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The strategic importance of services for manufacturing companies

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Information about The strategic importance of services for manufacturing companies
Business & Mgmt

Published on March 4, 2014

Author: hgebauer

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This presentation shows the strategic importance of services for the manufacturing industry.
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The strategic importance of servic for manufacturing companies HeikoGebauer Associate Professor for Service Management at the Institute of Technology Management (University of St.Gallen) in Switzerland Guest Professor at the Service Research Center (Karlstad University) in Sweden

Meaning of services in manufacturingcompanies (1/2) Theoretical perspectives Practical illustration Transition from product manufacturers to services providers Outsourcing services for manufacturing small volume cars Moving downstream towards services Construction and design of components Design of small volume cars Servitisation in the manufacturing sector Service business development Logistic support and technical advice Capital equipment manufactures moving towards high-value solutions Product-service-systems Sources: Wiseand Baumgartner, 1998; Davies (2004), Vandermerwe and Rada, 1988, Oliva and Kallenberg (2003), Mathyssens and Vandendempt (1998 and 2008), Brown, Gustafsson, Witell, 2009

Meaning of services in manufacturing companies (2/2) Theoretical perspectives Practical illustration Transition from product manufacturers to services providers Outsourcing services Service leverage (logistics or IT) Moving downstream towards services Service for other products Full services (service level agreements, extended warranty) Servitisation in the manufacturing sector Service business development Parts, field service, modernization Capital equipment manufactures moving towards high-value solutions Product-service-systems Sources: Wiseand Baumgartner, 1998; Davies (2004), Vandermerwe and Rada, 1988, Oliva and Kallenberg (2003), Mathyssens and Vandendempt (1998 and 2008), Brown, Gustafsson, Witell, 2009

Why should companies move into the service business? Anecdotal evidences "The [service] market is bigger than we ever dreamt“, Jack Welch the former CEO of General Electric Siemens announced the goal to create 50% of the total revenue through services IBM extended the service business (1993, 35.7% to. 60.2% of revenue attributed to services in 2003). Financial Strategic Service opportunities Marketing Augmenting the product offering More intense customer relationship Additional revenue Higher profitability than products More resistant to economic cycles Sources: Mathieu, 2001, IBM Annual reports, Simon, 1993 Adressing more comprehensive customer needs Co-created competences as resource barrier

Companies face strong challenges by extending the service business Anecdotal challenges Industry challenges ThyssenKruppsells its industrial service business because it could create synergies with its other business units. Service offerings are mainly restricted to basic services for the installed product base Comau increased the share of service revenue from 14 to 19% (2005-2008), but the corporate revenuedeclined about 29% Dürrprovided outsourcing services, but the corresponding challenges led to the decision to sell the service unit. Sources: Belzet al. 1997, Gebauer et al. 2005, Neu and Brown 2005 Investments in the service business do not create the corresponding returns leading to the “service paradox” Service are often given “free” during the negotiation of the product Service approach lack sufficient professionalization and systematization Despite expectations of about 50% revenues created through service, most companies still achieve less than 20%

Objectives on service business development Today Future New service in more than 5 years New services in 3 to 5 years Parts and field services Increased service contribution Increase total service revenues Higher share of service revenues Increase service profitability Increase customer satisfaction Parts and field services Learning objectives Potential barriers for service business development Strategic paths for service business Implementation of these paths

Understanding the complexity of service business development Learning objectives Barriers Strategic paths Implementation Service business is more complex than the product business Parameter Product business Service business Nature of demand More predictable, can better forecast Always unpredictable, sporadic Required response Standard, can be scheduled as soon as possible Number of product generations Limited 10 to 15 times higher Cognition can limit the extension of the service business Strategy formulation Overemphasis on tangible features Disbelief in the economic potential of services Considering services as too risky Strategy implementation Overemphasis on tangible features Focus on employees and not the service system Aggressive goals undermine credibility Sources: Cohen et al. 2006, Gebauer 2009

Identifying strategic paths through visualizing service opportunities Learning objectives Barriers Reconfiguration Strategic paths Implementation How do service opportunities occur?) Pre-Sales Sales After-sales Extension Primary customer activities Supplementary customer activities Where do service opportunities occur? AdaptedfromSawhney, 2004

Exploration and forming a new value constellation Learning objectives Hilti has formed a new value constellation through its fleet management Barriers New value constellation capturing nearly all customer activities Strategic paths Implementation After-sales service provider or customer support service provider Dynamic capabilities Sensing opportunities beyond existing industry barriers Seizing the business model Reconfiguring companies assets and structure

Exploitation and the corresponding service strategies Learning objectives Development partner Barriers Strategic paths Implementation After-sales service provider Customer support service provider Outsourcing partner Source: Gebauer, Fischer and Fleisch (forthcoming 2010)

Service strategies and the corresponding service offerings and value proposition Learning objectives Barriers Service strategy Service offerings Value proposition After-sales service providers Spare parts, repairs, inspections, hotline, installation, training React as soon as possible to product failures in customer processes Customer support service providers Preventive maintenance, process optimization, and aftersales services Preventing product failures in the customer process Outsourcing partners Operational services, operating customers maintenance function Reduce fix costs in the customer processes Development partners Design and construction services Apply development competencies to improve customer processes Strategic paths Implementation Source: Fischer, Gebauer, Gustafsson and Witell (forthcoming 2010)

Operational capabilities for implementing the service strategies Learning objectives Barriers Strategic paths Implementation Service orientation in the operational capabilities¹ A – abstract value of services, B – role understanding, C – personnel recruiting, D – training, E – compensation, F – distinction product and service organization, G – proximity to customers Development partners A 1 G B Customer support After-sales 0.5 service providers service providers 0 A A F C 1 1 G B G B 0.5 0.5 E D Outsourcing partners 0 0 F C F C A 1 E D E D G B 0.5 F 0 E Legend (0 –low, 1 – high –cluster means)¹ Source: Gebauer, Gustafsson, Edvardsson and Witell (forthcoming 2010), Neu and Brown (2005 and 2008) C D

Illustration of implementation actitivies Learning objectives Barriers Strategic paths Strategic paths Implementation of operational capabilities After-sales service providers to customer support service providers Changing the awareness from service as add-on to services as essential part of value creation Changing the employee’s roles from reliable trouble shooter to preventing failures Setting-up a separate SBU for services Increasing the service responsiveness in the human resource management Changing from central to decentralized service delivery Customer support service providers to outsourcing partners Turning the service SBU into an independent company Focusing on recruiting former employees of customers Training the role of reliable performance enablers Customer support service providers to development partners Set-up an integrated R&D team for design services Enhance service orientation in values, behaviors as well as human resources (recruiting, training, and compensation) Train behavioral and customer-focused attitudes Implementation Source: Gebauer, Gustafsson, Edvardsson and Witell (forthcoming 2010), Neu and Brown (2005 and 2008)

Objectives on service business development Today Future New service in more than 5 years New services in 3 to 5 years Parts and field services Increased service contribution Increase total service revenues Higher share of service revenues Increase service profitability Increase customer satisfaction Parts and field services Learning objectives Potential barriers for service business development Strategic paths for service business Implementation of these paths

Reflecting the learning objectives Potential barriers for service business development Managers often underestimate the complexity Cognition limits management efforts in formulating and implementing the service strategies Strategic paths for service business Service opportunities arise around primary and supplementary customer activities as well as extension and reconfiguration of customer activities Service opportunities can be either exploited or used to explore new value constellations Exploitations arises around extension and primary customer activities, whereas exploration focuses on the reconfiguration and the supplementary activities Exploitation creates strategic paths around after-sales service and customer support service providers as well as development and outsourcing partners Implementation of these paths Exploitationrequires the development of operational capabilities (culture, human resources and organizational structure) Explorations requires dynamic capabilities (sensing, seizing and reconfiguration)

Thank you very much for your attention Any questions? Heiko Gebauer Associate Professor for Service Management at the Institute of Technology Management (University of St.Gallen) in Switzerland Guest Professor at the Service Research Center (Karlstad University) in Sweden

Research proposal HeikoGebauer Associate Professor for Service Management at the Institute of Technology Management (University of St.Gallen) in Switzerland Guest Professor at the Service Research Center (Karlstad University) in Sweden

Research proposal: Service management in manufacturing industries Research activities Research fundings • Basic funding from the University 10%) Faculities (internal) • SNF (Swiss National Science Foundation) • Industry foundations (GebertRueff foundation) International cooperation Other faculities • EU-Project • KTI (commission for technology and innovation management) • Industry projects • Guest professorship Contributions • Scientific contributions (publications in selected academic journals) • Contributions for managers and companies (publications in management journals) (5-

Research approach Theoretical perspectives Contingency theory Resource-based view and capabilities Service-Dominant Logic (Value Creation) Behavioral theory of the firm Cognition theory Industries Manufacturing sector Infrastructure sectors Public transport Energy utilities (Smart Grid) Research methods - Empirical and not conceptual driven - Empirical includes both qualitative and quantitative research approaches

Research agenda - 1) The development of operational capabilities in the service business towards core capabilities 2) The impact of dynamic capabilities in the service business development 3) The role of market-orientation in the service business development 4) The organization theories on organizational structures.

Lecture concept Managing service operations HeikoGebauer Associate Professor for Service Management at the Institute of Technology Management (University of St.Gallen) in Switzerland Guest Professor at the Service Research Center (Karlstad University) in Sweden

Managing Service Organisations (1) Content Chapter 1: Characteristics and categorization of services and their implications on managing services, customer integration Chapter 2: Strategic perspective on services – service strategies, strategic approaches to achieve differentiation opportunities and cost advantages, resource-based and market-based view in the context of services Chapter 3 and 5: Operational perspective on services Service innovation – innovation process, innovation approaches and tools Service delivery – service operation, service delivery, service recovery Service marketing – moments of truth, gap-model and communication of services Chapter 6: International perspective on services – international service strategies, internationalization process and market entry, cultural impact on service innovation, service delivery and service marketing Chapter 7: Leadership perspective on services – management processes, human resource management, performance measurement systems Chapter 8-9: Service management in specific industries Manufacturing industry Health care services Energy sector Banking and insurance industry

Managing Service Organisations (2) Learning objectives Guidance for developing service strategies and to achieve sustainable competitive advantages through services and in service industries Usages of tools and decision support systems to analyze strengths and weaknesses in the service innovation, service delivery and service marketing processes Understanding of potential challenges and conflicts in the leadership process Guidance for driver, limitations and strategies for the internationalization of services In-depth application of these competencies in selected industries Didactics Attendance in class is favored Interactive learning processes Theoretical knowledge is presented through the actual application Practical examples to illustrate the argumentation Case studies

Thank you very much for your attention Any questions? Heiko Gebauer Associate Professor for Service Management at the Institute of Technology Management (University of St.Gallen) in Switzerland Guest Professor at the Service Research Center (Karlstad University) in Sweden

Exploitationorexploration: How to approachtheserviceopportunities? Learning objectives Barriers Exploration Reconfiguration • Radical improvement • New value constellation • Dynamic capabilities Strategic paths Implementation How do service opportunities appear?) Extension Pre-Sales Sales After-sales Exploitation • Incremental improvements • Value-adding to existing value constellation • Development of operational capabilities Primary customer activities Supplementary customer activities Where do service opportunities appear? AdaptedfromSawhney, 2004, Fischer, Gebauer, Guanjie, Gregory and Fleisch. (forthcoming 2010)

Exploitationorexploration: How to approachtheserviceopportunities? Learning objectives Barriers Exploration Reconfiguration • Radical improvement • New value constellation • Dynamic capabilities Strategic paths Implementation How do service opportunities appear?) Extension Pre-Sales Sales After-sales Exploitation • Incremental improvements • Value-adding to existing value constellation • Development of operational capabilities Primary customer activities Supplementary customer activities Where do service opportunities appear? AdaptedfromSawhney, 2004, Fischer, Gebauer, Guanjie, Gregory and Fleisch. (forthcoming 2010)

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