Is Servitization the Next Big Business Model in Manufacturing?

Is Servitization the Next Big Business Model in Manufacturing min

Out of the many business models, servitization is one that has been gaining traction in recent years. It is a new way to look at how companies are run, and it is changing the way they do business.

In the manufacturing industry, servitization is causing a paradigm shift in the status quo. Manufacturers of physical products that are sold as one-offs are gradually adopting the servitization model where they are coming up with innovative service offerings to replace the current way of doing business. This is achieved by:

  • Offering additional services (add-on services) to go along with and throughout the life cycle of the product that is being sold

  • Completely moving away from selling products to selling services, a.k.a servitization 

Widespread digitalisation or adoption of digital technology, advances in cloud computing, and the overall change in customer preferences are driving manufacturers to adopt more sustainable ways of running their businesses. 

It's evident that manufacturers are embracing digital transformation and delivering services powered by modern digital solutions. As per a McKinsey study, manufacturing firms are introducing on average eight digital services

And that begs the question - Is servitization gradually emerging as the next big business model in manufacturing? 

Servitized businesses are growing rapidly, and there are now hundreds of thousands of them operating across the globe. However, not everyone thinks that servitization is the future of business. Some people believe that it will never replace traditional product sales. Others think that it will only work for certain types of businesses.

To find out whether servitization is the next big business model, we need to look at its pros and cons. We'll start by examining the advantages of servitization. Then we'll examine the disadvantages. Finally, we will discuss the risks involved in adopting servitization. (Just to say, you’ve mentioned the Pros/advantages using a main headline below. But you seem to have omitted headlines mentioning the Cons/disadvantages, and the Risks)

Pros of Servitization in Manufacturing 

Increased flexibility

Manufacturing is an extremely rigid process. There are very few exceptions to this rule. The reason why most manufacturing processes follow this pattern is that it makes sense. If you want to make something, you have to first design it, then build it, and finally sell it.

However, as time passes, technologies change, customers' needs evolve, and so does your company’s. In order to keep up with these changes, you need to constantly innovate. 

This is where servitization comes into play. With servitization, you can offer additional services to go along with your products or offer the products as a service. These services can help you meet the evolving needs of your customers.

For example, let's say you’re a manufacturer of washing machines. Your target market consists of people who live in apartments. Instead of selling washing machines, you may sell washing service plans in the form of pay-per-use. 

Better customer experience

Customer tastes and preferences have changed. By servitizing your product, you can create custom solutions tailored to your customer's needs at a bargain price. And this leads to a better customer experience. 

Sustainability of your business

When you sell a product, it's a one-time transaction. You make a one-off profit, transfer ownership to your customer, and offer a warranty or guarantee for a limited time. In most cases, the buyer may not transact in this way again for a long while.

However, with servitization, you can offer a recurring service. And that means recurring revenue that is not only profitable but also sustainable for your business. For example, instead of selling cars, manufacturers might sell mobility services (MaaS) such as car sharing. This way, they can generate more income while reducing their carbon footprint. 

Disadvantages and Risks of Servitization in Manufacturing

Despite the benefits of servitization, manufacturers may face significant challenges because of adopting it. Some of them include: 

Changes in attitude 

Any kind of change in the status quo is often met with resistance. In regard to servitization, it could be in the form of employee resistance to change. The switch from product-focused to customer-focused business is a huge leap that entails a massive overhaul in systems and processes. Employees have to be trained to seamlessly fit into the new model, and that can be a bit of a challenge. 

Increased complexity

The introduction of servitization can bring about increased complexity. For example, you must consider things like data management, analytics, security, etc. These are all areas that require expertise and time to master. There is a lot more to consider when you're looking at the complete value chain of your product.

Lack of resources

Manufacturing is a capital-intensive industry. Companies invest heavily in research and development to create better products. They also spend money on marketing and advertising to sell those products. But when you introduce servitization, you have to allocate resources to other activities such as training employees, managing customer relationships, and so forth. This means that companies will not be able to focus on core competencies.

Poor customer experience

The shift from being a manufacturer to being a service provider means that you will be doing a lot more on customer service. When you're dealing with customers directly, you must make sure that their needs are always taken care of. You have to ensure that they get what they want and that they receive good customer service. If you don't do this right, then you might lose customers. And losing customers is something that no company wants to happen. 

Reduced margins

With servitization, manufacturers lose the opportunity to sell products at higher prices. This means that in some cases, there may not be enough profit margin to cover costs in the short term. It's important to note that this isn't necessarily true for every type of servitization business.

Risk of becoming obsolete

When you move away from selling physical goods, you risk being left behind as technology advances. This means that your products are likely to become obsolete.

Summing up

Servitization in manufacturing has many advantages but also some drawbacks. The key thing to remember is that servitization is not going to replace traditional product sales. Instead, it is designed to help manufacturers improve their overall performance.

However, there's a silver lining. 

As per this study carried out in 2019, digital servitization is catching on and is positively impacting the turnover ratio of manufacturing industries. The study also suggests that managers in manufacturing firms should provide digital services such as web-based services for customised product design and web-based offers for product utilization, to maximize the firm’s turnover.

There are plenty of examples where companies, not necessarily manufacturers, have successfully turned their products into services through business model innovation. Some notable ones include Xerox, Caterpillar, and Netflix. While there is still a need for more research to study the rate at which manufacturers are adopting servitization, there's no doubt that it's here to stay!

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