Competitive advantage; from sustainable to temporary by resilience, speed and reconfiguration of resources. CBS Competitiveness Day 2014 @ Copenhagen Business School

1. Driving Competitiveness through
Servitization
Competitiveness Day
08 September 2014
servitization@cbs.dk

2. 2
What we have accomplished in
pre-phase
 5th International Seminar on Service Modularity and Architecture,
January 16-17, CBS – with the participation of 25 researchers from 15
European universities
 Workshop with practitioners “Driving Competitiveness through
Servitization, April 28, CBS
 Booklet – “Driving Competitiveness Through Servitization: A Guide for
Practitioners”, published by CBS Competitiveness Platform
 Development of a research agenda for Phase 2 of the project

3. 3
Agenda
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

4. 4
Intense societal debate on the
competitiveness of Danish industry
Headlines such as:
• If we move our production, what is next?
• Productivity in Denmark is lagging behind
• Will the innovation activities go the same way?
• Can re-insourcing replace off-shoring?
• How to cope with “servitization”?
• Creation of value through new business models
• What would Denmark live off?

5. 5
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
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

6. 6
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

7. 7
Agenda
What we do Heading
1. Factors influencing the competitive situation • Global challenges
2. How to compete in this environment • Operations strategy

8. 8
Competitive performance
objectives
Competitive
performance
objective
Implications Examples of KPIs for
manufacturing
Examples of KPIs for
service
Quality • Being right
• Fit for purpose
• Process control
• Defects per unit
• Mean time to failure
Customer satisfaction
Flexibility • Being able to change
• Customization
• Resilience
Range of product mix Range of service mix
Speed • Being fast
• Risk of obsolescence
Cycle time for process Response time
Dependability • Being on time
• Trust
• Stability
% orders delivered on
time
% faults addressed
within time
Cost • Being productive
• Efficiency
Efficiency Labor productivity

9. 9
Polar diagram for our service
versus a competitor’s service
Cost effectiveness
Quality Flexibility
DependabilitySpeed
Competitor
Our company
Required performance

10. 10
Agenda
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

11. 11
Servitization - creating value
through the provision of services
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. 12
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

13. 13
Extending the value proposition
through servitization

14. 14
Agenda
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

15. 15
Servitization is an attractive
strategic response

16. 16
From component manufacturer to
solution provider
Type of Servitization Characteristics
Product Oriented
Use Oriented
Result Oriented
• The business model is still
mainly geared towards sales of
products, but some extra
services are added
• The product stays in ownership
with the provider, and is made
available in a different form,
and sometimes shared by a
number of users
• The client and provider in
principle agree on a result, and
there is no pre-determined
product involved
Examples
• Product related services
• Advice and consultancy
• Product lease
• Product renting or sharing
• Product pooling
• Activity Management/Outsourcing
• Pay per service unit

17. 17
Agenda
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

18. 18
Contracting potentials and risk

19. 19
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

20. 20
Agenda
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

21. 21
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

22. 22
Agenda
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

23. 23
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

24. 24
Agenda
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

25. 25
Addressing the servitization
paradox
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

26. 26
Challenges of delivering advanced
services and integrated solutions
Firms face a stream of challenges that should be evaluated vis-à-vis the performance
objectives, both in the short term and long term. They have to:
• Create leadership support from top management to sales and operations managers
• Make the necessary investments to develop and implement services and solutions
• Change the mind-set and capabilities of the organization to selling and delivering services
and solutions
• Make a strategic effort to capture the potential of the installed base
• Develop KPIs and align incentives to ensure integrated sales and delivery of products
combined with services
• Coordinate and align the development of new products integrated with new services
• Involve customers in the development process
• Create the necessary flexibility and adaptability to enable customization
• Formulate attractive value propositions through better understanding of customer needs
• Ensure that the quality of service provision lives up to customer expectations
• Specify Service Level Agreements to ensure an appropriate balance of risk and rewards in
the face of information asymmetry
• Develop trustful relationships to support the investment in customer specific competencies
• Manage the geographical and cultural distances in a globally distributed network of service
partners

27. Servitization as a global competitive strategic response - why do we embark on
servitization?
• Management of value chain and inter-firm relationships
• Mapping of servitization landscape in Denmark
• Benchmarking
• Investment decisions for service development
Design and innovation for servitization – what is needed to realize servitization?
• Innovating business models
• Mapping of servitization performance
• Development of new services
• Formulation of value propositions for value creation and value capture
• Managing the adoption of disruptive process technologies
• Development of servitization for sustainability and reverse logistics of products
The processes of servitization transformation – how to implement servitization?
• Development of new knowledge, capabilities and skills
• Development and management of distributed network of service partners
• Development of KPIs and alignment of incentives within the company and with partners
• Development of managerial tools for self-assessment of servitization performance and roadmapping
Research THEMES

28. Mapping – the researcher gathers information to identify Danish manufacturing companies
that are pursuing servitization and to graphically show the levels of servitization maturity. We
expect the mapping phase to take 10 months approaching 200 companies and then giving
feed-back to those responding.
Case studies – the researcher explores how servitization is applied in a company over a
period of time and makes comparisons with other servitization activities (both within the
company and with one or more companies). The duration of a project is 3 – 9 months.
Action research – the researcher is active in the company servitization process
implementing the concepts and models from the theory of servitization. The duration of a
project may be 1.5 - 3.5 years.
In-depth longitudinal field studies – the research is carried out on the basis of interactive
and participatory roles held by the researcher often with the researcher embedded in
servitization projects in the company with hands-on application of the theories and tools over
a continuous period of time. The duration of a project may be 2 - 3.5 years.
Clinical research - the researcher participates in problem solving projects within the
company. The researcher assists the company in developing servitization and solving
problems in the process. These projects should be planned and negotiated between the
company and CBS. The duration of a project is dependent on the issue(s).
Our approach

29. 29
Our approach
Academic Partners
 Domestic (e.g., DTU, Aarhus University)
 International (e.g., Cambridge University, London Business
School, Aalto University)
Industrial Partners
 Interactive field projects
 Progressive knowledge development
Funding
 The Danish Industry Foundation
 Companies

30. Would you like to be an industrial
partner of ours?
What types of research projects
would be interesting to you?
We’d be delighted to hear your thoughts!
servitization@cbs.dk