Components and Products
We work with component and product manufacturers of diverse industries and geographies to grow and optimize their service business.
A Sector in Flux
As competition in manufacturing and engineering industries intensified, companies responded by developing increasingly global operations and supply chains and offshoring production. They implemented lean processes in the pursuit of lower costs and higher quality and enhanced their products and brand.
Faced with limits to growth for new industrial products and systems, managements began also to appreciate the importance of the installed base and the potential for revenue streams over the product lifetime. They recognized that actual product sales constitute only a fraction of the total revenue opportunity – the rest being services, from product support and spare parts to upgrades and productivity improvements. Estimates have shown that total service revenues associated with an industrial product over its lifetime amount to between 5 and 20 times the sales value of the product. After-sales services now constitute a strategic anchor for many industrial companies, aiming at a mix of maximizing customer loyalty and retention, generating additional revenues and profits from the installed base and defending against lower cost competitors.
Now new forces are driving ever more powerful shifts: Demand is fragmenting, both geographically and in terms of customer requirements — more options and customization, faster product cycles and more frequent upgrades, better and more after-sale service. At the same time, rapid digitization is radically transforming how manufacturers operate and interact with customers, while enabling entirely different kinds of products and services. Products, in fact, are no longer at the center of all things. They are increasingly defined by the outcomes they achieve and the data they generate. Data collected from products in the field become raw material for new services and customized solutions. To deliver outcomes, manufacturers must integrate more into their customers’ processes, inducing customers to place greater emphasis on the total customer experience. Therefore, making things is starting to matter less while knowing things more. In many cases successful companies will no longer be the ones that make the best products, but the ones that gather the best data and combine them to offer the best services, whether on their own or together with others.
The product service market is usually characterized by large installed bases, large numbers of customers and multiple channels to market.
Competition is intense with large numbers of market players. Customers usually have high in-house service competence and competition in aftermarket is also intense, including from customers, third party service providers (often low cost), and, increasingly, product competitors.
Product downtime is expensive for customers and its avoidance provides the competitive framework while operational superiority drives competitiveness. Component and product services are largely a matter of scale and logistics to drive high efficiencies and productivity while maximizing recurring revenues from the installed base is a critical success factor.
Given the flux what is the best way forward for manufacturers? Should they try to get into the digitization game as early as possible in spite of uncertainties, or should they wait until things become clearer? One significant risk of waiting is the claim to the data: Digitization of assets is vendor neutral. If third parties (customers, competitors, independent providers) seize the initiative and digitize product data without the original manufacturer, this might not only endanger the manufacturer’s influence on product utility and performance (potentially jeopardizing service revenue streams), but also increases the risk of product commoditization and limits the manufacturer’s differentiation and margin potential. So access to, even “ownership”, of data is something manufacturers can ill afford to lose. And often the best way of keeping that access is by building on data to design and sell services and solutions.
For manufacturers to take full advantage of new technology to strengthen market positions, often requires transformational strategic, cultural and organizational shifts and upgrading of capabilities: Sales & Marketing must focus on value co-creation and customer experience; R&D must incorporate service thinking; Offerings, delivery systems and supply chains must integrate through the Industrial Internet of Things (IIoT) and turn data into actions.
Nevertheless, surveys indicate that only a minority of manufacturers are planning radical changes to harness the potential of digitization and services or have introduced training in digital skills. But it is wrong to underestimate the speed of technology driven disruption. Companies risk being left behind as competitors from within and from outside their industry draw ever closer to their customers.