Management Assignmnet Guide 2 | Assignments Management Theory

Meeting 2: Servitization

The strategic transition to services: a dominant logic perspective and its implications

for operations

Gaiardelli, P., Martinez, V., & Cavalieri, S. (2015)

Companies race towards the market proposition of advanced technological into a product could translate into value

destruction. On the contrary, the development of differentiation strategies rooted in the product-service paradigm may

represent a key element for competitive advantage.

Servitisation of manufacturing ➔ transformational journey, which commits industrial organisations to move along a

continuum, from the provision of products and artefacts, through the proposition of product–service solutions, to a

change in their structural and infrastructural capabilities and decision-making processes. It often means higher

investment and greater risks.

a. Aim of the article is to provide a contribution to the debate on understanding the transformation process that

industrial companies are experiencing by identifying the main organizational and operational drivers which

would enable and foster their transition to services.

Space, time and alignment in the transition to service:

• Space: actors on the network can create partnerships between firms and suppliers to overcome a perceived lack of

control.

• Time: high-end or complex product-service offerings need to extend their life in order to leverage their full value.

• Alignment: two crucial elements of the internal alignment of ﬁrms are service strategic intent and service portfolio.

Two key elements of external alignment are ﬁrms’ service strategies and service network and customers. Both

internal and external alignment are a key to reaching the stability of a ﬁrm in periodical transitions.

Supporting capabilities that support the change to services:

• Contract management: increasing levels of service complexity raise a need for a development in contractual and

relational capabilities.

• Pricing: firms should determine how servitisation can lead to innovative pricing strategies, and what capabilities are

needed for these changes.

• Co-design capabilities: in the transition to service, firms that succeed are the one that identify, combine and exploit

different sources of knowledge in the delivery of service.

Main findings:

Risk of irreversibility of the servitization path ➔ occurs when manufacturing firm go through the servitization path, and

overcome a certain point, beyond which the firm could lose core technical competencies.

Developing relational capabilities (value-in-context) is more important than developing the contractual capabilities

(value-in-exchange) as the level of service complexity increases. Firms have to build inter-personal and inter-

organisational trust.

Companies have difficulties to manage their ambidexterity, by both exploiting existent business and exploring new one.

An internal proper alignment is needed (on the pricing strategic level, internal organisational level, service design, etc).

Overcoming the Service Paradox in Manufacturing Companies

Gebauer, H., Fleisch, E., & Friedli, T. (2005)

Service paradox ➔ substantial investment in extending the business leads to increased service offerings and higher

costs, but does not generate the expected correspondingly higher returns.

Services being more labour intensive and intangible, services might produce more sustainable compettive advantages.

Extending to service proceeds along three lines: financial benefit (higher profit margins), marketing opportunities (better

services for selling more products), and strategic argument (competitive strategy based on service).

a. Provide guidance for managers seeking to successfully extend the service side of manufacturing companies.

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Meeting 2 : Servitization

The strategic transition to services: a dominant logic perspective and its implications

for operations

Gaiardelli, P., Martinez, V., & Cavalieri, S. (2015)

Companies race towards the market proposition of advanced technological into a product could translate into value destruction. On the contrary, the development of differentiation strategies rooted in the product-service paradigm may represent a key element for competitive advantage. Servitisation of manufacturing ➔ transformational journey, which commits industrial organisations to move along a continuum, from the provision of products and artefacts, through the proposition of product–service solutions, to a change in their structural and infrastructural capabilities and decision-making processes. It often means higher investment and greater risks. a. Aim of the article is to provide a contribution to the debate on understanding the transformation process that industrial companies are experiencing by identifying the main organizational and operational drivers which would enable and foster their transition to services. Space, time and alignment in the transition to service:

Space: actors on the network can create partnerships between firms and suppliers to overcome a perceived lack of control.
Time: high-end or complex product-service offerings need to extend their life in order to leverage their full value.
Alignment: two crucial elements of the internal alignment of firms are service strategic intent and service portfolio. Two key elements of external alignment are firms’ service strategies and service network and customers. Both internal and external alignment are a key to reaching the stability of a firm in periodical transitions. Supporting capabilities that support the change to services:
Contract management: increasing levels of service complexity raise a need for a development in contractual and relational capabilities.
Pricing: firms should determine how servitisation can lead to innovative pricing strategies, and what capabilities are needed for these changes.
Co-design capabilities: in the transition to service, firms that succeed are the one that identify, combine and exploit different sources of knowledge in the delivery of service. Main findings: Risk of irreversibility of the servitization path ➔ occurs when manufacturing firm go through the servitization path, and overcome a certain point, beyond which the firm could lose core technical competencies. Developing relational capabilities (value-in-context) is more important than developing the contractual capabilities (value-in-exchange) as the level of service complexity increases. Firms have to build inter-personal and inter- organisational trust. Companies have difficulties to manage their ambidexterity, by both exploiting existent business and exploring new one. An internal proper alignment is needed (on the pricing strategic level, internal organisational level, service design, etc).

Overcoming the Service Paradox in Manufacturing Companies

Gebauer, H., Fleisch, E., & Friedli, T. (2005)

Service paradox ➔ substantial investment in extending the business leads to increased service offerings and higher costs, but does not generate the expected correspondingly higher returns. Services being more labour intensive and intangible, services might produce more sustainable compettive advantages. Extending to service proceeds along three lines: financial benefit (higher profit margins), marketing opportunities (better services for selling more products), and strategic argument (competitive strategy based on service). a. Provide guidance for managers seeking to successfully extend the service side of manufacturing companies.

While going through the servitization path, the increase in total revenue follows the increase in service revenue. It means good sold revenue is pretty stable, which is consistent with Berry (compete on value rather than on price). Figure 3: only 11% get more than 40% of their revenues from service revenues. Cognitive phenomenon can explain managerial aversion to invest in service :

Overemphasis on obvious and tangible characteristics (preference for investing resources in products because it’s simply more obvious than service).
A failure to recognize the economic potential of extended service business.
Risk aversion of managers in manufacturing companies. “Too risky to invest resources in an area they are not familiar with.” Organizational arrangements for extending the service business : Recurrent aspects of the organizational arrangements in manufacturing firms for overcoming the “service paradox”: Establishing a market-oriented and clearly defined service development process. Companies which succeed in extending the service business are those which obtain comprehensive information on customer needs. Focusing service offers on the value proposition to the customer : Distinction between product-related services (maintenance, etc), and customer support services. It’s better to first improve its product-related service in order to inspire confidence to customers, and then develop customer support services. Offering a combination of both product-related and customer support services allow to:
maximize the up-time and yield of the product within the customer process.
change the focus of customer interaction from a transaction to a relationship basis. Initiating relationship marketing : Initiating this relationship make services “tangibles”. If customers are used to see the firm as product providers, they won’t believe the firm is capable of offering good services, so the firm has to change its identity in the eyes of customers. Relationship marketing should be implemented at three different dimensions:
External: making promises. Successful companies project a specific image which highlights the uniqueness of its services in comparison to those of its competitors (Lovelock, 2001).
Internal: “enabling promises”. Changing employees’ mind-set.
Interactive: service delivery has interfaces critical to customer perceptions of the service and so his long-term purchasing behaviour. Management of these interfaces is interactive marketing. Defining a clear service strategy : A clear service strategy encourages companies to make the appropriate organizational arrangements and resource allocations. 3 requirements:
Understanding the market in terms of customer needs + market potential and future service trend.
All areas of the company affected by service strategy are involved in the development process.

many companies struggle to implement these organizational arrangements successfully because of several unanticipated side effects.

Hybrid offerings: How manufacturing firms combine goods and services successfully

Ulaga, W., & Reinartz, W. (2011)

a. The article examines success factors for designing and delivering hybrid offerings in business markets.

What distinctive capabilities goods-manufacturers should develop to generate successful hybrid offerings?
What unique resources manufacturers should leverage to build these distinctive capabilities?
How can goods manufacturers translate unique resources and distinctive capabilities into positional advantages, and how do these effects vary across different types of services? Hybrid offering ➔ combination of one or more goods and one or more services that provide the customer a better satisfaction than if the good and service were available separately. Said otherwise, products and services combined into innovation offerings. Organizations struggle to exploit those hybrid value propositions, and academics insights are too few. Conceptual background Resources ➔ productive assets the firm can use. Capabilities ➔ what the firm can do. An organizational capability is a firm’s capacity to deploy resources for a desired end result. Distinctive capabilities might lead to successful hybrid offers. Competitive advantage should rely on the uniqueness of the firm’s portfolio of resources and capabilities. Remarque: a firm commitment from the top management is an indispensable condition for a successful growth strategy in hybrid offerings. Four relevant resources available to manufacturing firms : The four resources below represent unique resources that goods manufacturers might own. They are critical inputs to the construction of distinctive capabilities.
Installed base product usage & process data ➔ the growing role of smart technologies has improved manufacturers’ access to strategic customer data. Plus, goods are increasingly equipped with information and communication technologies and form extensions of networks. Data is a unique asset that firms jealously protects.
Product development and manufacturing assets ➔ firms have unique assets related to R&D, both tangible and intangible (processes, license, etc). Key manufacturing principles (standardization, quality control, etc) are familiar. The firm needs to figure out how to leverage this to develop hybrid offers.
Product sales force & distribution network ➔ manufacturers often invest a lot in sales organisation, or rely on channel intermediaries to cover sales territory.
Field service organization ➔ manufacturers often invest into field organizations to deliver goods and services. Field service network is a resource for providing after-sales services cost effectively, but also is an opportunity for venturing into new and more complex hybrid offering. Still, firms often fail into getting the most out of their investment in service networks, which can often be due to scarce human resources. Five relevant capabilities available to manufacturing firms :
Service-related data processing and interpretation capability ➔ refer to the manufacturer’s capacity to analyse and interpret product usage and customer process data from an installed base, using advanced monitoring and communication technologies, and then use those data to develop hybrid offerings that allow customers to achieve productivity gains and/or cost reductions.
Execution risk assessment and mitigation capabilities ➔ this risk is particularly accrued when customers’ action affect service performance. Ways to limit the risk are as following: (1) adopt a price that allows to safeguard contract profitability, (2) redistribute the risk into multiple accounts, (3) build effective risk evaluation.
Design-to-service capability ➔ the manufacturer’s capacity to develop a hybrid offering such that its tangible and intangible elements interact synergistically to tap its full differentiation and/or cost reduction potential. Firms need to develop hybrid offering in which product and service interact synergistically for value creation rather than in a merely additive manner. To do so, managers realised they need to incorporate the service component earlier in their innovation processes (because innovation is still quite focussed on goods).

Hybrid offering sales capability ➔ selling hybrid offerings requires a different approach than selling goods. Plus, it requires strong customer involvement or even cocreation, to elaborate the offering. Finally, hybrid offering sales frequently involve multiple actors, across both customers and the vendor firm. CHALLENGES

To “infuse” hybrid offerings sales into the existing sales model rather than simply replacing goods sales with it.
The firm needs to train frontline employees to perform hybrid offering sales.
To make sure hybrid offering sales initiatives are aligned with the goal and activities of their distribution network.
Specific sales tools need to be used to help the salespeople in documenting and communicating the value of a hybrid offering to the customer.

Hybrid offering deployment capabilities ➔ the firm needs to strike a balance between ensuring efficiency and effectiveness in hybrid offerings production and delivery processes. A product-line approach here is prerequisite for efficiency of production because: repeatability and economies of scale, standardization, etc. WARNING: not focus too much on productivity and cost reduction because, as seen with the Rust & Huang article, such focus can lead service revenue reduction. So, the manufacturers have to also seek effectiveness through flexibility in their customer interface.

competences to help customers optimize processes, or specific process elements in their operations. PSS are tailored to customer contexts and needs. Customers’ willingness to pay tend to be high. PSS are priced similar to professional services. To succeed in PSS, manufacturers have to leverage their service-related data processing and interpretation capabilities to gain knowledge on their customers.

Process delegation service (PDS) ➔ the range of services a manufacturer provides when it performs processes on behalf of customers. PSS was input-based, whereas PDS goes further with focussing on the promise to achieve a process performance. Supplier integrates goods and services into hybrid offerings. PDS is highly customized to customer’s specific requirements. Customer involvement (cocreation). Interest of both parties are strongly aligned. Customers require that suppliers assume some level of the process outcome risk. Complex gain-sharing agreement. Most difficult to implement because of highly sophisticated capabilities. In these studies, companies typically grew from PLS into AES and PSS. Only half the firms in the authors’ samples gradually shifted into PDS, after they consolidated their positions in the other 3 categories. Impact of capabilities on positional advantage
Service-related data processing and interpretation capability ➔ For PLS it reduces service delivery costs (cost advantage), for the others it’s expected to design new value-added services (differentiation advantage).
Execution risk assessment and mitigation capability ➔ becomes critical when it comes to provide outcome guarantees (output-based – AES or PDS). If manufacturers have strong risk assessment and mitigation skills, they can differentiate by venturing into performance-based AES and PDS offerings (differentiation advantage).
Design-to service capability + the core product development and manufacturing resources ➔ helps bringing new hybrid offerings on the market (differentiation advantage) + helps redesigning offerings so manufacturers can achieve delivery cost reductions (cost advantage).
Hybrid offering sales capability in addition with product sales force and distribution network ➔ a sales force that can sell both products and services, motivate frontline employees to contribute by promoting service sales, align its sales efforts with those of channel intermediaries, and invest in service sales documentation and communication tools (differentiation advantage).
Hybrid offering deployment capability ➔ goal is to deliver the value proposition at a minimum cost by standardizing service production to do economies of scale (cost advantage). Implications for theory : Most literatures emphasized the potential of services to improve profitability through greater differentiation, Ulaga & Reinartz argue that in many situations, hybrid offerings increase their profitability also through cost advantages.

Management Assignmnet Guide 2, Assignments of Management Theory

Related documents

Partial preview of the text

Download Management Assignmnet Guide 2 and more Assignments Management Theory in PDF only on Docsity!

Meeting 2 : Servitization

The strategic transition to services: a dominant logic perspective and its implications

for operations

Gaiardelli, P., Martinez, V., & Cavalieri, S. (2015)

Overcoming the Service Paradox in Manufacturing Companies

Gebauer, H., Fleisch, E., & Friedli, T. (2005)

Hybrid offerings: How manufacturing firms combine goods and services successfully

Ulaga, W., & Reinartz, W. (2011)