The reasons why a firm adopts the servitisation strategy

There are three major rationales for manufacturers adopting this operations strategy – strategic, economic, and sustainability.

In extending operations into the provision of services, manufacturing firms can achieve a number of strategic outcomes. First they can lock in customers. By including a range of after sales services to customers who purchase the product, those customers will be more loyal than if they simply bought the goods.   To help ensure this, manufacturers may sell their goods at or very near to cost, making a profit out of the after sales services they then provide. Indeed, in some cases, the goods are only leased to the customer.   For instance, in the early years of photocopiers, this equipment was so expensive to make that the manufacturers had little option but to lease machines to customers and support this with maintenance and service contracts. Moreover some capital goods, such as trains, have a life time of 30 years, which clearly offers opportunities for sales growth from ‘old’ sales rather than new ones. Second, servitisation can lock out competitors, that is to say prevent or delay competitors from increasing their market share on the basis of new product development. This is because the customers of servitised manufacturers are linked to their suppliers due to service contracts. Third, adding services to the product is one way that a manufacture can differentiate its offer.  Fourth, servitisation often reduces risk for customers. For instance, a customer that simply purchases a manufactured product accepts all the risk associated with the cost of servicing, maintaining and repairing that item. By offering a service contract, the manufacturer typically takes on that risk because such contracts typically guarantee what the service and maintenance cost will be. The final strategic reasons for servitisation is that increasingly customers demand this, as it allows them to reduce their cost base and outsource some services they previously did for themselves.

The most obvious economic reason for servitisation is that it provides stable revenues. Whilst the sale of products may fluctuate with the economic cycle, seasonality or some other factor, service contracts are usually established for a number of years and provide a steady stream of revenue. Linked to this, is the so-called installed base argument. That is to say that the number of manufactured goods already in the market typically far exceeds the number of new goods being produced. So for instance, in the UK for every new car being manufactured there are 13 being used already and for every aircraft being manufactured there are 15 in service.  Third, the profit margins on services may be higher than on manufactured goods. This is due in part to the fact that there are two main variable costs in making things – materials and labour, whereas only one main variable cost in delivering services – labour.  Finally, servitisation adds value. Given the nature of global competition and low cost manufacture of goods in developing countries, it is argued that UK manufacturers cannot simply compete on the basis of cost. Hence by bundling their products together with innovative services, this enables firms to compete in the global marketplace.

Servitisation is also a sustainable strategy. First, this strategy may change the way in which resources are used.   If goods are leased rather than owned, it may mean that these goods can be shared across many customers, and thereby reduce waste and overall production.   For instance, some motor manufacturers are now facilitating customers ‘hiring’ cars for short periods of time from street locations in big cities. Second, servitisation often motivates firms to change the way in which goods are designed, so that providing after sales services is more reliable and cost effective.

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