Innovating Your Business Model for Service Success

Professor Andy Neely Director, Cambridge Service Alliance

9th October 2014

Services offer significant economic opportunities

Major proportion of GDP and employment in western world… • Service sector accounts for over 70% of EU’s economic activity • Nearly 70% of EU’s workforce are employed in service sectors

China and India are also assessing their role in the service economy

What about services in manufacturing?

But we may be at a technologically enabled tipping point… §  Servitization/Servicization… §  Product-Service Systems… §  Service Science… §  Remote Product Servicing… §  Intelligent Vehicle Health Management…

The shift to service based competitive strategies is not new:

q Andersen and Narus – Capturing the Value of Supplementary Services, Harvard Business Review, 1995.

q Wise and Baumgartner – Go Downstream: The New Imperative in Manufacturing, Harvard Business Review, 1999.

Service business model innovation

John Deere iGuide system

Uses GPS technology to automatically shift the steering pattern of the tractor to compensate for implement drift

Customers design and complete market research

Exploiting the internet to enable crowd sourcing

And the opportunities for service continue

Footnote for Sir John Harington who is credited with inventing the first flush toilet in 1596!

Yesterday’s Technology…

Thomas Crapper (1836-1910) Sanitary Pioneer

Today’s toilet technology

Neorest toilets… •  Lid opens automatically as you walk up… •  The seat’s heated… •  There’s a catalytic air purifier to remove any “unwanted odours”… •  With a manual power override for those particularly unpleasant visits… •  There’s a warm-water massage spray and a hot air dryer… •  The temperature and intensity of both are controlled using a LCD panel… •  Once you’ve finished and left the “sensor zone” the toilet automatically closes the lid and starts a three stage “Cyclone” flush… • The strength of which depends on how long you’ve been busy on the toilet and previous patterns of usage.

The intelligent toilet…

What about tomorrow’s toilet technology?

Put simply… The servitization of manufacturing = adding services to products…

Servitization is a global phenomena

0%#

10%#

20%#

30%#

40%#

50%#

60%#

Malaysia#

Singapore#

Spain#

Finland#

United#States#

Sweden#

South#Africa#

Austria#

Thailand#

Netherlands#

Germany#

Hong#Kong#

Canada#

United#Kingdom#

Australia#

Vietnam#

Italy#

Switzerland#

France#

Japan#

Belgium#

Indonesia#

Mexico#

Taiwan#

Turkey#

South#Korea#Brazil#

India#

Russian#FederaPon#

China#

Propor%ons(of(Manufacturing(Firms(that(have(Servi%zed((2013)(

Why is manufacturing servitizing?

Strategic rationale

Environmental rationale

Economic rationale

1.  Manufacturing firms in developed economies cannot compete on the basis of cost (technological developments are enabling them to add innovative services)…

2.  The installed base argument (e.g. for every new car sold there are already 13 in operation, 15 to 1 for civil aircraft and 22 to 1 for trains)…

3.  Stability of revenues – services vs. products…

1.  Lock in customers (sell the original equipment at cost, make money on spares & suppliers - razor, printers)…

2.  Lock out competitors… 3.  Increase the level of differentiation (e.g. equipment

provider offers to take customer’s risk and give predictable maintenance costs)…

4.  Customers demand it (e.g. contracting for capability)… 5.  Service as a pre-sale activity…

Service as a pre-sale activity Outstanding service satisfaction pays off

Based on 130 000 service customer replies World Wide in CfL (Customer for Life)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Very Poor Poor Good Very Good Outstanding

Service satisfaction

Defin

itely

Rep

urch

ase

Volv

o

Car - OutstandingCar - Very GoodCar - GoodCar - PoorCar - Very Poor

(Data from Volvo Cars, 2013)

Why is manufacturing servitizing?

Strategic rationale

Environmental rationale

Economic rationale

1.  Manufacturing firms in developed economies cannot compete on the basis of cost (technological developments are enabling them to add innovative services)…

2.  The installed base argument (e.g. for every new car sold there are already 13 in operation, 15 to 1 for civil aircraft and 22 to 1 for trains)…

3.  Stability of revenues – services vs. products…

1.  Environmental rationale (change notions of ownership and resource use – e.g. Mobility cars)…

1.  Lock in customers (sell the original equipment at cost, make money on spares & suppliers - razor, printers)…

2.  Lock out competitors… 3.  Increase the level of differentiation (e.g. equipment

provider offers to take customer’s risk and give predictable maintenance costs)…

4.  Customers demand it (e.g. contracting for capability)… 5.  Service as a pre-sale activity…

The overarching trends

From a world of… To a world including…

Products

Outputs

Transactions

Suppliers

Elements

Solutions

Outcomes

Relationships

Network partners

Ecosystems

The shift to services requires business model

innovation

Creating value through service and support

Advisory focused

Aftermarket focused

Product focused

Product & parts Solution

At p

oint

of s

ale

Thro

ugh

life

Whe

n is

val

ue re

alis

ed?

Where does the value lie?

Outcome focused

Creating value through service and support

Product & parts Solution

At p

oint

of s

ale

Thro

ugh

life

Whe

n is

val

ue re

alis

ed?

Where does the value lie?

Product focused

www.caterpillar.com www.vestas.com

www.ibm.com

Understanding business model innovation

Diversity across ecosystems/ sectors

Comparable companies within ecosystems/sectors

Rail ecosystem •  2 train solution providers

Defense ecosystem •  2 defense solution providers

Utility ecosystem •  Water service provider •  Energy service provider

Local public ecosystem (councils*) •  2 support service providers

IT sector (multiple ecosystems**) •  2 IT solutions provider

Professional service (multiple ecosystems) •  Supply chain consultancy •  Open innovation consultancy

Our study sought to understand how a diverse set of organisations innovated their service business models.

STAKEHOLDERS/ SYSTEM OF CLIENT(S)

PARTNERS

VALUE DELIVERY

ACCOUNTABILITY SPREAD

VALUE PROPOSITION

ECOSYSTEM

What did we learn?

Ecosystem

…service providers have to understand the underlying customer need and provide a

solution

Theodore Levitt was wrong…

Customers don’t even want ¼ inch holes…

Value delivery

Manage risk

The nine capabilities that underlie business model innovation

Demonstrate value

Understand client’s BM

Demonstrate delivery skills

ACCOUNTABILITY SPREAD

VALUE PROPOSITION

Understand sources of risk associated

with BMI

Collect data to quantify risk

(data resources)

Price risk to client and manage risk

with partners

Identify partners and design

governance**

Design value content and structure*

Coordinate multi-party value

delivery

VALUE DELIVERY

ECOSYSTEM

PERFORMANCE (PROFITS & GROWTH)

SUSTAINABILITY

* Value delivery content are the service activities provided; structure determines ‘who does what’ ** Value delivery governance determines organizational arrangements (e.g. contracts among partners)

Adding an ecosystem perspective

Demonstrate value

Understand client’s BM

Demonstrate delivery skills

ACCOUNTABILITY SPREAD

VALUE PROPOSITION

Understand sources of risk associated

with BMI

Collect data to quantify risk

(data resources)

Price risk to client and manage risk

with partners

Identify partners and design governance

Design value content and

structure

Coordinate multi-party value

delivery

VALUE DELIVERY

ECOSYSTEM

Identifying all the members in the

ecosystem

Understand economics in the

ecosystem

Understand dynamics in the

ecosystem

For more information…

Cambridge*Service*Alliance

From Processes to Promise: How complex service providers use business model innovation to deliver sustainable growth

Ivanka VisnjicBusiness Models Research Lead, Cambridge Service Alliance Assistant Professor, ESADE Business School

Andy NeelyDirector, Cambridge Service Alliance

Founder members:

Professor Andy Neely Director, Cambridge Service Alliance University of Cambridge 17 Charles Babbage Road Cambridge, CB3 0FS adn1000@cam.ac.uk Web LinkedIn Newsletter Twitter Blog