The Servitization of Manufacturing. Professor Andy Neely University of Cambridge and Cranfield School of Management

Transcription

1 The Servitization of Manufacturing Professor Andy Neely University of Cambridge and Cranfield School of Management

2 Five questions 1. What do we know about manufacturing in the UK? 2. How is manufacturing changing? 3. Why is manufacturing changing (the driving forces)? 4. Data on the servitization of manufacturing (scale and impact) 5. Observations what research do we need?

3 Five questions 1. What do we know about manufacturing in the UK? 2. How is manufacturing changing? 3. Why is manufacturing changing (the driving forces)? 4. Data on the servitization of manufacturing (scale and impact) 5. Observations what research do we need?

4 UK manufacturing output: Manufacturing Output (Index 2003=100) Talk of a decline in manufacturing is overstated in terms of output KPIs for Manufacturing, BERR,

5 UK manufacturing employment: Manufacturing Employment (Index 2003=100) But not overstated in terms of employment! KPIs for Manufacturing, BERR,

6 UK manufacturing productivity: Manufacturing Productivity (Ouput per hour, Index 2003=100) Same output produced by fewer people results in higher productivity KPIs for Manufacturing, BERR,

7 UK manufacturing profitability: Manufacturing Profitability (% net rate of return) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% For private sector non-manufacturing corporations as a whole, profitability reached 14.5% in But not necessarily higher profitability! KPIs for Manufacturing, BERR,

8 Five questions 1. What do we know about manufacturing in the UK? 2. How is manufacturing changing? 3. Why is manufacturing changing (the driving forces)? 4. Data on the servitization of manufacturing (scale and impact) 5. Observations what research do we need?

9 Declining profitability raises questions about the economic sustainability of business models Sainsbury Review: The Race to the Top (2007) In 1980, less than one-tenth of manufacturing exports came from the developing world. Today it is almost one-third and in 20 years time it is likely to be one-half. UK manufacturing cannot compete on the basis of cost (Innovation Review, 2003; Innovation Nation, 2008) The different requirements of manufacturing and services: we need to build up skills in the management of fragmented manufacturing chains, and to focus our research efforts and skills development on the complex, high-value production activities likely to be successful in high-cost economies. We have to consider complex, high-value and fragmented production activities (not just technology within the firm, but also coordination of technology across firms and across countries)

10 Focusing on high value production (by integrating services) Interest in service-based competitive strategies is not new: Andersen and Narus Capturing the Value of Supplementary Services, Harvard Business Review, Wise and Baumgartner Go Downstream: The New Imperative in Manufacturing, Harvard Business Review, But we may be at a technologically enabled tipping point Servitization/Servicization Product-Service Systems Services Sciences Remote Product Servicing Intelligent Vehicle Health Management

11 And the shift to services is not just in aero engines

12 The opportunities for services John Deere iguide system (2007) Uses GPS technology to automatically shift the steering pattern of the tractor to compensate for implement drift Health and Usage Monitoring Systems Use sensors on equipment to detect repair and overhaul requirements

13 And the opportunities for services continue Yesterday s Technology Thomas Crapper ( ) Sanitary Pioneer Footnote for Sir John Harington who is credited with inventing the first flush toilet in 1596!

14 Today s toilet technology The intelligent toilet Neorest toilets Lid opens automatically as you walk up The seat s heated There s a catalytic air purifier to remove any unwanted odours With a manual power override for those particularly unpleasant visits There s a warm-water massage spray and a hot air dryer The temperature and intensity of both are controlled using a LCD panel Once you ve finished and left the sensor zone the toilet automatically closes the lid and starts a three stage Cyclone flush; the strength of which depends on how long you ve been busy on the toilet and previous patterns of usage.

15 What about the toilet of tomorrow? Put simply The servitization of manufacturing = adding services to products

16 Five questions 1. What do we know about manufacturing in the UK? 2. How is manufacturing changing? 3. Why is manufacturing changing (the driving forces)? 4. Data on the servitization of manufacturing (scale and impact) 5. Observations what research do we need?

17 Why is manufacturing servitizing? Economic rationale Strategic rationale Environmental rationale 1. Manufacturing firms in developed economies cannot compete on the basis of cost (technological developments are enabling them to add innovative services) 2. The installed base argument (e.g. for every new car sold there are already 13 in operation, 15 to 1 for civil aircraft and 22 to 1 for trains) 1. Lock in customers (sell the original equipment at cost, make money on spares & suppliers - razor, printers) 2. Lock out competitors 3. Increase the level of differentiation (e.g. equipment provider offers to take customer s risk and give predictable maintenance costs) 4. Customers demand it (e.g. contracting for capability) 1. Environmental rationale (change notions of ownership and resource use e.g. Mobility cars) Professor Andy Neely, 2008

18 Five questions 1. What do we know about manufacturing in the UK? 2. How is manufacturing changing? 3. Why is manufacturing changing (the driving forces)? 4. Data on the servitization of manufacturing (scale and impact) 5. Observations what research do we need?

19 So what do we know about the servitization of manufacturing? Empirical and descriptive study Using data from OSIRIS [44,000 listed companies from around the world]. Initial search - identifying all companies with primary or secondary US SIC codes in the range inclusive [n=22,952]. Secondary search - only companies with over 100 employees were included in the sample [n=12,521].

20 Coding identifying which firms have servitized Coding using business descriptions to identify whether firms classified as manufacturing offer: Pure manufacturing, e.g. PetroChina principally engaged in a broad range of petroleum and natural gas-related activities. Some combination of manufacturing and service, e.g. Siemens - predominantly electronics and electrical engineering, but provides a wide variety of consulting, maintenance and other services. Pure service, e.g. The Brink's Company, conducts business in the security industry. The services offered by the Company include armoured-car transportation, automated teller machine (ATM) servicing, currency and deposit processing, coin sorting and wrapping, and arranging the secure air transportation of valuables.

21 Number of Firms Despite having manufacturing SIC codes Proportion of manufacturing firms offering services Manufacturing Servitized Service Bankrupt No Description

22 Percentage of Firms But the transition is not straightforward Manufacturing Servitized Sample Bankrupt Interestingly of those 212 firms that had declared bankruptcy, 113 (53.3%) had servitized, while 99 (46.7%) were pure manufacturing firms. The sample as a whole consisted of 30.05% servitized firms and 69.95% pure manufacturing firms.

23 Which services are being offered? Which services are offered? % of firms offering service Design and Development Services 21.74% 2,312 Systems and Solutions 15.61% 1,660 Retail and Distribution Services 12.02% 1,278 Maintenance and Support Services 11.81% 1,256 Installation and Implementation Services 5.02% 534 Financial Services 3.75% 399 Property and Real Estate 3.66% 389 Consulting Services 2.63% 280 Outsourcing and Operating Services 1.67% 178 Procurement Services 1.14% 121 Leasing Services 0.99% 105 Transportation and Trucking Services 0.21% 22 Number of firms offering service

24 % of Firms In which countries have firms servitized? 60% 50% 40% 30% 20% 10% 0% % servitized firms USA Finland Singapore Malaysia Netherlands Belgium Norway Germany Bermuda Switzerland Sweden Taiwan Cayman Islands Spain Great Britain Greece Australia Czech Republic Denmark Thailand France Indonesia Austria Japan China

25 USA Taiwan Thailand Singapore Sweden Norway Netherlands Malaysia Cayman Islands Japan Indonesia Greece Great Britain France Finland Spain Denmark Germany Czech Republic China Switzerland Bermuda Belgium Australia Austria Which services in which countries? 350% 300% 250% 200% 150% 100% 50% 0% Transportation and trucking services Systems and solutions services Retail and distribution services Property and real estate services Procurement services Outsourcing and operating services Maintenance and support services Leasing services Installation and implementation services Financial services Design and development services Consulting services Two points to note: 1. Variation in the average numbers of services offered by firms in different countries - close to 3 different services/firm (US), to less than 1.5 (Czech Republic). 2. Some areas of service offering are universal e.g. design and development services while others appear to be particularly prevalent in specific countries e.g. systems and solutions services in Sweden, Finland and Germany.

26 % of firms The larger firms are servitizing 80.00% 70.00% 60.00% 50.00% 40.00% Pure Manufacturing Servitized 30.00% 20.00% 10.00% 0.00% <24,674 24,674-47,811 47,812-78,533 78, , , , , , , , , ,1611 1,011,612-2,690, sales revenue (US$ '000s) >2,690,866 Only in the top decile [measured in terms of sales revenues] is the number of servitized firms greater than the number of pure manufacturing firms. While only 32.27% of the sample have servitized, these firms account for 55.46% of 2004 sales revenues.

27 The financial consequences of servitization Number of firms Total 2004 sales revenues (US$ billion) 2004 sales revenues (% of sample total) Total 2004 net profit (US$ billion) 2004 net profit (% of sample total) Total firms 7,836 13, Pure manufacturing 5,307 5, % % Servitized 2,529 7, % % Why do servitized firms generate a higher proportion of sales revenues, but a lower proportion of total new profits?

28 Factors affecting financial performance Number of firms Means (all firms) Means (pure manufacturing firms only) Means (servitized firms only) Total revenues US$000 s ,704,093 1,120,809 2,928,090 Cost of goods sold US$000 s ,116, ,262 1,967,050 Net profit US$000 s ,551 72, ,794 Cost of employment/operating revenue % Operating revenue/employee US$000 s Average cost of employee/year US$000 s Profit per employee US$000 s Collection period Credit period Working capital per employee US$000 s Total assets per employee US$000 s Stock turnover R&D expenses US$000 s ,777 63, ,435

29 Size of firm (deciles of employees) Statistically which firms make higher net profits as a % of sales revenues? Extent of servitization (# services offered) Servitized Servitized Servitized Servitized Servitized Servitized 2 Servitized Servitized Servitized Servitized 3 Servitized Servitized 4 Servitized Servitized Servitized 5 Servitized Servitized Servitized Servitized 6 Servitized 7 Servitized Servitized Servitized Servitized 8 Servitized 9 10 Manuf Manuf Manuf Manuf Manuf Results significant at the 10% level

30 Let s consider forms of Product-Service System 1. Product oriented PSS ownership of the tangible product is transferred to the customer, but additional services directly related to the product are provided. 2. Use oriented PSS ownership of the tangible product is retained by the service provider, who sells the functions of the product, via modified distribution and payment systems, such as sharing, pooling, and leasing. 3. Result oriented PSS the PSS replaces services for products e.g. voic service replacing answering machines. Hockerts, K. and Weaver, N. (2002) - Towards a Theory of Sustainable Product Service Systems, INSEAD-CMER Research Workshop "Sustainable Product Service Systems.

31 The empirical data suggest five forms of PSS 1. Add services by going downstream (vertical integration) Could be termed integration oriented PSS ownership of the tangible product is transferred to the customer, but the supplier seeks vertical integration, e.g. by moving into retail and distribution; financial services; consulting services; and transportation and trucking services Effectively a product + a range of associated services Relatively speaking: easy to implement and low risk 2. Add services to the product Known as product oriented PSS ownership of the tangible product is transferred to the customer, but additional services directly related to the product are provided, e.g. design and development services; installation and implementation services; maintenance and support services; consulting services; outsourcing and operating services; procurement services Effectively a product + services integral to the product Relatively speaking: easy to implement and low risk Professor Andy Neely, 2008

32 The empirical data suggest five forms of PSS 3. Integrate services into the product Could be termed service oriented PSS ownership of tangible product is transferred to the customer, but additional services are offered as an integral part of the value offering, e.g. Health Usage Monitoring Systems and Intelligence Vehicle Health Management Effectively an integrated product-service system Changes the nature of the business model, often shifts responsibility and risk Reliant on technology so can require complex infrastructure 4. Shift focus to service (delivered through product) Known as use oriented PSS ownership of the tangible product is retained by the service provider, who sells the functions of the product, via modified distribution and payment systems, such as sharing, pooling, and leasing. Borrow/lease and return (e.g. Mobility cars, Netflix) Service-product systems Major challenge change conceptions of ownership 5. Replace product with service Known as result oriented PSS The PSS replaces services for products e.g. voic service replacing answering machines Professor Andy Neely, 2008

33 Mapping the 12 services identified Form of PSS Integration oriented PSS involve moving downstream Product oriented PSS involve offering additional services that are directly related to the product Service oriented PSS involve offering systems and solutions Use oriented PSS involve services such as leasing Which of the 12 services would be included? Consulting services, financial services, retail and distribution, transportation and trucking services and property and real estate services Design and development services, installation and implementation services, maintenance and support services, outsourcing and operating, and procurement services Systems and solutions Leasing Professor Andy Neely, 2008

34 Size of firm (deciles of employees) Statistically which firms make higher net profits as a % of sales revenues? Integrated PSS Type of Product-Service System Product oriented PSS Service oriented PSS Use oriented PSS 1 Servitized Servitized Servitized Servitized 2 Servitized Servitized Servitized Servitized 3 Servitized Servitized 4 Servitized Servitized Servitized Servitized 5 Servitized Servitized 6 7 Servitized 8 Servitized 9 10 Manufacturing For the largest decile pure manufacturing firms make higher net profits as a % of sales revenues than those firms offering product related PSS. Results significant at the 10% level

35 Five questions 1. What do we know about manufacturing in the UK? 2. How is manufacturing changing? 3. Why is manufacturing changing (the driving forces)? 4. Data on the servitization of manufacturing (scale and impact) 5. Observations what research do we need?

36 The challenges of servitizing Description of the PSS Scale of the challenge? Shifting mindsets Of marketing from transactional to relational marketing Of sales from selling multi-million dollar products to selling service contracts and capability Of customers from wanting to own the product to be happy with the service Timescale Managing and delivering multi-year partnerships Managing and controlling long-term risk and exposure Business model and customer offering Modelling and understanding the cost and profitability implications of long-term partnerships Understanding what value means to customers and consumers, not producers and suppliers Developing the capability to design and deliver services rather than products Developing a service culture Embedding all of the above into a service organisation Professor Andy Neely, 2008

37 The challenges of servitizing Description of the PSS Scale of the challenge? Shifting mindsets Of marketing from transactional to relational marketing Of sales from selling multi-million dollar products to selling service contracts and capability Of customers from wanting to own the product to be happy with the service Timescale Managing and delivering multi-year partnerships Managing and controlling long-term risk and exposure Business model and customer offering Modelling and understanding the cost and profitability implications of long-term partnerships Understanding what value means to customers and consumers, not producers and suppliers Developing the capability to design and deliver services rather than products Developing a service culture Embedding all of the above into a service organisation Professor Andy Neely, 2008

38 The challenges of servitizing Description of the PSS Scale of the challenge? Shifting mindsets Of marketing from transactional to relational marketing Of sales from selling multi-million dollar products to selling service contracts and capability Of customers from wanting to own the product to be happy with the service Timescale Managing and delivering multi-year partnerships Managing and controlling long-term risk and exposure Business model and customer offering Modelling and understanding the cost and profitability implications of long-term partnerships Understanding what value means to customers and consumers, not producers and suppliers Developing the capability to design and deliver services rather than products Developing a service culture Embedding all of the above into a service organisation Professor Andy Neely, 2008

39 The challenges of servitizing Description of the PSS Scale of the challenge? Shifting mindsets Of marketing from transactional to relational marketing Of sales from selling multi-million dollar products to selling service contracts and capability Of customers from wanting to own the product to be happy with the service Timescale Managing and delivering multi-year partnerships Managing and controlling long-term risk and exposure Business model and customer offering Modelling and understanding the cost and profitability implications of long-term partnerships Understanding what value means to customers and consumers, not producers and suppliers Developing the capability to design and deliver services rather than products Developing a service culture Embedding all of the above into a service organisation Professor Andy Neely, 2008

40 The challenges of servitizing Description of the PSS Scale of the challenge? Shifting mindsets Of marketing from transactional to relational marketing Of sales from selling multi-million dollar products to selling service contracts and capability Of customers from wanting to own the product to be happy with the service Timescale Managing and delivering multi-year partnerships Managing and controlling long-term risk and exposure Business model and customer offering Modelling and understanding the cost and profitability implications of long-term partnerships Understanding what value means to customers and consumers, not producers and suppliers Developing the capability to design and deliver services rather than products Developing a service culture Embedding all of the above into a service organisation Professor Andy Neely, 2008