The challenges of adopting a servitisation strategy

Manufacturers may find that adopting servitisation may lead to undesirable outcomes and be unsuccessfully implemented.   One the potential problems can be that suppliers take over responsibility for some aspect of a customer’s business and this exposes them to consequent risks. As this may be in an area that they are unfamiliar with, they may fail to fully evaluate the risk and understand its potential impact on their business. Second, some servitised operations involve multiple partnerships. This increases complexity that can be challenging to manage. Likewise some forms of Servitisation create a new asset base that is inflexible and may be difficult to adjust or restructure during an economic downturn. Fourth, return on investment may be low if, if the services developed are aimed at a small ‘installed product base’ i.e. existing number of products in the market.

Perhaps of even more importance is the degree of competition downstream from manufacturing. As Wise and Baumgartner (1999) pointed out, retailers in particular are very powerful in many markets. Those that operate on a national scale have sophisticated operating systems, and great influence over consumers. They have replaced local stores and have become powerful consolidators of distribution channels. Retailers, such as ASDA and Wal-Mart, can use their scale and purchasing power to levy premiums on shelf space and exert pressure to reduce prices, and thereby reduce manufacturers’ profits. Moreover consumer loyalty has switched from the manufacturer to the store and its own in-house brands. Retailers have even replaced manufacturers’ financing services with their own. Wise and Baumgartner (1999) illustrate this with the case of the white goods manufacturer Whirlpool. It was a dominant player in the appliance value chain, but by 1999 it sold one-quarter of its U.S. appliance volume through Sears, usually under Sears’s Kenmore brand. Likewise Whirlpool had earned considerable profits by offering consumer credit and maintenance contracts for its appliances, but these services were now provided by Sears and other retail chains.

Finally, manufacturers may fail to understand the financial implications of shifting their operations across different stages of the value chain.   In simple terms, the cost structure of manufacturing, retailing and service provision is typically very different.  For instance, manufacturing may have high fixed costs and low labour costs, whereas in services it may be vice versa.  So different cost structures mean that firms need to understand the implications that this will have in terms of research and development costs, returns of investment, profit margins, and cash flow and how these may be different from across a range of different operational activities. However, these structural differences are greatly influenced by the relative power of stakeholders in the value chain, as discussed in the paragraph above.

Wise, R. and Baumgartner, P. (1999) Go Downstream: The New Profit Imperative in Manufacturing, Harvard Business Review, September/October

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This entry was posted in Chap 14 Operations strategy, Sector: Manufacturing, Sector: Retail and tagged , . Bookmark the permalink.

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