RESTART Resilience and Training for SMEs

Servitization is the transformation of products or resources into services, meaning selling entire solutions instead of just products. It’s mostly defined as adding services to your product-focused business, in order to deliver a desired outcome to your customers and create new revenue streams, therefore making your business primarily solution-focused.

Some well-known examples are Netflix and Spotify - delivering media as a service, rather than customers buying the CDs, DVDs et cetera that produce those outcomes. In engineering, Rolls-Royce is delivering power-by-the-hour to airplane companies instead of selling engines. HILTI is selling a package of services enabling maximum tools utilization, instead of just selling tools for construction sites.

All kinds of companies can benefit from servitization, by offering additional services to supplement their traditional products such as maintenance, fleet management, customization, resource optimization, pay-per-use models, etc.. 

In this module you will learn what servitization is, the benefits it brings and challenges that companies have to overcome in case to embrace it.

We can say that there are three levels of services complementing products.

	Advanced Advanced services are defined by contractual agreements that require a product-service system. Ownership of the servitized good usually isn’t transferred to the customer therefore he pays for the use of the product or per unit of service provided by the resource.
	Intermediate Refers to services provided proactively and enabled with remote monitoring and diagnostic capabilities. Those are more precise and customized services for each client, rather than a standard model that is the same for everyone.
	Basic Services such as maintenance repair, overhaul, and asset support, which are provided at the customer’s request or with a fixed frequency.

Traditionally, servization initiatives were something reserved for large companies which had substantial resources and knowledge to develop and introduce new services. But it has been proven that small and medium businesses are capable to servitize their offer and greatly benefit from it. Bigger companies are usually able to make the transition to servitization more easily because of their network and their budget. But for MSMEs there is also a significant opportunity as they are more agile and flexible in changing course of the business. Furthermore, with digitization and all the new technologies on the market, these smaller companies are able to successfully reap the benefits of servitization.

As customers continue to expect additional benefits and long lasting relationships, companies of all sizes are adding services to their product offer. Companies that take advantage of the opportunity in service will become more financially secure and build stronger customer relationships.

Being SMEs or large companies, the winners will be those who succeed in adding different types of services to their products and who create real value for their customers.

Examples:

• Large companies:
  • Electronics company Philips provides LED lighting-as-a-service to Amsterdam-Schiphol airport enhanced by ‘Internet of Things’ connectivity. Philips sells ‘light’ to the airport, instead of products. Schiphol pays for the light it uses, while Philips remains the owner of all fixtures and installations.
  • WashTec is delivering its car wash technology via pay-per-use model complemented with a bundle of additional services from the chemical supply and regular maintenance to repairs and site cleaning. They are even supporting launch of the business with planning assistance and competition and location analysis.
• MSMEs:
  • Dutch company Bundles offer home appliances as a service. In collaboration with equipment producers, they rent home appliances, like washing machines, and charge for their time in use, energy or resource consumption, delivering the function (or outcome) instead of product.
  • Croatian company Alius Grupa is selling a total care service for logistic chain management in pharmacy (transport and storage monitoring of medicines), instead of just selling equipment for monitoring temperature and humidity.
  • Croatian company Ventex is selling location monitoring and emergency response service for elderly care, instead of selling GPS tracking devices.

Creation and improvement of services, often referred as service innovation or service design, is an interdisciplinary approach that combines different methods and tools from various disciplines. This part of the module is going to introduce you with the Service Innovation Methodology developed by the international group of business support organizations gathered under THINGS+ project, co-financed by the Interreg Central Europe programme.

Service Innovation Methodology is developed specifically for SMEs (applicable also in micro enterprises) and defined by:

Service Innovation Methodology is a coherent, robust, and operational methodology for the improvement of entrepreneurs’ skills in the development of product-based services, that will allow them to implement servitization in 4 phases:

Servitization and innovation is enabled with clear understanding of customer problem(s) that products and services solve; while buying and using circumstances help define which offer (if any) will be chosen by the customers as the most appropriate and convenient solution. The process of identification of the opportunities is some kind of a process of discovering “the other side” – side of users and buyers, their reasons and motivations. It can be very difficult to switch perspective from product side to customer side, therefore gradual approach is needed.

This phase is about unveiling hidden knowledge and starting the shift of the perspective – from “product centricity” into “customer centricity”.

The main task is to clarify offer (product and service bundle) – define the boundaries of the starting content of the servitization project and identify opportunities based on existing knowledge about customers, markets and relevant and influential factors that can shape competitive position of the company.

Phase 1 - Steps to be taken:

1. Choose your most perspective product, asses its financial relevance (impact on income) and perceived importance (perception of how important for the company image they are)
2. Identify key features of the offer that could be categorized based on how customers perceive them. Use Product attributes map for the gradual shift of the perspective from product to customer related issues.
3. Define of the main customer problem(s)! It shifts the perspective to the customers, targeted segment for which company aim to develop service. Various but clearly targeted and well-defined customers have to be in mind when doing this step. Suggested technique is to choose particular real person that “represent” particular customer segment. 
4. Identify the elements of your value proposition. After defining customer’s main problem or Job to be done, use the Value Proposition Canvas to further discover how is your product fitting into the needs of customer.
5. Identify all the alternatives at customer’s disposal. Market segment should be defined by the problem that particular products and services are solving. This concept redefines the market perception and introduces new and unconventional competitors that should be identified. Servitization initiatives aim to unlock previously ignored or underserved markets which were not manufacturing companies core markets.
6. Compare your offer to the alternatives in order to understand why a particular solution is chosen by the customers under particular customer circumstances. You can use Strategy Canvas to visually understand and predict customer behaviour when particular customer circumstances and (product) offering features are confronted.

Identification of “outside-in” opportunities starts with additional description and understanding of key customer segments and creation of a customer profile: persona. Aim is to expand perspectives beyond traditional product or demographic perspective and to initiate customer analysis based on the problems customers are trying to solve and circumstances under which those problems exist. The aim is to describe the customer based on a specific individual – a real person representing the customer segment.

 Next step is to visually capture the entire cycle of customer’s experience from the moment the customer’s problem emerges until after the solution is applied. Stages of the journey can be generic (preparation, purchase, delivery, use, supplements, maintenance, disposal) or more precisely defined. After all stages are defined, customers behavior at every stage should be analyzed (define what is the customer doing-thinking-feeling) so any unsatisfactory experience (pain points) can be identified and recognized as possible opportunity to develop innovative service.

This phase ends with initial Servitization concept based on opportunities which will be recognized as most promising and doable. In case of more possibilities, the company will have to make a decision on which one to pursue, having in mind its own capabilities, challenges and possible gains.

In the third phase, company has to identify key changes in the way how the customers will be served, and how business model and key elements that define company’s capabilities should be altered (resources, processes and decision-making criteria/values). You can start with the revision of the New (“to be”) Customer Journey based on the initial servitization concept. It is suggested that the revised Customer Journey should be developed from the scratch – as if there is no previously established relationships and activities related to “old” customer journey.

After the customer side is defined, company perspective should be explored in order to define: which are the touchpoints, in what way to organize them and what will be the most appropriate way to support the newly developed customer side. Next step is to integrate the planned changes into the business model. To be able to do it, companies should understand both existing key elements of their business model and changes that are required. Once existing “as is” and planned “to be” business models are defined - overlaps and differences need to be checked. 

1. Revise/define the New (“to be”) Customer Journey based on the initial servitization concept.
2. Integrate the planned changes into the business model. You should understand both existing key elements of the business model and changes that are required. Suggested procedure is to use Business Model Canvas as checklist for the identification and description of key elements of both existing (product manufacturing-based) business model and the servitized business model.
3. Create detailed description of the differences and expected changes in terms of resources, processes and values.
4. Review of the previously defined servitization concept from the feasibility perspective. Are you capable to manage the change?

Fourth phase’s main focus is the creation of the strategy for the commercialization of the servitized product. The key aim is to develop a sound commercialization strategy and implementation plan. Since companies could face many “unknowns” during the implementation, traditional strategic management approach based on the indicators, thresholds and goals is not appropriate. Discovery driven (or assumption based) planning is strongly suggested. At this initial commercialization stage, learning what is possible is much more important than just achieving what was planned.

1. Create implementation strategy. In order to avoid too complex planning and decision-making procedure, simple strategy management tool is proposed (e.g. One Page Strategy). It should enable seamless implementation of servitization initiative and its integration into broader, already existing strategy.
2. Create a list of assumptions that arise from drafting the strategy. Great number of assumptions regarding environment, markets, customers but also organizational and individual capabilities. Management based on the assumptions allows swifter response and better adjustment which is more in line with the lean startup thinking (customer development process) than traditional, inert approach.
3. Elaborate and document key implementation activities drafted in the strategy to better communicate and delegate elaborated tasks within the company’s organizational structure.
4. Monitor implementation of the servitization initiative and respond to assumption validation.

• Business model adjustments – in some cases, large adjustments on operational level need to be made, which can be challenging. Some of the processes that may need to change are logistics, billing and collecting, asset tracking, customer support service and financial. One of the major challenges is organizing the reverse logistics which means that the companies need to build the operational structure to take-back their products and reuse, refurbish or recycle them.
• Supply chain needs to be integrated and well organized - this needs to be done in collaboration with supply chain partners. Often new Service Level Agreements (SLAs) are needed.
• Determining the price of a service - determining the price of a product is relatively simple, but knowing how much service (on average) you will have to provide over the entire lifetime is difficult. You mustn't overcharge the clients or underestimate your own activities.
• Customers –  convincing customers to considerer a new offering with associated new payment models, contracts and responsibilities can be a big challenge. Customers need to have confidence that the services you offer them will be adequate.
• A change in employee mindset and organizational transformation - due to the change in the way of functioning, i.e. selling services instead of products, there will be resistance from some employees who, until now, have been focused on one-time sales targets instead of long-term customer engagement. Servitization requires different sales mentality and sales processes.
• Rapid and unpredictable changes in income - companies could experience large changes from month to month in income, especially if they run a pay-per-use model and have large changes in the intensity of services provided.
• Proactive support - companies will need to act preventative instead of reactive in order to minimize downtime and maintenance costs, which sometimes requires development of innovative maintenance concepts.

Despite the challenges for the company introducing servitization, there are many benefits companies should strive for:

• Better response to market trends like outsourcing and asset management
• Rationalization of resources and expenses for both company and its customers
• More revenue in the long run
• Larger market share and growth opportunity
• Improved responses to customer needs
• Improved product innovation
• Building new revenue streams
• Constant or recurring income stream
• Increasing customer loyalty
• Setting higher barriers to competition
• Service is no longer a cost but a value creator
• Scalable (for any size of company)
• Improved pace of technology adoption

The continuous growth of the global population and economy are resulting with an increasing demand for energy and other resources. Although efficient technologies are available and their economic benefits are clear, there are different barriers that prevent these from being deployed, like high up-front costs for example. Sustainability goals require introduction of these technologies and solutions which are expensive and complex to deliver, and this is where servitized business models play a significant role. By optimizing entire value chain, servitization leads to more efficient utilization of resources and improved energy consumption, therefore enhances environmental performance.

Servitization as an innovative business model has implications not just for the companies engaging with it, but also has wider societal implications. For example in food supply chain, servitization encourages introduction of new technologies and different partners, making food production more efficient, secure and available.

Circularity is also a driver for servitization. In delivering a servitized product there is a motivation to reuse, recycle and prolong product lifecycle since they are being optimized for longer use and outcome delivery. Design of a servitized product is looking at the entire lifecycle of the product, rationalizing its use in order to deliver the desirable outcome. Companies that design a product are responsible for delivery, use, service and efficiency over a longer period of time. In a servitized context, where the company retains ownership and responsibility for the products, they are motivated to optimize their use  and pursue circular economy principles.