we have seen in our work is the increasingly complex nature of inter-organisational relationships. It is common to see firms competing for some contracts, while collaborating on others. IBM, for example, competes with software vendors such as Oracle and SAP, yet also installs Oracle and SAP systems when their customers want them to. BAE Systems partners with Babcock to deliver services at Portsmouth Naval Base, yet competes with Babcock for other MoD contracts. This complex and nested set of relationships raises some interesting questions. If you define another organisation solely as your competitor there's a danger you miss opportunities for innovation and collaboration. The car industry provides an excellent example. Many car manufacturers have close relationships with (or in some cases own) Dealer networks. They see the Dealer as the primary route to market and the obvious choice for all after-sales service and support. Yet there are loads of small, independent garages that offer vehicle service and support. Often customers prefer these independent garages - they are cheaper, operate with lower overheads and only use genuine original equipment spares when needed. Traditionally the automotive manufacturers have seen these independent garages as the enemy. They take work from the Dealer network, build direct relationships with the end customer and generally disrupt the industry.

But if you draw a broader circle and include these "annoying independent garages" in your ecosystem, you could - as an original equipment manufacturer - start to ask how might we collaborate with these independent garages? Should we offer to manage their spare parts inventories through consignment stocks? Should we provide them specialist tooling and equipment, creating a larger market for proprietary technologies? As the use of telematics and remote monitoring increases, should we - the original equipment manufacturer - sell the engine diagnostic data to independent garages to help them provide better service to their customers? Perhaps the original equipment manufacturer can create a more seamless, integrated and lower cost service for their customers by collaborating with their traditional competitors.

Its only when you start to challenges the assumptions that you hold about how your industry operates and where the boundaries lie that you start to think creatively about the opportunities that are open to you. Taking an ecosystem perspective and broadening your horizon is a great way of thinking about how you might innovate your business model.

GE, The Industrial Internet and the Battle to Come

During Cambridge Service Week this year we heard from Stefan Bungart, Leader of GE Software Europe. Stefan talked about GE's development of a new services platform - Predix. Think of the iStore, but for the industrial internet. GE's position is that it wants Predix to become an openly available platform that can host apps developed by others - apps that are used to remotely monitor and manage machines and equipment, indeed any device connected to the internet - hence the industrial internet.

You could argue that Apple, Facebook and Google have largely sewn up the business to consumer internet - they are the dominant platforms. Other platforms may emerge, but they face an uphill battle to overcome the incumbent players. The industrial internet, however, is still wide open. We don't yet have any dominant players and they may never emerge. However, manufacturing firms across all sectors recognise the way the world is moving. More and more devices are being connected to the internet. These devices are feeding data back to central control hubs and the best of these are using the data to make predictions about product performance and how this can be optimized, as well as using the data to inform future generations of product design. The question - hence the battle to come - is which firms will dominate the industrial internet.

GE has already declared its intent - in 2015 the Predix platform will be made publicly available. Jeff Immelt, Chairman and CEO of GE is quoted as saying "the more we can connect, monitor, and manage the world’s machines, the more insight and visibility we can give our customers to reduce unplanned downtime and increase predictability. By opening up Predix to the world, companies of any size and in any industry can benefit from the investments GE has made by eliminating the barrier to entry". What he doesn't say is what happens to the data that all of these devices generate as it passes through the GE platform. GE is reported to use 10 million sensors to monitor daily 50 million data points across $1 trillion of managed assets. The businesses order backlog is around $180 billion - a number that continues to grow as the installed base of GE assets and those that GE helps monitor increases in size. Will GE be the equivalent of Apple, Facebook and Google for the industrial internet or will someone else seize this market? Potential competitors from the software, applications and consulting industry might include IBM, Microsoft or Tata. From an industrial perspective the smart money might be on Hitachi, Samsung or Siemens. How about Apple, Google or Facebook? Can and will they make the transition to the industrial internet?

The jury's out on how this opportunity will develop, but one thing is clear. The battle for the industrial internet will heat up in the next few years. The potential for innovation and greater efficiency in product and service design, as well as operation and maintenance is too great. The winners of this race will have access to unparalleled data that if used insightfully will drive significant service efficiency and innovation. Firms will still have to deliver great service - they'll have to get the basics right - but they'll do so from a rich and data-informed position that will put them ahead of the rest of the pack and so confer significant competitive advantage.

Is servitization for everyone?

One of the questions I have been asking my students recently is whether "servitization is a strategy for everyone". Effectively I ask them to take any product they wish and develop an idea for a service that is directly related to the product. The students have come up with some great ideas. One group developed a business model for renting umbrellas. Imagine having umbrella rental kiosks at busy main line stations in London. You arrive at Kings Cross, without an umbrella, only to find it is raining. Rather than buying an overpriced umbrella in a local store, you can rent one for a day and if you don't return it, you forfeit your deposit, but are then allowed to keep the umbrella. Another group developed a business model for exchanging baby products - a store where you could buy second hand cots, toys and prams (all of which had been fully refurbished and reconditioned). As your baby grows older and bigger the store would take back products you no longer needed and sell you a new set - a child's bed rather than a cot or toys for a three year old, rather than a new born baby. Any products you returned to the shop would be refurbished, reconditioned and sold on to a new set of parents. Yet other groups have suggested technologically enabled services. One team came up with the idea of machine tool manufacturers offering environmental monitoring services. This group proposed that firms should couple an energy monitoring service with the machine tools they sell. In essence the manufacturer of the machine tool would provide guidance and advice on how to reduce energy consumption of capital equipment.

While the ideas themselves are interesting, one of the things that I have found most fascinating is that nobody has yet come up with a product that could not be accompanied by a service. Luxury goods - where ownership might confer status - are appealing as rental items. Why own that fantastic diamond necklace (and carry the risks and costs associated with ownership of a very valuable piece of jewellery) when you can rent whatever jewellery you want for particular events. A counter argument might be that jewellery as a gift is important. If I told my wife that I had rented our wedding ring rather than bought it for her I might get short shrift. But the jeweller who sold me the ring offers a reconditioning service, a personalisation service and could offer a consultancy service, providing advice on which product to select.

Move to the other end of the scale and think about commodity products. Take something as simple as a paperclip. What service could be associated with paperclips? At first blush this appears to be a more challenging question. Paperclips are so plentiful and cheap that it is more difficult to conceive a service. But think about how many paperclips are wasted, taken off sheets of paper and dropped in the bin or put in that jar that sits on your desk and gradually fills to overflowing. What about a service centred around paperclip recycling, where unwanted paperclips (like spent batteries) are collected and returned to source. What about paperclips with RFID tags on them - paperclips that could provide location information so you would never again lose that important document in a pile of paperwork!

The more I think about it, the more I feel that the world of services and solutions is endless. Some of my academic colleagues argue that products are only ever a means to deliver services. I wouldn't go quite that far, but I think it is right to say that all products can be supported or supplemented by services. I'd be interested to hear of examples of products that you think it would be difficult to support or supplement with services.

The Big Data Revolution: What Happened to Data Quality?

There's a wonderful irony in the world of Big Data Analytics. At a time when interest in Big Data appears to be growing exponentially, it appears that some are forgetting the fundamental challenges of Data Quality. A quick Google Trends analysis highlights the point. The chart below shows two trend lines extracted from Google Trends. The line in blue reflects the popularity of searches for Big Data, while the line in red shows the popularity of searches for Data Quality. It is important to note that the lines show relative popularity, not absolute volumes of search terms. In fact, Google Keywords suggests that in absolute terms searches for Big Data are about 20 times as popular as searches for Data Quality.

This raises an interesting question - what's happened to Data Quality? At a time when organisations are becoming ever more interested in using their data to create performance insights and predictions, interest the Data Quality appears to be declining. Is this because Data Quality is no longer an issue?

I don't think so. On three separate occasions in the last week alone I have been involved in discussions with senior managers from some of the world's leading manufacturing and service businesses. Each time, the issue of Data Quality has come up loud and clear. These firms recognise the potential of Big Data and Analytics, but are realistic enough to know that unless they sort out their data fundamentals - unless the track the right things and make sure the raw data if accessible and of high quality, all of the Big Data Analytics in the world is not going to help them. That's why - in the Cambridge Service Alliance - one of our projects this year is focusing on creating a data diagnostic - a methodology that can be used to check whether the data you have access to is appropriate and can be better used to optimise the delivery of your services and solutions. We're in the process of testing this data diagnostic at the moment and would love to hear from you if you'd be interested in being one of the pilot test sites.

Innovating Your Service Business Model: The Capabilities to Succeed

One of the themes we have been exploring in the Cambridge Service Alliance is the question of how organisations best innovate their service business models. In some of our early work, Ivanka Visnjic and I, developed a framework of 12 capabilities that underpin successful service business model innovation. Since then we have been developing and iterating this framework, creating a maturity model that firms can used to assess the maturity of their capabilities for innovating their service business models. It seemed to me that it would a good idea to write a series of blogs on this framework and the twelve capabilities that underpin it - so here's the first one - explaining the framework.

In essence our research suggests there are four categories of capability that really matter when it comes to innovating the service business model. These are: (i) the ecosystem; (ii) the value proposition; (iii) the value delivery system and (iv) accountability spread. Let me explain these in turn.

The first set of capabilities are concerned with the ecosystem - increasingly competition is taking place at the level of the ecosystem, not the individual firm. In today's interconnected economy, what matters is the way the ecosystem is configured and how your firm is positioned to capture value from it. Apple and HP illustrate the point. If you ask the question - "of the $1,000 someone pays for an Apple or HP machine, who gets the money" - you find that Apple keep 60-70%, while HP keep only 30%. Why the difference? Because Apple use their own proprietary operating system (they don't cede money to Microsoft), they use their own chip (they don't cede money to Intel) and they have created their own distribution infrastructure (they don't cede money to the retailers).

So what can HP do? It is too late for them to develop their own operating system or get into chip manufacturing. Both technologies are too well established, with large incumbent players and high barriers to entry. The cost of establishing a retail infrastructure, certainly a high street retail infrastructure, is prohibitive. But what they can do is invest in Linux. If HP help Linux become a more dominant operating system then Linux reduces Microsoft's power in the marketplace and hence their ability to appropriate value, leaving more of the money on the table for HP. And in fact, it is in the interests of all of HP's traditional competitors to increase the power of Linux. So if HP collaborates with other laptop manufacturers, then collectively they can try to shape the ecosystem and their ability to capture value.

It is not just the ecosystem perspective that matters. The second theme that we saw in our research was the importance of innovating the value proposition - really understanding what the customer valued and the outcomes they were looking for. There's an old Theodore Levitt quote - "customers don't want quarter inch drills, they want quarter inch holes".  We don't think this is right. Customers don't even want quarter inch holes. When innovating your value proposition you have to understand why the customer wants the quarter inch hole. If it is to hang a picture, then how else might the picture be hung - you could glue it to the wall. You could invite an artist in to paint the picture on the wall. The key to innovating you value proposition is to understand deeply what your customers really value.

Beyond the value proposition, the third category of capabilities centred on the value delivery system. Here we are shifting into the question of how do we configure the resources and activities required to deliver the value proposition. What should we do? What should we ask others to do? Many of the services firms deliver today require networks of organisations to pool their capabilities. Understanding the right network structure and identifying the right partners is essential when innovating the service business model.

Finally, we shift to capabilities concerned with accountability spread. Here the idea is that by taking on responsibility for the outcomes your customers want - you increase your risk and exposure. By innovating the value delivery system - either through technology or partnering with others - you may decrease the control you have over the ecosystem. Hence you have increased your accountability, but potentially reduced your control - hence you may have increased your risk or accountability spread. Understanding the implications of this and how the risk will therefore be managed is paramount if the service business model is to be sustainable.

These four categories of capability - ecosystem, value proposition, value delivery system and accountability spread - form the highest level of our framework for understanding business model innovation. In future blogs I'll unpack each of these categories in turn and explain the capabilities that underpin them.

Professor Andy Neely

Director Cambridge Service Alliance