How manufacturing firms can become service and solution providers

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This presentation describes how manufacturing firms can become successfully service and solution provider. It is based on 15 years of experiences working intensively with firms. It shows the pains and gains for the strategic shift from products to solutions.

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How manufacturing firms can become service and solution providers

  1. 1. From products to services and solutions Heiko Gebauer heiko.gebauer@eawag.ch
  2. 2. If services & solutions become more important, companies that play this new game must understand its rules
  3. 3. Evolution in the value proposition From products to solutions Strategic focus Traditional product Valueaddedservices Value proposition “We sell and ensure highquality products“ “We improve product efficiency and effectiveness“ “We make the customer more successful” We prevent breakdown of ship motors We optimize your shipping costs We react very fast to fork lift breakdowns We reduce life-cycle for your fork lift fleet We improve your logistic efficiency We decrease the handling costs for Cparts Industries Solutions
  4. 4. Commercial aircraft industry
  5. 5. Airbus’ long way from the traditional product to value-added services and solutions Revenues in Billion (Euro) 40 Supply chain 10.4% revenue growth p.a. 10.2% more deliveries p.a. 20% more service revenue Maintenance Flight operators 30 Integrated Leasing firms 20 10 Aircraft manufacturers 0 2003 2004 Product revenue ... 2011 2012 Component suppliers Service revenue • 7400 airplanes in operation • Service revenues reach about 1.5 billion Euro (4% of total revenue) • Deliveries increased from 305 to 612 • General Electric (50%) • Lufthansa Technik (+5% p.a., 60% external) • Boeing (15%)
  6. 6. Five reasons why you should get married to solutions … Complexity Product Value-added services Solutions Few Many Fuzzy Homogenous Heterogeneous Individualistic Similar Localized Customized Demand Sales forecast (un)predictable Customer forecast Scope 1 to 3 1 to 15 1 to 15 X 3rd party Competitors Offerings Geography Adapted form Cohen et al. (200)6
  7. 7. Forecasting customers as „mutualism“
  8. 8. Five reasons why you should get married to solutions … Complexity Product Value-added services Solutions Few Many Fuzzy Homogenous Heterogeneous Individualistic Similar Localized Customized Demand Sales forecast (un)predictable Customer forecast Scope 1 to 3 1 to 15 1 to 15 X 3rd party Competitors Offerings Geography Adapted form Cohen et al. (200)6
  9. 9. Five reasons why you should get married to solutions … Complexity Product Value-added services Solutions Few Many Fuzzy Homogenous Heterogeneous Individualistic Similar Localized Customized Demand Sales forecast (un)predictable Customer forecast Scope 1 to 3 1 to 15 1 to 15 X 3rd party Competitors Offerings Geography Adapted form Cohen et al. (200)6
  10. 10. Companies struggling with service and solutions
  11. 11. Drivers for the solution business (1) Eroding product prices Price index 100 75 50 25 0 1 2 3 4 5 6 7 Product generations
  12. 12. Drivers for the solution business (2) Market potential "The [service] market is bigger than we ever dreamt“, Jack Welch the former CEO of GENERAL ELECTRIC Automotive 1/1 13/1 2.5/1 22/1 Locomotive Elevator 1.8/1 24/1 30/1 Tractor 0 10 20 30 Installed base to new order intake 1.2/1 0 1 2 Ratio life-cycle cost to investment cost 3
  13. 13. Drivers for the solution business (3) Automotive Locomotive Elevator Tractor
  14. 14. Technology-enabled solutions benefit the company and dealer network first and the customer second Interconnected installed base Information levels Beneficiaries Status Company / dealer network Diagnose Automated control Upgrade Customer profiles and behavior Automated replenishments Localization and logistics Contracting Purchase Customers Delivery Training Use / Operate Maintenance Locate
  15. 15. Trade-off between gain & pain Gain Pain  High service market potential (installed base)  Transitioning sales force  Service profitability > product profitability  Greater skill requirement  Value created by solution above and beyond the sum of the components  Greater business value for customers results in increased win rates  Opens up new markets  Increasing share of wallet / deal size  Improved customer retention  Longer sales cycle and lower hit rates  Service excellence  Investment in solution development and delivery  Cross-functional management effort
  16. 16. Evolution in the value proposition From products to solutions Strategic focus Traditional product Valueaddedservices Value proposition “We sell and ensure highquality products“ “We improve product efficiency and effectiveness “ “We make the customer more successful” We prevent breakdown of ship motors We optimize your shipping costs We react very fast to fork lift breakdowns We reduce life-cycle for your fork lift fleet We improve your logistic efficiency We decrease the handling costs for Cparts Industries Solutions
  17. 17. Hilti‘s strategic leap towards the solution business Hilti Consumables (e.g., anchoring & installation) Drilling, demolition, cuttin g, sanding and screw fastening systems Sales channels Customers Specialized shops Private builders Retailers Construction firms (e.g., Hochtief, Vinci, ACS, Bechtel, Fluor) Personal selling E-Shop
  18. 18. Hilti‘s strategic leap towards the solution business (2) Ted Levitt (Harvard Business Review 1960) “ … People don’t want to buy a quarter-inch drill. They want a quarter-inch hole… ”
  19. 19. Hilti‘s strategic leap towards the solution business (3) Products Consumables (e.g., anchoring & installation) Quality & innovation (e.g., drilling, demolition, c utting, sanding and screw fastening systems) Services Financial services Theft-insurance Add customer value, but what customers do the attract? Repair Maintenance Destroy customer value! Solutions Fleet management solutions (e.g. fee for administering the fleet) Purchase Delivery Repair Maintenance Replace
  20. 20. Michelin’s bumpy road to fleet management solutions Michelin Off-Road Tires Sales channels Customers Professional tire distributors (e.g., . independent regional entrepreneurs or bigger networks) Private Logistic firms Truck Tires Car Tires Euromaster and its 1,700 service centers in Europe Others
  21. 21. Michelin’s bumpy road to fleet management solutions (2) Products 4-lives of a tire Services Add customer value Solutions Selling kilometers, not tires Michelin Fleet Solutions Off-Road Tires Monitor Repair Truck Tires Switch Permute Car Tires Inflate MFS sales team, but ... Customer don’t get the value Pricing competition to sales sales approach Involve partners, but … Quality levels Customer complaints Incentives
  22. 22. Solution business is a painstaking work on many, many details Success factors  Managerial motivation  Innovation process  Value proposition  Marketing relationship  Strategy  Organization  Culture
  23. 23. Culture means NOT REPLACING product culture, but TO EXTEND it (1) Hierarchical level Top management Visionary Middle management Active Farmer Gate keeper Trusted adviser Entrepreneur Performance enables Reactive Hunter Daily operation Troubleshooter Preventing trouble Asset Purchasing Logistics Service/Maintenanc management e Scope of competencies Business development
  24. 24. Culture means NOT REPLACING product culture, but TO EXTEND it (2) Vision  Total solution is sold as a service Visionary  Total solution is sold Service Product Services Services Active Entrepreneur  Services are sold integrated in the total offering Product  Services are sold with hardware Product  Selling products and giving away services Product Services Doing „Selling services is just like selling seats in the airplane. You can not sell the seats from yesterday. You always have to take the opportunities”
  25. 25. Culture means NOT REPLACING product culture, but TO EXTEND it (3) Customer processes Application of cutting tools Gate keeper End-customer Optimization Distributor Evaluation Fraisa Purchasing Machine manufacturer Application Trusted adviser Performance enabler Bank Logistic provider Recycling firm Emergency purchase Replenishment Refurbishment Recycling
  26. 26. Culture means NOT REPLACING product culture, but TO EXTEND it (4) Customer processes Application of cutting tools Gate keeper Optimization Trusted adviser Performance enabler End-customer Distributor Machine manufacturer Evaluation Fraisa Purchasing Application Bank Logistic provider Recycling firm Replenishment Refurbishment Recycling
  27. 27. Organizational structure, processes, and incentives (1) Integrated Business unit BU Product Separated BU Product Cost centre for services Second-level support Regions Subsidiary / Dealers Markets BU Services Service delivery Subsidiary / Dealers Product sales Service sales & delivery
  28. 28. Organizational structure, processes, and incentives (2) Separated Business unit BU Product & systems Regions Profitcenter services Metrology solutions Second-level support Certified partners Markets Product partners Service partners Solution partners
  29. 29. Organizational structure, processes, and incentives (3) Integrated Cost centre for services Business unit Regions BU Busses BU BU Service Trucks s Cost centre for services Second-level support Second-level support Subsidiaries Markets Service delivery Dealers Service delivery
  30. 30. Organizational structure, processes, and incentives (4) Organizational structures Incentives Processes Culture
  31. 31. Roll-out – Starting to commercialize value-added service and solutions Products Value-added services Solutions
  32. 32. Is there a way to the gain? Yes it is, but ...  It is major organizational change process. Keep the existing AND building new competences, skills, and capabilities.  Re-consider the organizational structure, processes, and incentives.  There is not one organizational structure that fits all. Many small adjustment and its the sum of adjustments that matters  Careful roll-out planning (1, 2 and 3)  Convince yourself, convince your dealer, convince your customers
  33. 33. Thank you very much

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