Tuesday, 1 July 2014

Business Servitization: What we know and what is still to come?

Servitization is formally described as the process of seeking additional value through taking services propositions to market, and is an academic theme of increasing relevance. Competitive advantage achieved through services is potentially more sustainable since, being less visible and more labour dependent, services are more difficult to imitate than other strategies focused on product innovation, technological superiority or low prices. Servitization is part of the service dominant logic, which highlights an epistemological shift in the customers understanding of value; from understanding the ‘value in exchange’ of product ownership business models to understanding ‘value in use’ created through access to resources, which entails a transition from transactional value to value-in-use. Rolls Royce offering hours of use of their engines and not selling them, or IBM developing software and consultancy instead of producing computers are successful business cases of the organizational transformation required when implementing service business models, with ~ 90% of revenues now coming from service or digital provision respectively. These successful strategies are increasingly presented in business school case studies. But, is all that glitters gold? Are servitization strategies a winning recipe for managers and policy makers from across the competitive and industrial landscape?
 
The answers are not direct and we still need to develop new quantitative and qualitative approaches to assess the service-oriented business models from different angles. We are organizing an academic forum for discussion on these topics in parallel with similar communities across Europe, with the Spring servitization conference in Aston and the service operation management forum in Tilburg. What can we learn from these initiatives?
 
I attended the Aston Spring Servitization conference one month ago. I had the invaluable opportunity to interact with senior executives from large manufacturing companies implementing service-oriented business models successfully into their organizations. This is consistent with what was discussed six months ago in the second edition of the conference we held in Granada (book of abstracts can be accessed here). So, evidence shows a consistency of signalling servitization as a potentially successful strategy for manufacturing companies. This good performance can be enhanced when applied alongside appropriate methodologies such as cost analysis, gap analysis or enterprise resource planning.
 
However, other streams of research have started to explore the phenomena of servitization in other industries. This brings some surprises. Creative industries like music or cinema have seen a huge decrease of their revenues, while the digitalization of their resources and the implementation of service business models like streaming music and video increase. Recent research (see here and here) highlights that creative industries are different from manufacturing in three respects. First the digitalization of creative content has been forced from the power of peer-to-peer networks. The increasing pressures of those platforms obliged managers in creative industries to offer a wider range of formats. Second, those new formats are substitutes of traditional physical format rather than complements, like occurred with manufacturing industries. Third, creative industries are focused mostly on B2C relationships. 
 
Service science is still in its inception and future debates will explore the problem from new perspectives. It is difficult to give a precise indication about the relevant subjects for academics and practitioners but I will try to summarize some of them. 
 
Service oriented business models increase value creation and capture in manufacturing sectors, specifically in B2B relations. These services are tailored and focused on minimizing the risk of the client and providing extra information. In this category we have global services from companies like Rolls Royce, MAN or Goodyear undertaking specific and constant monitoring of their engines, trucks or tyres. Corporate clients behave differently to final consumers and the challenge is whether servitization can be implemented closer to the final consumer. Some effort has been made in the direction of analysing servitization as a B2C business model. In this category we have new constructs being explored like gamification, co-creation or ‘the internet of all things’. 
 
As any other stream of research in its inception, servitization has been explored mostly from theoretical perspectives. Future research will need to assess service-oriented business models with quantitative approaches. At a first glance I can see that big data will be an opportunity for the analysis of B2C business models, but the real deal is to analyse the success of manufacturing firms. This is especially challenging as long as it is difficult to measure the productivity of a service: what is the unit of analysis of a service?
 
In fact, the productivity and the economic analysis of service is a relevant issue to explore. The success of manufacturing business models during the last three centuries was based on the productivity increase given economies of scale, economies of scope and technology improvement. An interesting question is whether business models based on services will maintain those levels of productivity growth for the next decades. This has direct implications for territorial competitiveness and hence policy makers should be aware of these potential limitations (or not) of services business models as a source of economic development.
 
Last but not least, firm location could be another relevant subject to explore. E-Commerce and cloud computing technology simplify the process of delocalization from big cities. Knowledge intensive small business can move now to rural areas where the cost of rent space is cheaper, or to less developed countries with lower salaries. All those process will impact on firm demographics and again is a relevant area for those interested in territorial competitiveness.
 
Overall, the exploration and implementation of service business models is a subject that is changing our lives and will impact the competitiveness of firms and territories. I understand that the word ‘servitizacion’ may not be the best choice, but this should not be used to discredit the analysis of the phenomenon, which undoubtedly will be an area of significant interest for the upcoming years. 

* The author of this post is Ferran Vendrell and was originally published in Orkestra's blog.
 

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