From Products to Services

The reaction to external pressure & the different types of service strategy.

This presentation explores the macro-market pressures which seem to prompt manufacturers to consider services.

Laurie Young
(Updated 2012)

From Products to Services

Profitable manufacturing

PRICE
Margin Service

Service is often lost in the margins of the business and largely ignored.

Product

From Products to Services

The strategic dilemma

External Pressures

PRICE

Margin

Cost of service is exposed and comes under scrutiny for the first time
Product

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Boardroom discussion

Can we reduce costs? Do we need to invest in new machinery? Can we push costs down to our suppliers? How much can we outsource? Can we reduce failure costs by increasing product quality? Can we differentiate with service ? Can we productise our services ?

From Products to Services

The product companys response

External Pressures

PRICE
Margin

Margin

Note: this is a valid strategy. Experience shows that some thrive by staying as manufacturers & not moving toward service.

Product
TO PRODUCT

Product

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The move to production efficiency involves:

Reduce cost of manufacture. Significant productivity improvement. Investment in new techniques (eg just in time or

six sigma).

Reduce overhead (e.g. cheap labour)

Outsource or franchise service.

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Response to Margin Pressure: change to a service orientation

External Pressure

PRICE
Margin Margin Service Margin

Product

Product

Product TO SERVICE

From Products to Services

Response to Margin Pressure: change to a service orientation

External Pressures

PRICE
Margin Margin Service Service Margin

Margin

Product

Product

Product TO SERVICE

Note: Experience suggests that firms which do not change, or handle change poorly, suffer.

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Industries which have experienced this:

Computing. Aircraft manufacturing. Medical diagnostic equipment. Telecoms equipment Manufacturing. Office equipment. Heavy engineering. Construction (e.g. lighting)

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The forces shaping service demand.

Rise of service; manufacturing decline.

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Relationship of GDP per head to service employment.

% Workforce employed in services

100 90 80 70 60 50 40 30 20 10 0 0 5 10 15 20 25 30 35 GDP per Capita ($US)

Ethiopia Mexico Bangladesh Spain Portugal Ireland Greece Netherlands Belgium
Canada UK USA

Australia

Note: Manufacturing can have same value, but productivity means lower % of GDP. It seems to be about balance, not an inevitable move to service dominance.

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline. Rising standards.

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Rising standards prompt demand for services in developing economies

Education. (people want a better

chance for their children) Healthcare. Housing Quality of life. Previously unavailable products, needing service support.

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline.
Rising standards. Rising prosperity and increased leisure.

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Rising Prosperity stimulates innovation in new service concepts.

Vacations. Fitness.

Hospitality
Leisure. Service as an experience, as opposed to

product purchase.(e.g. the Vodka bar)

Rise in disposable income and leisure causes move to service economy

From Products to Services

For example: China & consumer services.

Due south of Miyun County, 62 km from Siyuan Bridge, Beijing. Offers skiing, water skiing, grass skiing, sliding and gliding. Largest of its kind in North China with the most advanced facilities. 12 trails for: beginners, intermediate and advanced skiers, The first snowboarding park Chinas first Moguls advanced trail A childrens snowmobile route. Equipped with a hi-tech snowmaking system, 12 snowmaking machines, 2 snow groomers, a quadruple chair-lift, a double chair lift, 11 beginners drag lifts and a 1,318 meter toboggan run. There are also the snow amusement such as the Cable Hangglider, snow sledges from Canada, etc. 3 million skiers in China.unavailable a few years ago

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline.

Rising standards.
Rising prosperity and increased leisure. Government policy.

From Products to Services

For example: Chinas intent to grow service % of GDP.

China is planning to increase incentives and financial aid to boost service companies in a bid to increase the sector's contribution to the countrys economy to 50% by 2020. The State Council said incentives such as land approvals and capital bailouts would be given to service companies engaged in logistics, information technology, software, electronic commerce, industrial design, law and accounting. This underscores Beijing's eagerness to lessen its reliance on the manufacturing sector, which now represents 50% of the countrys economy. Manufacturing has led to problems such as energy shortages and pollution.

The Mainland would also encourage these firms to list their shares in the domestic and overseas stock markets to raise funds for future development, the State Council said. Press announcement 2010.

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline. Rising standards.

Rising prosperity and increased leisure.

Government policy. Changing business policy

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The experience curve and outsourcing

Costs

Position of clients in house team

Cost gain Position of supplier

Time

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China & international services outsourcing.

The global outsourcing industry is worth about $150bn. The Indian outsourcing sector has 51% global share. Chinas top 5 outsourcing companies have been growing at

about 20% annually, but slower than their Indian peers. Beijings incentive package was a clear sign that it was aiming to encroach on Indias $60bn IT services market. The mainland government is investing in the sector and pushing out English education much earlier. Egidio Zarrella, KPMG partner and IT adviser, said China was likely to become a global leader in IT outsourcing, serving domestic businesses and swathes of the Asia-Pacific region. China is on the ascendancy. Not only are they learning English, but they are also training in Japanese, which is a very profitable market where the Indians have been struggling.

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline. Rising standards. Rising prosperity and increased leisure. Government policy. Changing business policy International opportunity in service markets.

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The UNs report on service exports.

Millions of dollars.

1980

1990

2000

2006

Source: United Nations conference on trade and development UNCTAD Handbook of Statistics.

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Cambridges findings of those who have changed.

60 50

40

30

20

10

0 USA Singapore Netherlands Germany UK China

Source: Professor Andy Neely, Cambridge University.

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The reason for international growth in services.

Growth in service markets in different countries. For

example: tourism. The spread of ideas and policies in business markets. For example: outsourcing. New technology makes communication and international co-operation easier. For example: law. Government policy supports service exports.

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline.
Rising standards. Rising prosperity and increased leisure. Government policy. Changing business policy International opportunity in service markets. Market maturity.

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Market maturity.

Industry sales Note: At maturity, there can be a tendency to offer the product benefits through innovative services.

Time

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For example: shaving

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For example: shaving

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For example: shaving

Royal Shave$55 Traditional Shave$35 Head Shave$35 Traditional Shave & Head Shave$55 Haircut$40 Haircut & Traditional Shave$65 Haircut & Royal Shave$80 Scalp Treatment$35 Aromatherapy Skin Treatment$45 Beard or Goatee Trim with Shave$35 Moustache Trim$15 Shaving Consultation No Charge

From Products to Services

The forces shaping service demand.

Rise of service; manufacturing decline.

Rising standards.
Rising prosperity and increased leisure. Government policy. Changing business policy International opportunity in service markets. Market maturity. Changed customers.

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Changed customers
Rising standards prompt expectations of better

service. Different end users prompt more exacting performance demands. Different environments demand technical integrationsometimes with competitors products. Changed buying patterns demand different offers and different relationships.

From Products to Services

Is there a difference in buying?

Strategic & Operational Planning & Analysis

Investment Planning

Purchasing

Acceptance/ Transition

Implementation

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Is there a difference in buying?

Strategic & Operational Planning & Analysis

Investment Planning

Purchasing

Acceptance/ Transition

Implementation

Purchasing decisions require products or packaged services.

From Products to Services

Is there a difference in buying?

Strategic & Operational Planning & Analysis

Investment Planning

Purchasing

Acceptance/ Transition

Implementation

Business decisions require analysis and debate.

Purchasing decisions require products and packaged services.

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The forces shaping service demand.

Rise of service; manufacturing decline. Rising standards. Rising prosperity and increased leisure. Government policy. Changing business policy International opportunity in service markets. Market maturity. Changed customers. Competitors offering services to customers.

Note; It is sensible to understand which of these are affecting the market, using scenarios

From Products to Services

Ericsson industrial networks uses scenarios to understand macro forces.

A Swedish company one hundred years old. Manufactured large communication switches

for huge telecommunication companies. Their customers were changing. Their industry was experiencing demand for services. Used scenario planning technique.

From Products to Services

Ericssons scenarios.
Service Mania: all end users

(customers of their customers) would turn to brokers for help

Gran traditizione: end customer

would rely on traditional networks for service.

Up and away: access to

advanced communication would be virtually free of charge.

These three stories were used to plan strategy and direction.