Improving Business Performance

How manufacturers can survive this period of radical change – move into services

Change, a 1985 paper argued, can be characterised as a “punctuated equilibrium”: long periods of relative calm and small incremental alterations that are interrupted by brief, but radical, seismic shifts. COVID-19 means that we are now living through one of those revolutionary moments.

 

But that also means that there is an opportunity to look at things in a new way. For the past 20 years, we’ve been conducting research and advising manufacturers to compete through services – activities aimed at solving customers’ problems – rather than simply just pushing boxes out of the factory.

 

And our reasons are simple: services are good for business, good for the economy and environment, and good for society. Now accounting for 80% of the UK’s economic output, services have grown by 30% over the past 20 years. By comparison, gross domestic product (GDP) generated from selling products has contracted – a trend that is being replicated in every developed economy across the world.

 

But it has been a slow and sometimes painful journey – “What is this thing called servitization,” we are asked. “And how do you spell it?!” Up until now, change in this field, like in so many others, has been evolutionary, somewhat incremental and exploratory. But then arrives a global pandemic that shatters the equilibrium and stimulates radical innovation.

 

These are challenging times, and it’s important not to make light of the struggles facing the global economy. Business activity is currently polarised around sector and geography. On the one hand are manufacturers who support the food and health sectors and have never been busier. On the other are those businesses linked to the aerospaceautomotive, and oil and gas industries which are being forced to mothball facilities and lay off staff in their tens of thousands.

 

For some, the implications are so severe that they may not survive. Even those that are doing well are having to deal with a reduced workforce, social distancing in the workplace, and the economic fallout of customers being unable to pay their bills.

 

Disrupting the old norms

 

How appealing the old norms may now seem. Until just a few months ago, most executives within manufacturing organisations had a rather passive, established view of services. For us, it was frustrating, but comfortingly familiar.

 

We could work with these manufacturers to help them better understand the value of services, influence key decision-makers and then hopefully get a chance to support their innovation of new business models, technologies and organisational structures. But we often experienced an equilibrium – the harder we helped manufacturing executives to push for more services, the harder the system pushed back. Now, however, that equilibrium is being disrupted.

 

Take performance advisory services. These are services that allow manufacturers to use digital technologies to gain insight into how customers use their products, and then offer data and/or intelligence back to that customer on how to gain more value from those products.

 

An example of this type of service is Siemens’ monitoring of the condition of airport baggage carts. The company gathers acoustic and vibration data from rail-mounted luggage carts around the airport and uses this data to assess the likelihood of breakdowns before they happen.

 

Breakdowns cost time and money. So spotting potential breakdowns in advance saves airport operators the penalties that must be paid when luggage isn’t loaded onto flights on time, and improves the passenger experience through the punctual delivery of baggage.

 

We have seen a wealth of technically excellent digital systems like this. Most, however, have so far failed to be commercially viable and manufacturers have been reluctant to invest in and push them to customers. But in the current climate, that may change.

 

As well as opening up a huge new market opportunity, these services could be far more profitable than simply selling the products themselves. Such services can also develop enviable intimacy with and loyalty from customers as the provider is able to address their customers’ demands and problems much more quickly and effectively.

 

And now times are changing, the economic potential of services is becoming more visible. Indeed, remote support and performance advisory services – helpdesks, remote support for breakdowns, digital installations – provide obvious solutions in an age of social distancing, remote working and lockdowns.

 

Customers either want remote advice on how to fix problems themselves, or they want the manufacturer to remotely fix and upgrade their equipment. It’s not all about technology, of course – customers still value speaking to a person, just not face to face. But manufacturers no longer need to gamble as much on selling these new systems; customers actively are seeking them. Both parties are starting to look at the bigger picture, and services are proving vitally important to both.

 

Accelerated change

 

For some time yet, change will be accelerated and hastened. The end of this period of disruption will bring a new set of norms, and it’s beyond belief that we will return to the days of simply shifting boxes. At the very least, business plans will need to include how to deal with disruption – whether it’s related to health, the economy or the environment.

 

The opportunities that this creates for services are potentially dramatic. Services are in the midst of radical change and, of course, we all look forward to returning to those long periods of relative calm. However, in so many ways, things will never be the same. Business models for manufacturers will have been disrupted, and there will be new and different conversations about the value of services. These business models have the potential to deliver huge value, and a level of resilience that we may never see again for production-based ways of competing.


This article originally appeared in The Conversation

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