The Service Imperative

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Key takeaways for service executives from the Oxford Economics report on manufacturing transformation.

The service opportunity is now. Transforming service is key to driving profitable growth and competitive advantage. That’s what executives from manufacturing companies told Oxford Economics in a recent study commissioned by PTC. Inside you’ll find other key takeaways from the survey, specifically for service leaders.

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The Service Imperative

  1. 1. Manufacturing Transformation for Service Executives The Service Imperative Key takeaways for service executives from the Oxford Economics report on manufacturing transformation Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  2. 2. Manufacturing Transformation for Service Executives The service opportunity is now. Transforming service is key to driving profitable growth and competitive advantage. That’s what executives from manufacturing companies told Oxford Economics in a recent study commissioned by PTC. Inside you’ll find other key takeaways from the survey, specifically for service leaders. Oxford Economics Oxford Economics was founded in 1981 as a joint venture with Oxford University. Since then, they have become one of the world’s foremost independent global research firms. Headquartered in Oxford, England, with offices throughout the world, Oxford Economics employs more than 80 professional macroeconomic and industry economists—one of the largest teams of economists in the private sector. Get more information at oxfordeconomics.com PTC PTC’s technology solutions help customers transform the way they create and service products across the entire product lifecycle—from conception and design to sourcing and service—to create sustained competitive advantage. Founded in 1985, PTC employs approximately 6,000 professionals, including 1,300 dedicated service professionals, serving more than 27,000 businesses in rapidly-evolving, globally distributed manufacturing industries worldwide. Get more information at PTC.com Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  3. 3. Manufacturing Transformation for Service Executives Survey Profile The complete findings can be found in the Manufacturing Transformation report. Click here to download. Oxford Economics surveyed more than 300 manufacturing executives early in 2013. The survey covered major industries and world markets. Respondents represented a range of titles and business functions, from companies large and small. What is your firm’s industry segment? Medical Devices Industrial Equipment 17 17% Electronics / HighTech United States Aerospace and Defense 17% 16% % In which country is your company headquartered? China Japan Germany 16% South Korea Automotive Taiwan France 17% Denmark Norway Sweden Consumer / Retail / Apparel What best describes your role? Finland 0 10% Which best describes your business function? 59% 15% 20% 25% 30% 35% Annual revenue Very large: over $5b Supply Chain / Manufacturing 21% Product / Engineering 41% I am a C-level executive 5% IT 25% 29% 25% Small: $250m – $750m Strategy I report to a C-level executive Service Large: $1.26b – $5b Operations 0 Finance 5% 10 % 15 % 20 % Medium: $751m – $1.25b 25 % Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  4. 4. Manufacturing Transformation for Service Executives Survey Findings What executives told us points to manufacturing industries and companies in transition. Their answers helped fulfill the survey’s objectives to: ANALYZE how external market forces are transforming manufacturing strategies and competitive positioning. MEASURE the impact of strategy and planning, service, and manufacturing operations on business performance. PROVIDE INSIGHT In Depth To provide additional context for the research study’s findings, Oxford Economics interviewed executives from selected manufacturers in depth. You’ll see mini case studies on some of these companies, plus others, inside: John Deere Emerson Climate Systems Boston Scientific Ingersoll Rand into how manufacturing firms will drive growth, innovation, and customer satisfaction in the future. Flip through this e-book’s pages for the survey’s findings most relevant to service executives. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  5. 5. Manufacturing Transformation for Service Executives External market shifts Waves of Change 66% Economic realignment Technology change 61% 60 % Supplier/partner relationships 60% Technology—67% Technology advances make servicing products more complex. Talent Shortages—70% 70 Especially challenging: finding service managers with strong technical skills. Suppliers and Partners—70% 70% Navigating supply chains to support customers isn’t getting any easier. Increased Regulations—63% Service is the main front for regulatory compliance and customer complaints. 63% Increased regulations 46% Changing customer behavior 20% 67% 59% Global competition 10% What will have the greatest impact in the future? Executives overall identified the major trends shown at left. From the service executive’s perspective, these concerns take highest priority: % Talent shortages/labor costs 0% Market shifts are reshaping the competitive landscape for global manufacturers. 30% Service executives 45% 40% 50% 60% 70% 80% 90% 100% All executives Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  6. 6. Manufacturing Transformation for Service Executives Differentiator & Driver In a time of profound change, manufacturers agree: Service is a key market differentiator. For many manufacturers, service is, in fact, the top driver of competitive advantage. C-level manufacturing executives place higher value on differentiating through service than their staff. Fortune 1000 firms rank service as their most important competitive driver for the future. For manufacturers of all sizes, service is only slightly behind… and catching up fast. 68% 77% 63% 67% C-Level Executives Report to C-Level 0% 20% Today 40% 60% 80% High-tech and automotive firms see the “service as differentiator” trend most clearly. 62% 67% Europe 75% 82% 59% Asia Consumer/retail Industrial equipment Aerospace/defense 66% Medical devices 0% Today 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of respondents 3 Years Today Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 84% 68% 74% 64% 72% 60% 70% 63% 65% 56% 60% Automotive In 3 years Europe’s manufacturers put more emphasis than others on differentiating through service. U.S. 77% High-tech 100% In 3 years PTC.com
  7. 7. Manufacturing Transformation for Service Executives Service Innovation Given the growing strategic importance of service, manufacturers’ increasing focus on service innovation is not surprising. High-margin manufacturers see service innovation as a higher priority than other industry categories. Priority of service innovation 58 57% 56% High-tech Aerospace/defense Medical devices Industrial equipment Consumer/retail 10% 20% 30% % 40% 50% 80 % 60% 70% 10% or lower 0% 20% 40% + – 72% 62% 60% 80% 100% Case in Point: John Deere John Deere—the world-renowned maker of equipment for farmers, ranchers, loggers, builders, homeowners, and all others linked to the land—continually innovates in service. 80% 90% 100% % of respondents Today 10.1% or higher margin 70% 69% 69% 68% 56% 64% 54% 54% 56% Automotive 0% 10 68 % Total % In 3 years Over half of manufacturers now place high priority on innovating in service strategy and execution. Over two-thirds will do so in the near future. Among high-tech firms, 57% now focus on service innovation. This number will climb to 80% in three years—a rise of over 40%. The number of automotive firms keying on service innovation will increase from 56% to 70%—a 25% jump. “What’s leading edge today,” says Pat Pinkston, vice president of global platform services,“ becomes standard tomorrow.” Example: Telematics— for sending, receiving, and storing information on product performance— was formerly an add-on option, but now comes with all John Deere products. Some data can be remotely monitored. For John Deere, service innovation is not just about improving customer relationships and increasing service revenue. Insights gained from service performance feed back throughout the company to help improve current products and generate ideas for new products. John Deere uses the term “servitization” to describe this process. Each innovation cycle contributes to further differentiating John Deere products in customers’ eyes. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  8. 8. Manufacturing Transformation for Service Executives Bottom-Line Impact Innovation is shifting service’s primary benefit from cost reduction to revenue growth. Profits get a turbo-boost when manufacturers place higher priority on service. There’s consensus among manufacturing executives: By focusing on service, they’re raising their company’s revenue now—and will increase it even more in the future. At lower levels of priority, service has more impact on costs than revenue. When service prioritization rises, costs reduce much more, while revenue rises even more sharply. Revenue and cost impact of a focus on service The bottom-line impact from shifting to high priority on service varies somewhat by industry, but is felt significantly in all. 10% 9.5% 7.1% 8% 6% 4 % 2% 0% -2% -4% -6% -8% -10% 10% Revenue increase 9.3% 4.3% Cost reduction -6.9% -8.9% Today In 3 years Impact over time 4 Revenue increase 0% -2% -4% -6.1 % Moderate High Case in Point: Emerson Climate Systems % 2% -8.5% Low 6% 6.1% Cost reduction -5.5% 8% -6% -8% -10% Charles Peters, vice president of service engineering for Emerson Climate Systems, believes that focusing on service innovation helps drive sales revenue even before service offerings have been specified and integrated into a product line. The reason: “Customers prefer working with innovative firms,” he says. Emerson has seen meaningful gains in market share for core products based on the promise of future service delivery. Priority placed on service Through expanded use of remote diagnostics, customer self-diagnosis, and other service innovations, productivity is rising—as are company profits. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  9. 9. Manufacturing Transformation for Service Executives Service Strategies These strategies, in particular, drive manufacturers’ service transformation initiatives: Survey findings on the next few pages expand upon these specific service strategies, particularly from the service executive’s perspective. 1 Service as a Profit Center 2 Remote Diagnostics 3 Performance-Based Contracts 4 Service Anywhere Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  10. 10. Manufacturing Transformation for Service Executives Service Strategies—Service as a Profit Center Nearly half of all manufacturers operate service as a profit center. More will soon. Firms operating service as a profit center 45% Total High-tech Aerospace/defense 37 36% % Automotive Medical devices 10% 20% 30% 66% 65% 50% 59 58% Automotive 10% 60% 70% 22% 20% 80% In 3 years Industrial equipment and high-tech companies will remain furthest ahead of the trend. Automotive firms will be the fastest adopters of service as a profit center. 53% 51% 50% 42% 32% Consumer/retail Industrial equipment 58% 40% 39% 37% Aerospace/defense % 32% 30% 40% 50% 60% 70% % of respondents Today % of respondents Today 44% High-tech 46 44% 40% 48% Medical devices 0% 0% 36% Total % 42% Consumer/retail Firms bringing service in-house 56% 55% 52% 49% Industrial equipment To improve results, more manufacturers will bring service in-house. In 3 years Medical equipment and high-tech manufacturers will lead the charge. Asian manufacturers are ahead on bringing service in-house—and will remain ahead for the near future. Smaller firms are ahead of larger firms in organizing service as a profit center. Firms with higher margins are ahead for now—but smaller-margin firms are narrowing the gap. U.S. 33% 39% Europe 29% Today Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 39% 42% Asia 60% 3 Years PTC.com
  11. 11. Manufacturing Transformation for Service Executives Service Strategies—Remote Diagnostics Case in Point: Boston Scientific Remote diagnostics are on the rise. They’re revolutionizing service delivery. Pacemakers from Boston Scientific monitor a heart patient’s progress inside and outside of the hospital. Remote diagnostics are thus practically inherent in the product—not just in the service of them. Sujal Bhakalai, the company’s vice president of operations, puts it succinctly: “Remote diagnostics are transforming medical device manufacturing.” The use of remote diagnostics for service is increasing everywhere—in some industries faster than others, but in all of them significantly. The use of remote diagnostics is growing 40% Total 47% Aerospace/defense Automotive 22% 42% 34% Consumer/retail High-tech Industrial equipment 36% Medical devices 0% 10% 20% 56% 59% 30% 50% 63% 50% 58% 47% 66% 40% 50% 60% 70% % of respondents Today In 3 years Smaller firms are catching up to larger firms in adopting remote diagnostics for service. Asian manufacturers are furthest ahead of the trend. The size of a manufacturing company can make some difference in the use of remote diagnostics. Yet this will matter less in the future. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  12. 12. Manufacturing Transformation for Service Executives Service Strategies—Performance-Based Contracts Soon, nearly two-thirds of manufacturers will offer performance-based service contracts. Now behind American manufacturers, Asian and European manufacturers will soon leap ahead in their use of performance-based service contracts. Performance-based service contracts becoming common 41% Total 49 Automotive Industrial equipment Consumer/retail 0% 10% 20% % 40% 45% 43% Medical devices 40% 66% 39 Europe % Today 62% 61% 60% 65 % 34 % Asia 69% 50% 60% 70% 80% In 3 years Aerospace and defense firms, along with makers of medical devices, will be practice leaders. Manufacturers of consumer products will see the biggest jump in performance-based service contracts—almost doubling their use. 3 Years Case in Point: Ingersoll Rand % of respondents Today 61 % 70% 36% 34% 30% 52 U.S. % 74 % Aerospace/defense High-tech 65% Ingersoll Rand’s Trane division offers performance-based service contracts that allow a building owner to apply future energy and operational savings to financing of HVAC equipment upgrades. The customer’s added value isn’t simply to predict a cut in energy costs—Trane effectively guarantees the savings through this innovative service option. And when you consider that energy is the largest single operating expense in most buildings (with A/C alone typically accounting for 40% of the total bill), the savings stand to be significant. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  13. 13. Manufacturing Transformation for Service Executives Service Strategies—Service Anywhere Manufacturers with the highest revenue and profit growth will move decisively to design, build, and service anywhere. Globalization’s challenge: staying close to customers, wherever they are. Manufacturers are moving to tailor their offerings to regional needs, preferences, expectations, and standards. Design, build and service anywhere 26% 35% Total Aerospace/defense High-tech Automotive Consumer/retail Medical devices Industrial equipment 0% 10% 58% 40% 60% 80% 100% In 3 years Asian manufacturers will soon lead their European and North American counterparts. North America 40% Europe 60% Asia 70% 50% 30% 40% 50% 60% 70% 80% % of respondents Today 65% 69% 20% Today 63% 60% 56% 54% 16% 20% 0% 67% 26% 29% 26% 24% 28% 29% High Revenue Firms High Profitability Firms In 3 years Design, build, and service anywhere will grow a remarkable 125% in three years. Aerospace and defense manufacturers now lead in the practice—and plan to keep leading. C-level executives see more value than their staff in design, build, and service anywhere. 31% 22% C-Level Executives Report to C-Level Industrial equipment manufacturers will be particularly ambitious. They’ll more than triple their efforts to design, build, and service anywhere. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0% 20% Today 64% 55% 40% 60% 80% 100% In 3 years PTC.com
  14. 14. Manufacturing Transformation for Service Executives Service Transformation Manufacturers aiming to transform service should recognize three current realities: Not all parts of the company assign the same importance to service. Manufacturing, finance, and, as you’d expect, service executives believe that service will be a top driver of competitive advantage in three years. 60% 50% Coordinating service with other functions is critical for success. Increasing the coordination of service strategy with R&D and manufacturing will grow increasingly important. This trend will continue across major industries. Greater strategy coordination of service with other functions Service Manufacturing Finance With research and development 40% 0% 30% 40% 72% 74% 60% 80% 100% In 3 years Service strategy correlates to profits. Firms that focus more on coordinating service with other functions have higher margins. 10% 0% Service 50% 20% Today 20% 60% 59% 54% With supply chain and manufacturing Operations Manufacturing R&D R&D IT 40% 30% Thinking horizontally about service—i.e., making it integral to strategy development across functions—leads to higher ROI for a manufacturer’s growth initiatives. Feedback from service to other functions is becoming the norm. Manufacturers will increasingly use the product and service performance insights gained from service execution to help drive… 20% 10% 0% But operations, R&D, and especially IT executives, see things differently as they look ahead. Service leaders may wish to cultivate their peers in IT, in particular, to help realize their organization’s bold vision for service transformation. 58% 71% 52% 65% 47% 59% …service planning …product development …supply chain, manufacturing 0% 20% Today 40% 60% 80% 100% In 3 years More than ever, service feedback influences product designs. This includes small enhancements, but also major innovations—such as the increased use of remote diagnostics to create smart products. Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com
  15. 15. Manufacturing Transformation for Service Executives It’s one thing to talk the talk on the service imperative. Better to walk the walk. Use this brief action checklist to assess your organization’s current status and future preparedness for taking full advantage of the service opportunity. (1) How is your senior management—across functions, including R&D, HR, and IT—addressing the critical role of service for gaining competitive advantage? (2) How especially can you enhance coordination of service with R&D, the supply chain, and manufacturing? (3) Does your organization have a closed feedback loop between service execution and service planning, R&D, and manufacturing and supply chain management? (4) What organizational changes are you making to run service as a profit center and incorporate performance-based service contracts into your business model? (5) How much are you able to service anywhere through partner and supplier networks, remote diagnostics, and other enabling technologies? Want to know more? Click here to download PTC’s ebook on Service as Strategy. © 2013, PTC Inc. (PTC). All rights reserved. Information described herein is furnished for informational use only, is subject to change without notice, and should not be taken as a guarantee, commitment, condition or offer by PTC. PTC, the PTC logo, Windchill, and all other PTC product names and logos are trademarks or registered trademarks of PTC and/or its subsidiaries in the United States and other countries. All other product or company names are property of their respective owners. The timing of any product release, including any features or functionality, is subject to change at PTC’s discretion. J2669–Oxford-Economics-for-Service-Exec-ebook–EN–1013 Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 PTC.com

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