Børsen: Servitization as an opportunity for manufacturing companies

Press/Media: Press / Media


Børsen: How can small and medium-sized Danish companies benefit from service as a strategic competitive parameter?
We have seen in recent years a strong trend of profit migration from physical products to services. If a car manufacturer would have missed the trend towards upward profit migration its profitability would be a mere 30% of its current level. The other 70% are earned in services such as dealerships, after-sales services, mobility solutions, and financial services. The key is not to be large, but to understand what other "jobs" one can perform for ones' clients. Many small and medium-sized manufacturing firms will find that their customers are willing to pay a large premium for a hassle-free product, which comes with its pre-financing, maintenance and decommissioning service attached. These are the areas were superior profitability can be found, while they get increasingly squeezed on the sales price of their physical products.

Børsen: Why are new technological and management tools crucial for growth?
Particularly in Denmark, the last decade has been the era of "LEAN". In this wave a lot of good improvements have taken place for example, reduction of inventories, increase of productivity, or cost reduction through outsourcing. However, the focus on re-organization has in many firms had the negative side-effect of reduced appetite to expand their business. In particular, investing in the more uncertain servitization-based business opportunities has been particularly slow in Denmark. At Aarhus BSS we work with companies to re-learn the craft of perceiving opportunities, prospecting into and defining new business models and learning how to probe into new markets. These are skills, methods and techniques that are often in short supply in the average SME.

Børsen: What is your best advice for small and medium-sized production companies?
Start by forming a growth team. Provide the team with a mandate to track new trends and new opportunities in your industry. Provide the team with the methodological skills to be able to do quickly define and forecast market size to validate opportunities. Provide the team with funding to do small experiments into new markets. Such experiments should preferably be built around a high customer intimacy. Here I also believe that we have a competitive advantage in Denmark. It is much easier here to innovate across firm boundaries by working with your supplier or customer or complementary value chain partner, than in other economies with a lesser trust-based culture.

Børsen: Why is it a bad idea to sell only physical products?
The upward profit migration has two negative effects for firms that keep on focussing only on selling physical products: 1) First they fail to capture the secondary value that their physical product has created. Think of an elevator manufacturer that does not provide the ongoing maintenance. The competition in the selling of the physical elevator is so fierce that you can win contracts only through offering at a price below your cost. However, maintenance contracts often last many years and turn the business ultimately into a highly profitable one. 2) Second, their lower profitability vis-à-vis their competitors that offer physical products and services, will also prevent them from investing sufficiently in R&D resulting ultimately in a loss of competitiveness and a speeding up of the decline. 3) Many SMEs in Denmark operate in mature industries in which low margins and competitive shake out are common place. Here Servitization offers the best hope to reinvent the industry, restart the industry life-cycle and operate in a more profitable market segment.

Børsen: How much will service solutions mean for a company's success in the future?
This will depend on the industry, but we see in many industries a pattern where the physical-product based business might be consuming 80% of the cost for 20% of the profit, while the service business might with 20% of the cost, generate 80% of the profits. Firms that fail to build a competitive position in the service business will quickly be outcompeted by their rivals that did.

Børsen: Why should companies focus on supporting it’s customers' value chains?
In fast moving industries, customers pay high premiums for hassle-free products, which allows them to focus on their business. Think about a company supplying specialized furniture for hospitals. They often offer very similar products as they have to comply with the same requirements and are selected through large bidding processes, which drive down profits. If one firm however engineers a new generation of furniture together with a hospital it is suddenly in a project business, which is less transparent and more profitable. On top it might be able to instead of "selling" the furniture at low profit margins, "operate" the furniture in the hospital. It might even pre-finance the furniture, cutting the capital expenditure (CAPEX) for the hospital to open up higher profit margins in the operational expenditure (OPEX) business. In such a project it would have improved its customer's value chain and been paid handsomely for it.


  • Servitization as an opportunity for manufacturing companies

    Jørgen Høg, 1 page



TitleServitization as an opportunity for manufacturing companies
Degree of recognitionNational
Media name/outletBørsen
Media typePrint
Producer/AuthorJørgen Høg
PersonsRené Rohrbeck
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