A session at the CBS Competitiveness Day 2015 - This presentation will give an overview of how service business models can provide opportunities for driving competitiveness of Danish industry. The presentation is based on the ongoing applied research project 'Driving Competitiveness through Servitization’ which is supported by The Danish Industry Foundation. The project focuses on service strategies of manufacturers and is carried out in collaboration with a number of Danish companies.

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Driving Competitiveness through
Servitization
CBS Competitiveness Day
10 September 2015
servitization@cbs.dk
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About theproject
• Four year project funded by The Danish Industry Foundation (okt. 2014-18).
• The project includes both large and SME’s with different types of products/core
processes (OEM’s and subcontractors of components and materials).
• We build on a pre-project carried out in the spring of 2014.
• Dissimination activities are expected to reach 200 companies with around 15
case studies and one or more longitudinal field studies.
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Who are behind the project
• Christer Karlsson, Professor, Academic Director CBS Competitiveness Platform
• Juliana Hsuan, Professor (mso), Department of Operations Management
• Thomas Frandsen, Adjunkt, Department of Operations Management
• Jawwad Raja, Adjunkt, Department of Operations Management
• Christina Merolli Poulsen, Projektleder, CBS Competitiveness Platform
• Ieva Harjo, Forskningsassistent, Department of Operations Management
• Kai Inga Basner, Student, Department of Operations Management
• Christina Schou Mikkelsen, Student, Department of Operations Management
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Driving Competitiveness through
Servitization
What we do Heading
1. Factors influencing the competitive situation • Global challenges
2. How to compete in this environment • Operations strategy
3. Servitization – what can be offered in
addition to the product?
• Servitization of manufacturing
• Extending your value proposition
4. How far to go – what services to offer • Strategic considerations
• Moving from product manufacturer to
service provider
5. Clarifying the service as a product • Contracting potentials and risk
6. The service relation has implications on how
to calculate costs
• Calculating costs
7. Considering the customer perspective • Perspectives on servitization
8. The challenges of servitization • The servitization paradox
• Challenges to servitization
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Productivity has been a topic of
intense debate during the last years
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A growing realization that services
are important for competitiveness

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Companies in the Industry Core
Group
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Competitiveness is the capability to
create value
• Competitiveness aims at qualifying as
a supplier and winning the order
• It deals with outcompeting competitors
• Productivity is just one factor
Competitiveness is a cross-
disciplinary issue
CBS brings together research and
practice across fields and industries
www.cbs.dk/competitiveness
Productivity and Competitiveness:
Challenges to Management
Why focus on competitiveness? Key competitiveness dimensions
The purpose of the platform is to strengthen competitiveness
of Danish industry in a global context
Quality Flexibility
DependabilitySpeed
Cost effectiveness
Competitor Our company
Required
performance
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Factors and trends that affect
industrial operations worldwide
Factors Trends Description
Macroeconomic
Globalization Competition from low cost countries
Commoditization Competition shifts to cost
Customer demand Risk aversion and new contract forms
Market
Lock in customers
Sale of equipment at low cost to profit from spare parts and
maintenance
Life cycle offerings Total cost of ownership calculations
New profit formulas Fixed costs and long term, outcome based contracts
Technology
Internet of Things/Connectivity
Incorporation of sensors and actuators in machines to provide
remote maintenance and continuous information
Big Data analytics Making sense and analysis of the vast amount of field data
Additive manufacturing (3D Printing)
Displacement of inventory and spare parts by installing 3D
printers at the customer’s site
Environmental
Geopolitical Export controls and conflict regions
Ownership vs. usage
Using rather than owning physical assets is more economically
sound for the customer and environment friendly for all
Global resource scarcity
Energy prices, CO2 reduction, design for disassembly, take
back systems
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Background and driving forces
Competitive advantage; from sustainable to temporary
by resilience, speed and reconfiguration of resources
• Danish companies are increasingly competing on global markets
• Information and communication technologies shape economics
• Innovation is happening at a much higher pace
• Technology is transferred
• Complex product and process systems are becoming more intertwined
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Servitization - creating value
through the provision of services
Servitization is about competing through value propositions that
integrate services with product offerings
Servitization is about competing through value propositions that
integrate services with product offerings
Servitization based on
physical product:
- Adding services
- Offering functions
- Total solutions
Essentially it is about
‘interfering’ in your
customers’ processes
Selling an asset Providing recovery
Maximizing availability Offering outcomes
(See table 4 on page 10) 12
Services can have a large potential
for growing revenues and profits
Vestas, June 12, 2014 Presentation from Capital Markets Day, ’Capture full potential of the
service business’ slide 9

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Value propositions and customer
expectations
Type of value
proposition
Customer expectations Example
Selling an asset Quality and performance of
equipment
Offer customized product
Providing recovery of
an asset
Minimum disruption in case of
equipment failure
Repair of equipment after
notification
Maximizing the
availability of an asset
Fault free equipment Provide remote and preventive
maintenance
Offering outcomes for
the customer
Assisting customers to achieve their
goals
Take over customer
functions/activities
A product goes into to the processes of the customer
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Extending the value proposition
through servitization
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Servitization is an attractive
strategic response
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Product-centered servitization
A portfolio of services is directly coupled to a product offering
• Products (goods) as a tangible commodity manufactured to be sold and quite
simplistically is capable of “falling on your toe”
• Services: “economic activity that does not result in ownership of a tangible asset”
• Servitization is “the increased offering of fuller market packages or “bundles” of
customer focussed combinations of goods, services, support, self-service and
knowledge in order to add value to core product offerings” (Vandermerwe and Rada, 1988)
Use
Oriented
Service
Result
Oriented
Service
Product
Oriented
Service
Maintenance
Repair
Leasing
Renting
Pooling
Activity management
Functional outcome
Product Service
Tucker (2004)
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Contracting potentials and risk
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Risks involved in servitization
Experiences from practice show mixed results on profit when firms
increase their service activities. Risks involved in servitization include:
Potential Risk Example
Recovery Lack of service infrastructure Involve partners, create service clusters
and networks
Availability Less revenue from service offerings Penetrate your installed base in order to
increase the adoption and capacity
utilization
Development Customer‐specific development costs Charge the design and the construction
of services separately and offer to
equalize them when the product is
purchased
Outsourcing Operational risks Risk pooling, transferring risk to
suppliers, integrate risks in pricing
mechanism

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Product Service System
categorization matrix
Standard service
Integral product
coordination of spare
parts for green cruise
ships
Standard service
Modular product
repair of galleys in
bulk carriers
Specialized service
Integral product
R&D consulting for
green cruise ships
Specialized service
Modular product
software upgrades for
navigation systems
Product System
ServiceSystem
integral modular
specialized
standard
Hsuan et al. (2012) 20
Calculating costs
Life Cycle Cost Analysis
Costs of a product’s entire life
Total Cost of Ownership
From price orientation to total cost
of owning a product
Both methods influence investment decisions
within the company and across value chains
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Competitive Priorities
• Competitive priorities and manufacturing strategy for OM
(e.g. Skinner, 1969; Hayes and Wheelwright, 1984; Swamidass, 1986;
Anderson et al., 1989).
• Cost, quality, delivery and flexibility most common
priorities.
• Studies do not adopt customer perspective to inform
priorities for manufacturing strategy.
• The customer’s perceptions of value should inform the
competitive priorities of a manufacturer.
• What are the priorities for servitized manufacturers?
• Advocated within the servitization literature is the need to
understand how customers value services (Vandermerwe,
1990; Baines et al., 2009).
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Defining value
From goods-dominant logic to service-dominant logic
SDL argues value can no longer be defined by the provider, but
evaluated through usage by the customer (Vargo and Lusch, 2004)
Embedded value
Performances against
product/service attributes
for which the customer is
prepared to pay
Value-in-Use
Customers’ perceptions of the
usefulness of the product
on offer, equivalent to ‘total
utility’
Use
process
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The Customer Perspective
• Who then is the customer?
• Decision whether to purchase maintenance and support services for
product offerings is often determined by buyers and end-users (cf.
Cohen and Whang, 1997; Kowalkowski, 2011).
• For example, users may focus on ease of use, whilst buyers may
focus on cost.
RQ: What are the similarities and differences between the attributes of
value-in-use from a buyer and user perspective for servitized offerings?
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Industrial engagement
Asset
Management
Repair your assets
through optimizing
your inventory and
simplifying your
transactions through
a single point of
contact for all
repairs.

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Comparison of Buyer and User
Attributes
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Understanding the customer’s
“make or buy” process
Typical customer needs Implications for the service provider
Focus on core activities Design services to seamlessly support and enhance the value of
customer’s core activities
Restructuring costs Evaluate the option of retaining product ownership and offering a
“leasing” service
Access to talent Adopt a customer centric focus and ability to offer expertise adapted
to customer needs
Reduce time to market Offer engineering and R&D capabilities as a service to the customer
and become a development partner
Manage risk Consider how scale, specialization and expertise can become a
valuable source of mitigating business risks
Manage capacity Increase flexibility of resources to mitigate fluctuations in demand
when customers procure services to manage capacity
Increase scalability Increase volume flexibility and ramp up speed
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Addressing the servitization
paradox
An observed “service paradox” in which revenues earned by the
manufacturer may increase but profits actually decrease with greater
servitization.
An observed “service paradox” in which revenues earned by the
manufacturer may increase but profits actually decrease with greater
servitization.
Setting strategic direction
Define and communicate a clear
service strategy and initiate the
necessary investments to align the
strategic direction with operational
capabilities
Adjusting organizational
design
Create the organizational
arrangements to support the
development, sale and delivery of
services and align performance
measures and objectives
Developing capabilities
Develop capabilities for designing
and delivering services, including
technical expertise, customer
orientation and Information
Technology
Establishing a service culture
Provide managerial attention to the
values supporting service design
and delivery such as customer
orientation, heterogeneity and
flexibility
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Activities and ways of
collaborating
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For more information
Visit our web-site blog.cbs.dk/servitization
Write us at servitization@cbs.dk