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What is Servitization and Why Should You Care?


There are some words that should have never seen the light of day.  “Servitization” is one of them.  Despite the fact that it does not fall trippingly from the tongue – actually it’s downright ugly – the term keeps showing up like a stray cat looking for a handout.

A few years ago its ambiguous and persistently recurring nature prompted two members of the U.K.’s Warwick Business School to try and trace it’s shape shifting career, noting that it’s been called a managerial philosophy, a model, a concept, an innovation and much more.  Wiktionary defines the term simply as “The delivery of a service component as an added value, when providing products.”

Well, whatever servitization means, it’s back. And it’s the linchpin of a plan to revitalize U.K. manufacturing, which appears as part of a recent special report titled Re-igniting Growth. 

Published by the Economic and Social Research Council (ESRC), the report investigates what it will take to kick-start the laggard U.K. economy. Based on interviews with leading academic luminaries, it explores initiatives across education, business, housing, banking, and manufacturing, to name a few.

ESRC is the U.K.’s largest organization for funding research and social issues. Many of the report’s themes are now being taken up by other related organizations and hopefully will translate into affirmative actions on the part of the country’s government – actions that may resonate with related sectors in the U.S.

But let’s return to servitization. 

In the report chapter titled “Servitisation: Ugly Term for a Clever Manufacturing Plan,” Professor Andy Neely acknowledges that a strong manufacturing sector is essential for sustainable economic growth in the U.K. 

Radical Changes Needed

But Neely, the Deputy Director of the ERSC-funded Advanced Institute for Management Research, is looking beyond the usual recipes for success – he is calling for a radical change in the way manufacturing companies offer their products. And servitization is, as the report notes, at the heart of this process.

Says Neely, “Companies are recognizing that firms don’t necessarily want a product, they want the capability that the product brings.  They want the outcome – they don’t want a quarter-inch drill but the quarter-inch hole it makes.”  BAE Systems, a client of Neely’s, offers servitization to the Ministry of Defense. (You can read more about BAE Systems and it’s contribution to the Eurofighter here.)  Rolls Royce sells more than aircraft engines; it offers a total package where customers buy “power by the hour” – they are purchasing the capability, not just the hardware.

In the same spirit, other U.K. manufacturers are offering contracts that include care and support throughout the entire lifecycle of the product.

Professor Neely is a busy fellow.  He is also a Director of the Cambridge Service Alliance at the University of Cambridge where he has done research to determine how many manufacturers are embracing servitization.  Among his findings are that nearly four out of 10 U.K. manufacturers are trodding this hallowed path.  This is not quite up to the 60 percent of the U.S. companies embracing this approach, but better than the Chinese who came in at 20 percent.  However, it should be noted that China was at one percent just six years ago.

“The idea that firms in the U.K. can do the high-value bit and emerging economies can do the low-cost manufacturing is a fallacy,” he comments.  “The reality is that everyone is chasing the same part of the value chain because they recognise that the value lies in offering the services around the product as much as in the product itself.”

The challenge for U.K. manufacturers and government policymakers is to make the necessary moves to capture a substantial share of a servitization-based high-value market.  This includes investing in the technological infrastructure that allows these services to delivered as part of the overall product package. For example, the inclusion of sensor devices that allow companies to track how their products are being used can help them anticipate repair requirements.

New Business Approach

Servitization requires a new business approach relying on a closer alignment of the incentives of the producer and the customer, the report goes on to say.  This may require a new mindset.  A simple example: leasing a car may be preferred to outright ownership.  Says Neely, “For manufacturing to servitise successfully, customers have to accept that it is not always necessary for them to take ownership of the physical product.”

Innovative ways to deliver the product and its associated services are essential to the concept and manufactures that commit to servitisation will need to make a “cultural and organisational shift.”  Companies that want to remain “pure” manufacturers or those who have unique products will probably not want to make the transition.  But for those that do, the rewards can be great.

Neely cites the example of an aeroplane manufacturer that sells not just the aircraft itself, but the product lifecycle support that comes with it, which can be three times the original purchase value.  Pharmaceuticals, he says, are another good example of a sector where firms can offer not just medicine but a better lifestyle.  “If you redesign your business as a health solutions provider it open up new opportunities for the pharma business because consumers don’t want to consume tablets – they don’t want to be ill in the first place.”

Now, if somebody can just come up with a term to replace “servitization,” the world will indeed be a better place. 

(Ed. note:  The French, not to be outdone, are promulgating their own brand of servitization.  You can learn how Dassault Systèmes is “Harmonizing Products, Nature and Life,” in this story we posted last November.)

 

 

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