Service business development in manufacturing companies

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This presentation is a very comprehensive view on different aspects of service business development in manufacturing companies. It discusses necessary investments into the service business, cognitive limitations for these investments, service strategies, organizational structures, and service business in China.

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Service business development in manufacturing companies

  1. 1. Service Business Development in Manufacturing Companies Heiko Gebauer Department Innovation Research in Utility Sectors - Eawag: Swiss Federal Institute of Aquatic Science and Technology University of St.Gallen (Switzerland) Karlstad University (Sweden)
  2. 2. Agenda 1. Attention-based and cognitive perspective on the service business development 1. Environment-strategy & strategy-structure configurations 2. Capability perspective on service business development 3. Service business development in China Cranfield University
  3. 3. Meaning of services in manufacturing companies Theoretical perspectives Cranfield University 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 Selectedsources: Wise and Baumgartner, 1998; Davies (2004), Vandermerwe and Rada, 1988, Oliva and Kallenberg (2003), Mathyssens and Vandendempt (1998 and 2008),Neely (2008), Brown, Gustafsson, Witell, 2009
  4. 4. Why should companies move into the service business? Cranfield University 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 Adressing more comprehensive customer needs Co-created competences as resource barrier Sources: Mathieu, 2001, IBM Annual reports, Simon, 1993
  5. 5. In business practice, companies face the “service paradox” Anecdotal challenges ThyssenKruppsells its industrial service business because it could not create synergies with its other business units. 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: Belz et al. 1997, Gebauer et al. 2005, Neu and Brown 2005 Cranfield University Industry challenges Service offerings are mainly restricted to basic services for the installed product base 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%
  6. 6. Understanding the complexity of service business development Cranfield University 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 Sources: Cohen et al. 2006
  7. 7. Contributions Cranfield University a) An investigation of the relationship between behavioral processes, motivation, investments in the service business and service revenue (together with Elgar Fleisch) b) An attention-based view on service orientation in the business strategy of manufacturing companies
  8. 8. Cranfield University From behavioral processes to overall profitability (1) Behavioral processes H1 Level of managerial motivation H2 Investments in the service business H3 Share of service revenue H4 Overall profitability
  9. 9. Cranfield University From behavioral processes to overall profitability (2) Behavioral processes H1 Level of managerial motivation 40% H2 Investments in the service business H3 Share of servicerevenue H4 Overall profitability 38.7% 35% 30% Fraction of companies sampled (n=199) 26.6% 25% 19.1% 20% 15% 11.1% 10% 4.5% 5% 0% 0-10% 10-20% 20-30% 30-40% Share of service revenue to total revenue over 40%
  10. 10. Cranfield University From behavioral processes to overall profitability (3) Behavioral processes H1 Level of managerial motivation H2 Investments in theservicebusi ness H3 Share of servicerevenue H4 Overall profitability 40% 33.9% 35% Fraction of companies sampled (n=199) 30% 25% 27.7% 21.7% 20% 15% 12.2% 10% 5% 4.5% 0% 0-5% 5-10% 10-15% 15-20% over 20% Share of investment in the service business on total investments
  11. 11. From behavioral processes to overall profitability (4) item Factor (construct) and item description¹ Cranfield University Factor loading Cronbach Alpha 0.87 Factor 1: Behavioral proceses 1 2 3 4 Our managers have not regnized the financial opportunities of an extended service business Our managers are highly risk averse on exploiting the strategic oppportunities of services Our managers tend to set overambitious goals for extending the service business Our managers have shown to overemphasis obvious causalities 0.78 0.82 0.67 0.86 0.81 Factor 2: Managerial motivation 5 6 Our managers put a high valence on extending the service business Our managers expect that their effort in extending the service business will succeed in more service revenue 0.84 0.83 0.95 Factor 3: Investments in the service business 7 8 What is the share of investmenst in service to total investments? Our managers invest substantially resources in extending the service business 0.92 0.97 0.87 Factor 4: Share of service revenue 9 10 What is the share of service revenue on total revenue? The services that we offer contribute substantially towards overall enterprise revenue 0.90 0.82 0.78 Factor 5: Overall profitability 11 12 Average return on sales of the business unit over the last three years. Average return on sales in comparison to industry average. 0.74 0.72 ¹ All items were measured on a 5-point scale (1 = lowest score, 5 = highest score). Exept for item 7, 9, 11 and 12 asked on a Likert-type scale (with the anchors 1 = totally disagree and 5 = totally agree). Item 7 was measured on a Likert-type scale with 1 = 0-5%, 2 = 5-10%. 3 = 10-15%, 4 =15-20% and 5=more than 20%. Item 9 was measured on a Likert-type scale with 1 = 0-10%, 2 = 10-20%. 3 = 20-30%, 4 = 30-40 and 5=more than 40%. Item 11 was measured on a Likert-type scale with 1 = negative, 2 = 0-2.5%. 3 = 2.5-5%, 4 = 5-7.5 and 5=more than 7.5%. Item 12 was measured on a Likert-type scale with 1 = very much below the industry average and 5 = very much above industry average.
  12. 12. Cranfield University From behavioral processes to overall profitability (5) H1: β =.-501, p ≤ .01 H2: β =.352, p ≤ .01 Behavioral processes H3: β =.479, p ≤ .05 2 1 Level of managerial motivation H4: β =.493, p ≤.01 3 Investments in the service business 4 Share of service revenue Overall profitability
  13. 13. Contributions Cranfield University a) An investigation of the relationship between behavioral processes, motivation, investments in the service business and service revenue (together with Elgar Fleisch) b) An attention-based view on service orientation in the business strategy of manufacturing companies
  14. 14. Attention-based theory of the firm Model of attention and firm behavior Cranfield University Key triggers • Focus of attention • Situated attention • Structural distribution of attention Source: Ocasio, 1997
  15. 15. Research model Cranfield University Focus of attention Situated attention H4 (+) and H5 (+) H6 (+) Competitive intensity H1 (+) Service orientation of the business strategy Customer expectations H3 (+) Overall profitability H2 (+) H - Hypothesis Strategy-formulation perspective Source: Gebauer (2009) Strategy-implementation perspective
  16. 16. Research model Cranfield University Focus of attention Situated attention H4 (+) and H5 (+) H6 (+) Competitive intensity H1 (+) Service orientation of the business strategy Customer expectations H3 (+) Overall profitability H2 (+) Strategy-formulation perspective Strategy-implementation perspective Hypothesis can not be rejected H - Hypothesis Source: Gebauer (2009)
  17. 17. Agenda 1. Attention-based and cognitive perspective on the service business development 1. Environment-strategy & strategy-structure configurations 2. Capability perspective on service business development 3. Service business development in China Cranfield University
  18. 18. Contributions Cranfield University a) Identifying service strategies in product manufacturing companies by exploring environment–strategy configurations a) Match or mismatch: strategy-structure configuration in the service business in the service business of manufacturing companies (together with Anders Gustafsson, Bo Edvardsson, and Lars Witell)
  19. 19. Cranfield University Research framework (1) Configuration of external environment and strategy External environment •Competitive intensity in the product field •Competitive intensity in the service field •Market growth •Customer‟s price sensitivity •Customer‟s strategic options for operating the product Strategy •Cost leadership •Product differentiation •Service differentiation •Service marketing differentiation •Service offering
  20. 20. Results Cranfield University The eight cluster emerging from the external environment constructs and strategy constructs match to four configurations •After-sales service providers • Customer support service providers • Outsourcing partners • Development partners
  21. 21. Contributions Cranfield University a) Identifying service strategies in product manufacturing companies by exploring environment–strategy configurations a) Match or mismatch: strategy-structure configuration in the service business in the service business of manufacturing companies (together with Anders Gustafsson, Bo Edvardsson, and Lars Witell)
  22. 22. Research framework (2) Cranfield University Configuration of service strategy and organizational design elements Service Strategies •Basic services for the installed base (after-sales services) •Advanced services for avoiding failures on the installed base •Design & construction services •Operational services (outsourcing services Organizational design elements Corporate culture a) Abstract value of services, b) Role understanding, Human resources c) Personnel recruiting d) Personnel training e) Personnel compensation Organizational structure f) Distinction product and service organization g) Proximity to customers
  23. 23. Results Four matching configurations were identified Cranfield University
  24. 24. Organizational design elements for implementing the service strategies Cranfield University Service orientation in organizational design elements¹ 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 Legend (0 – low, 1 – high – cluster means)¹ 0 E C D Source: Gebauer, Gustafsson, Edvardsson and Witell (forthcoming 2010), Neu and Brown (2005 and 2008)
  25. 25. Implement the strategy by adaptating typical factors on organizational design Corporate culture Service Strategy Role of employees After-sales service provider Customer support service provider Values of providing services Human resource management Personnel recruitment Personnel training Outsourcing Partner Integration of business unitresponsibility Development partner Organizational structure Intra-& interfirm collaboration Global service infrastructure Cranfield University
  26. 26. Defining different service packages for customers Cranfield University TRUMPF ServicePlus NaSa The extended night / saturday telephone hotline for support outside normal office hours. TRUMPF ServicePlus Tele The online-connection for efficient services and higher availability of machinery. TRUMPF ServicePlus Classic All preventive maintenance for one flat-rate. TRUMPF ServicePlus Special All preventive maintenance and remedy of all ocurring breakdowns for one flat-rate. TRUMPF ServicePlus Premium All-in-one – the extensive service for a TRUMPF machine. TRUMPF ServicePlus Extra The special services for more convenience.
  27. 27. Triggers for improving the service excellence Establish a separate service organization SIG Pack ... SIG Pack BU Systems SIG Pack ... Service SIG Pack ... Service Cranfield University BU Stand. Mach. SIG Pack ... Service SIG Pack ... Service BU Service Business CC Logistics IT / Prozesse Prod. Manag. Sales and Service-Hubs BU Systems BU Stand. Mach. Profit & Loss Responsibility Operative Leadership of ServiceHubs Definition of standardised Processes / IT Infrastructure Product-Management Resonsibility of local service business – Service-Sales – Spare parts Management – Fieldservice – Modernization – Hand over management Quelle: R. Hänggi, 2003
  28. 28. Investing in an international service infrastructure Third Level Support •Document services and database information support •Extended training support •Extended trouble shooting with qualified engineers •Technology and process support •Project support •Spare part stock for most used parts •Repair and Manufacturing of spare parts •Sales support Cranfield University HQ First Level Support (service base) •Local contact / language •Basic helps on phone •Local engineer support •Spare part order handling Second Level Support (subsidiary) •Hotline support •Preventive service programs •Basic training programs •Trouble shooting on side •Replacement parts on stock for urgent help •Spare part order handling •Commissioning and start up handling
  29. 29. ABB and NOKIA Cranfield University
  30. 30. Succeeding through the service strategies opens-up the potential of providing solutions Development partner After-sales service provider Customer support service provider Outsourcing partner Cranfield University Solution provider •Key capabilities: •Balancing different business models •Integration of different business models •Flexibility across different business models •Customer proximity to understanding requirements according to the business model Source: Gebauer, Fischer and Fleisch (2010)
  31. 31. Agenda 1. Attention-based and cognitive perspective on the service business development 1. Environment-strategy & strategy-structure configurations 2. Capability perspective on service business development 3. Service business development in China Cranfield University
  32. 32. Contributions Cranfield University a) Exploitation or exploration in service business development?: Insights from a dynamic capabilities perspective (together with Thomas Fischer Thomas, Ren Guanjin and Mike Gregory) a) Capability perspective on service business development in small and medium suppliers (together with Marco Paiola and Bo Edvardsson)
  33. 33. Two different approaches for the service business development Characteristics Exploitation Cranfield University Exploration Type of organizational change Incremental improvements of the existing strategic stage Radical, jump towards new strategic stage Primary addressed service opportunity (customer activity chain) Value constellations Temporal expansion within the primary customer activity chain Spatial reconfiguration within the adjacent customer activity chain Value-adding to existing value constellations Defining new value constellations Service-oriented performance improvements 10% to 27% of share of service revenue within a period of 10 to 12 years. From less than 20% to more than 40% share of service revenue within about 5 years
  34. 34. Exploitation or exploration: How to approach the service opportunities? Cranfield University Exploration Reconfiguration How do service opportunities appear?) • Radical improvement Pre-Sales Sales • New value constellation • Dynamic capabilities After-sales Exploitation Extension • Incremental improvements • Value-adding to existing value constellation • Development of operational capabilities Primary customer activities Supplementary customer activities Where do service opportunities appear? Adapted from Sawhney, 2004, Fischer, Gebauer, Guanjie, Gregory and Fleisch. (forthcoming 2010)
  35. 35. Exploitation and the corresponding service strategies Cranfield University Development partner After-sales service provider Customer support service provider Outsourcing partner Source: Gebauer, Fischer and Fleisch (forthcoming 2010)
  36. 36. Exploration and forming a new value constellation Cranfield University Hilti has formed a new value constellation through its fleet management New value constellation capturing nearly all customer activities 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
  37. 37. Service business development Cranfield University Exploration Phase 1: Integrating basic services into the product price Phase 2: Creating a new value constellation Phase 3: Making use of the service expansion along the adjacent customer activity chain Exploitation Phase 1 Integrating basic services into the product price Phase 2: Separating product and service business to extend service profit and revenue Phase 3: Making use of the service expansion along the primary customer activity chain
  38. 38. Service business development Cranfield University Exploration and dynamic capabilities Phase 2: Creating a new value constellation Sensing • Create markets,new customer value opportunities, and shape market behavior • Past competitive behavior function as hurdles for re-shaping the market structure. • Opened-up beyond traditional value chain logic and industry borders Seizing • Strategic vision of new value opportunities • Sophisticated approach to decision-making under high uncertainty • „Umbrella strategies' for the new value constellations • Risk management routines Reconfiguring • Reconfigure internal organizational design factors • Reconfigure business relationships with external • Integrate or reintegrate service and product • Customers buy and value is not a product or service but utility
  39. 39. Contributions Cranfield University a) Exploitation or exploration in service business development?: Insights from a dynamic capabilities perspective (together with Thomas Fischer Thomas, Ren Guanjin and Mike Gregory) a) Capability perspective on service business development in small and medium suppliers (together with Marco Paiola and Bo Edvardsson)
  40. 40. Existing research concentrates on OEMs 3rd tier supplier 2nd tier supplier • Very few evidences how small and medium suppliers can exploit the potential of service business development Sources:Matthyssens, Vandenbempt and Weynst, 2009; Gebauer, Paiola, Edvardsson, 2010 1st tier supplier OEM (Original equipment manufacturer) Cranfield University End customer Focus of existing research • OEMs moving into the aftermarket • OEMs possessing strong resource positions Sources: Matthyssens and Vandendempt, 2008; Fang, Palmatier, and Steenkamp, 2008; Oliva and Kallenberg, 2003; Davies, 2004; Neu and Brown, 2005; Raddats and Easingwood, 2010; Windahl and Lakemond, 2010.
  41. 41. Following factors motivate research on SMSs (small and medium suppliers) Small and medium suppliers Cranfield University Research motivation • Scope of product and service components necessary to provide solutions might correspond with the competence-base of MNEs, but is most probably beyond the organizational boundaries of SMSs • SMSsmight not reach the critical mass, which is needed by the service business to become profitable • OEMs are in superior market position to offer services throughout a long life cycle Source: Picture is free-licensed by Gettyimages Sources: Wise and Baumgartner, 1999; Davies, 2004; Oliva and Kallenberg, 2003; Gebauer , Fleisch and Friedli, 2005; Auguste, Harmon and Pandit, 2006; Gebauer, Paiola, Edvardsson, 2010.
  42. 42. Deepening the theoretical concept on service business development is necessary Success factors Cranfield University Organizational capabilities • Organizational capabilities, in general, originate from the resourcebased view • Organizational capabilities are twofold, including operational and dynamic capabilities • Organizational structures, human resources, corporate culture, measurement & rewards, service business development Sources: Wise and Baumgartner, 1999; Davies, 2004; Oliva and Kallenberg, 2003; Gebauer , Fleisch and Friedli, 2005; Auguste, Harmon and Pandit, 2006; Gebauer, Paiola, Edvardsson, 2010. Source: Picture is free-licensed by Gettyimages • Operational capabilities enable a company to earn a living in a relatively stable business environment • Dynamic capabilities encapsulate the evolutionary nature ofresources and capabilities (sense, seize, reconfigure) Sources: Penrose, 1959; Barney, 1991; Zollo and Winter, 2002; Eisenhardt and Martin, 2000; Teece et al., 1997; Zahra and George, 2002; Winter, 2003.
  43. 43. Focus is on qualitative research Research question Cranfield University Research methodology •Interpretative multiple-case study approach relying on a range of supplier industries in four European countries (Germany, Italy, Sweden and Switzerland) How organizational capabilities of small and medium suppliers coevolve with the service business development? •Setting was chosen on conceptual grounds rather than for its representativeness •Qualitative data was obtained between 2001 and 2009 through longitudinal action research with three of the nine participating SMSs and interviews with the remaining six SMSs •Analysis includes within-case analysis and crosscase analysis •As the capabilities emerged inductively from the field work, we turned to the previous research conceptually substantiated the capabilities and their interrelation with service business development.
  44. 44. Dynamic and operational capabilities are conceptualized in the following way Dynamic capabilities Cranfield University Operational capabilities Organizational routines Crossfunctional Broadfunctional Activityrelated External Internal Specialized SingleTask Individual cognition and skills Based on: Teece2007; Stefano, Peteraf, Verona, 2010. Individuals‟ specialized competencies Based on: Grant, 1996.
  45. 45. Our results indicate three different trajectories of service business development (1) Cranfield University Trajectories for the service business development Key characteristics Alpha: Enhancing relational value to the existing supplier-buyer relationships Beta: Financial value-seeking behavior in existing and new supplier-buyer relationships Number of SMSs 6 2 Strategic intension • Exploiting service opportunities insupplier-buyer relationship Business logic • Changing incrementally from transaction- to relationshiporiented business logic Competitive advantages • Co-produced relationalcompetencies Financial indicators • Services create 10% price premium for products Gamma: Radical leap towards a new value constellation downstream in the value chain 1 • Exploiting service opportunities for • Exploring untested service additional service revenues and market profits • Changing incrementally from • Forming radically a new transaction-orientation for products value network to transaction-orientation for products and service • New customers in adjacent valueadded steps • Co-produced service• Competencies co-produced competencies within the value network • Services create about 15% of the • Services create additional total revenue revenues and create about • Service achieves margin 25% of revenue leverage of two compared to • Service revenue achieves product revenue margin leverage of three compared to product revenue
  46. 46. Dynamic capabilities for the trajectories Alpha Beta Gamma Sensing • Timely and reactively • Breaking with the • Incremental preoccupations improvements • More counter-cycle • Marketing opportunities in • Financial opportunities customer relationships • • • • • Seizing • Balancing costs for services and quality of supplier-buyer relationship • Reconfiguring • Defining the value associated with the new services • Value-based prices for each service • Verifying willingness to demand and pay for the services Cranfield University • • • • • Corporate culture, human • Corporate culture, • resources and human resources, measurement systems organizational structures, and innovation process • Opening-up to strategic opportunities Market structure endogenous Substituting theory-in-use Emphasizing new value propositions Driving the structure of the market and shaping the market behavior Value propositions as utility, which product and service does for the customers ‚Umbrella strategies' with various scenarios Anticipating how each scenario would affect value creation logics Mobilizing other network player Visioning a value network, which forms new value constellations Corporate culture, human resources, organizational structures, and innovation process inside the single supplier Orchestrating reconfiguration activities of other network actors
  47. 47. Operational capabilities for the trajectories Alpha Beta Corporate culture • Behavioral roles of trusted • Services as potential source of adviser and “whatever-it- revenue and profits takes” philosophy • Behavior roles of a reliable service providers and "whatever-is-paid and valued" philosophy Human resources • Learn more quickly the nature of customer's service expectations • Rewarding “whatever-ittakes philosophy Cranfield University Gamma • Openess to re-structure the value chain and value constellations • Roles on breaking and critically reconsidering industry recipe • Roles on providing reliable solutions • Convince customer's to pay for • Partnering competencies to create services collaborative learning relationships • Rewarding outstanding financial • Developing behavioral competencies to learn performance (rewarding the quickly to provide integrated solutions "whatever-is-paid and valued" through a network of business partners philosophy) • Rewarding cooperation's with business partners and solving customer problems in collaboration with business partners Organizational structure • Service teams with profit-andloss responsibilities • Solution teams withprofit-and-loss responsibilities • inter-company collaboration with business partners Measurement • Erratic re-calculation of systems customer profitability • Set of financial and non-financial • Set of financial and non-financial indicators for the service teams indicators for the solution teams Innovation process • Milestones and assessments of the financial benefits • Opening-up the innovation process to business partners • Integrating product and service innovation into solution innovation processes
  48. 48. Our study offers following insights Theoretical implications  By concentrating on SMSs, we could also depart from the previous focus on considering the service business development as a single firm effort. Cranfield University Managerial implications  Described guidelines are managerial guidance for implementing one of the three trajectories  Trajectory Alpha and Beta entail network insights by describing the reconfiguration of capabilities between SMSs and their distributors.  Gamma shows how cooperating with new business partners forms a new network. Limitations  The dominating trajectory Alpha results from a familiarity, propinquity and maturity traps.  Future research should obtain additional qualitative data to replicate our findings  High path dependence for each trajectory Source: Matthyssen and Vandendempt (2008)  Analysis of dynamic and operational capabilities is limited when it comes to understand the potential path dependence leading
  49. 49. Agenda 1. Attention-based and cognitive perspective on the service business development 1. Environment-strategy & strategy-structure configurations 2. Capability perspective on service business development 3. Service business development in China Cranfield University
  50. 50. Contributions Cranfield University a) Global approach to the service business in manufacturing companies a) Business-to-business marketing as a key factor for increasing service revenue in China (together with Chunzhi Wang, Bernold Beckenbauer, Regine Krempl) and Spare parts logistics in China (together with Gunther Kuzca and Chunzhi Wang)
  51. 51. Global challenges in internationalizing the service business Establishing a global service infrastructure Cranfield University Service business development in China
  52. 52. Establishing a global service infrastructure Cranfield University Global level Organizational distinctiveness between product and service business Market level Responsiveness local requirement Integration Low (1) Integrated and ethnocentric global service approach Medium High ( 2) Integrated and polycentric global service structure Separation (4) Separated and geocentric global service structure (3) Separated and polycentric global service structure
  53. 53. (1) Integrated and ethnocentric global service approach Configuration Central Cranfield University Description Service organization is integrated as a cost center in the business unit for products • Central product organization controls marketing, sales, services, manufacturing, R&D, accounting/finance, and human resources Product organization Service organization Service offering: •Basic services for the installed base De-central Market organizations (M) •Advanced technical support •Part delivery from central warehouse Customers (C) C M1 • Service organization is integrated as a cost center in the business unit for products • Market organizations (sales agent or subsidiaries) sell products and provide customer service to augment the product during the sales phase of the product • The central service organization provides basic services for the installed base and advanced technical support • Services are included in the product price M2 M3 … Service offering: •Customer service C C … • Market organization has low decision-making authority • The central organization communicates intensively with the local organization
  54. 54. (2) Integrated and polycentric global service structure Configuration Central Description Service organization is integrated as a cost center in the business unit for products Product organization Service organization De-central Market organizations (M) M1 M2 M3 … Cranfield University Service offering: •Third level support Service offering: First-level and second- level support • Customer service • Basic services for the installed base • Maintenance services Parts delivery from local warehouse Customers (C) C • Service organization is integrated as a cost center in the business unit for products • The market organizations are a relatively independent units and control product sales, provision of customer service, basic services for the installed base, few maintenance services, and human resources. • Market organizations set-up local warehouses for spare parts delivery. • The third level support remains in the central organization • Key positions are obtained by local sales and service employees C C … • Central service organization has relatively low authority and decision making competencies • Volume of communication and information from the central to the market organization and among different market organizations is low • Services are included in the product price
  55. 55. (3) Separated and polycentric global service structure Configuration Description Separate business unit (BU) for services with own profit-and-loss responsibility Central BU Product BU Services Service offering: •Third level support De-central Market organizations (M) M1 M2 M3 … Cranfield University Service offering: First-level and second- level support • Customer service • Basic services for the installed base • Maintenance services Parts delivery from local warehouse Customers (C) C C C … • Service organization is an independent business unit with its own profit-and-loss responsibility • The business unit for services controls the service development, spare parts logisticss, and service support functions. • In each country remains a single market organizations that is still responsible for the product and service business, but the cost and revenue structure clearly distinguish between product and service business. • Market organization provides first- and second level support (customer service, basic services, maintenance services, whereas the separated central service organization takes over the responsibility to provide third level support. • Services are charged separately facilitating service profitability. • Relatively low decision-making authority remains in the central service organization. • Little communication between central business unit for services and local service centers and among the local service centers of different market organization.
  56. 56. (4) Separated and geocentric global service structure Configuration Central Description Separate business unit (BU) for services with own profit-and-loss responsibility BU Product BU Services Service offering: •Third level support Regional Service -Hub Cranfield University Service offering: •Second-level support •Parts delivery from regional warehouse De-central Market organizations (M)¹ Customers (C) Large markets Service offering: C M1 M1 First-level support¹ • Customer service Other markets • Basic services for C M2 the installed base • Preventive services C and service M3 contracts • Collaborative approach between both central business units (products and services) and the market organizations. To enhance the collaborative approach, the manufacturing companies reported to install regional functions. • Regional warehouses are established • Service hubs provide second-level support • Market organizations concentrate on selling preventive services and service contracts. • The service hubs facilitate the information flows between the central and local organization and promotes the exchange of experiences among the different market organizations. • Service hubs decide about the degree of standardization of the service offer and balance between the transferability of services across market organizations versus customization for individual customers. • Companies recruit and develop the best employees everywhere in the world for key positions across the global service network. • The managing directors of the different market organizations and the head of the business unit services are typically part of the management team of the hub. ¹According to market size and maturity, large market organizations can offer both 1st and 2nd level service offerings.
  57. 57. Contributions Cranfield University a) Global approach to the service business in manufacturing companies a) Business-to-business marketing as a key factor for increasing service revenue in China (together with Chunzhi Wang, BernoldBeckenbauer, RegineKrempl) and Spare parts logistics in China (together with GuntherKuzca and Chunzhi Wang)
  58. 58. Manufacturing companies achieve lower shares of service revenue in total revenue in China Cranfield University Service revenue as a percentage of total revenue, operating margin [in percent] 25 21.2 20 Percentage of service revenue on total revenue Operating margin 15 8.2 10.3 10 5.1 5 0 European service organizations of Swiss equipment manufacturing companies Chinese service organizations of Swiss equipment manufacturing companies
  59. 59. Effects of Chinese cultural characteristics on service management (1/2) Cranfield University Service strategies Cultural characteristics Effects on service management After-sales service provider Long-term orientation Establishing a binding relationship corresponds with supporting customer's purchase decision by offering customer service for "free". Guanxi, renqing and mianzi Service managers deliberately use "free" customer services for establishing a guanxi network and "giving face" to their customers. Long-term orientation Chinese service managers also use the "free-of-charge" approach for related services. Guanxi, renqing and mianzi Service managers deliberately use "free" product-related services for establishing a guanxi network and "giving face" to their customers. Power distance The high power distance in China limits the empowerment of service managers and service technicians to offer product-related services proactively. Guanxi, renqing and mianzi Service managers and service technicians are highly reluctant to change their mindsets. Customer support service provider
  60. 60. Effects of Chinese cultural characteristics on service management (2/2) Service strategies Cranfield University Effects on service management Uncertainty avoidance The preference for personal relationships limits the implementation of contractual arrangements for pricing equipment availability Power distance Customer support service provider Cultural characteristics Establishing a long-term relationship by using a "free-of-charge" approach for product-related services reduces the risk perceived by customers when they consider the purchase of equipment availability Guanxi, renqing and mianzi Service managers support customers to improve all processes associated with a company‟s product. In this case, they “give face” to their customers by praising customers' reputations Guanxi, renqing and mianzi Service managers deliberately use "free" product-related services for establishing a guanxi network and "giving face" to their customers. Guanxi, renqing and mianzi The guanxi network supports a reputation and personal relationships with its customers. Family as the base economic actor The fact that the base economic actor is the family rather than the firm leads to a high fluctuation among service staff.
  61. 61. Increasing spare parts logistic performance (1) Cranfield University Existing spare parts logistic concepts are insuffficient for the Chinese market (1) Direct export of spare parts from Europe to customers in China (Asia). Advantages - - Disadvantages - - - Low inventory and working capital costs. Low operating costs for the central warehouse in Europe. High availability of spare parts at the central warehouse. High logistics costs due to express transport mode. Long delivery times caused by customs clearance delays. Low customer satisfaction due to long delivery times. (2) Provision of spare parts from local warehouses and warehouses replenished from Europe to customers in China (Asia) - Short delivery times for parts available locally. - High customer satisfaction due to short delivery times. - Low logistics costs due to replenishment shipments from Europe to Asia rather than single express deliveries. - High inventory and working capital costs. - High costs for operating and maintaining a network of local warehouses. - Limited availability of spare parts at the local warehouses.
  62. 62. Increasing spare parts logistic performance (2) Cranfield University Combination of bonded and non-bonded stock could solve various challenges Spare parts center in Europe Beijing Korea Japan CSC Asia Shanghai Hong Kong Taiwan Thailand India Singapore* Hub ( bonded / non-bonded) Local warehouses *SEA is in charge of the following countries: Malaysia Vietnam India Philippines Pakistan Myanmar Indonesia Australia New Zeland
  63. 63. Detailed processes Cranfield University IT-Link SAP Virtual transfer of part Delivery Value1 Customs border Invoice (USD) Value 2 Value1 + freight + margin Defective part by log. partner Credit note (USD) For defective part Document / Value transfer Logistics partner / WMS Bonded stock End User in China Delivery Temporary Borrowing (only China) Payment VAT + duties Invoice for services Europe Customsaut horities Invoice (local currency) Non-bonded stock Value3+freight+margin+VAT Value 3 = Value 2 + duty + fees Defective part Sales Co. Delivery (physically) Daily process Monthly/weekly process process 63

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