Priorities when looking for servitization in the mechanical engineering industry

image_pdfimage_print

Priorities when looking for servitization in the mechanical engineering industry

Purpose
The necessity of a holistic framework for servitization and the discussion and classification of the associated measures for the development of a servitization strategy to expand the business areas in mechanical engineering is implicit. This is particularly relevant as servitization must take into account both business models (BM) and organizational change. This paper, therefore, sets out to investigate crucial measures, to implement a servitization strategy, ranked by their importance of implementation.
Design/Methodology/approach
The design of the research is twofold, consisting of a data gathering and data analysis step. While the first-mentioned was carried out through systematic literature research, the second part focused on analysing gathered information, including ranking the conclusions drawn. This was achieved through the Analytical Hierarchy Process (AHP). AHP is one of the most comprehensive frameworks that is seen as decision making for several criteria. The method makes it possible to consider the problem both quantitatively and qualitatively.
Findings
This paper suggests that at the beginning of the process of servitization, the focus has to be set on a major change in the mindset of the workforce and the organizational culture to succeed with the servitization model. Besides, significant investments must be made in infrastructure and resources to enable services at all. Defining the services offered is of mediocre importance. Adapting existing processes away from a product-centric view towards a service-oriented view is, in this case, indispensable, but not of the highest relevance. Evidently, the evaluation of services is of less importance during the implementation of servitization.
Research limitations
Since the paper is primarily based on literature research and subsequent analytical comparison through the AHP, further research is necessary to extend and validate the framework and measures found.
Practical implications
The paper tackles a business problem which importance will continue to increase in the next years, as there will be a need to develop existing strategies towards more service-centric business models: Differentiating oneself from competition and expanding the range of services and products contributes significantly to the long-term survival of companies which is driven by growth and sustainability.

Introduction

The expansion of business models for manufacturers away from material goods towards a combination of material goods and services has been studied for decades with initial efforts from Vandermerwe & Rada (1988), which coined the term servitization. The popular strategy of adding complementary services to tangible product offers evolved throughout the years and has played an ever-increasing role within the line of business of mechanical engineering hitherto. Today, the service sector accounts for around 70% of the EU gross domestic product, which underlines the importance of services for firms (Statista 2017). Economic reasons for the switch to more service-oriented business models were therefore identified by Baines et al. (2013) and range from rising competition in the mechanical engineering sector to increased cost pressure, companies are facing, which they try to conquer by extending their range of products and services.

Problem statement, objective & approach

Although servitization often results in positive business development in terms of strategic and economic aspects, the transition for manufacturers from a pure product supplier to a company that also includes services into their business model is linked to various hindering aspects. Many manufacturers fail to realize expected benefits and become victims of the service paradox, whereas investments in service businesses do not yield in higher returns (Gebauer et al. 2005). A large part of the paper is devoted to this main problem of servitization while it mainly aims to discuss and classify the factors for developing a servitization strategy to expand business areas in the mechanical engineering sector towards a more service-oriented model. Subsequently, the necessary measures to enable the modification of the current business model to a servitization model will be discussed. This forms the basis of implementation. Lastly, the measures required for implementing the business model will be ranked according to their importance to apply servitization practically using the Analytical Hierarchy Process (AHP).
Ranking of measures according to their importance is found to be a multi-criterion decision-making problem. Such problems require a method for assessing several measures of both a qualitative and quantitative nature. Therefore, the first part consists of the main data gathered through literature research. During this literature review, a strong overlapping between the recommended measures within literature and the existing findings of Tempelmayr et al. (2018) is identified, as shown in table 1.

Table 1: Adapted measures for successful servitization
Source: Taken from Tempelmayr et al. (2018)

The second part focused on analysing gathered information, including ranking the conclusions drawn, to implement the servitization strategy. This was achieved using a mathematical model, namely the Analytic Hierarchy Process (AHP) suggested by Saaty (2011). The AHP was found to be a suitable tool for the multivariate analysis of gathered data during literature research.

Exploiting the potential & identifying risks of servitization

Manufacturing firms in developed countries are facing increased competition resulting in harsh market conditions. In those markets, differentiation based on costs is hardly possible any more due to competitors from developing countries that can manufacture at lower costs. Cost pressure especially derives from an increasingly global economy and further technological progress in low-cost countries. Increased competition made an expansion of business models for manufacturers away from material goods towards a combination of material goods and services necessary. Furthermore, servitization also reflects the overall economic trend towards a more service-oriented society, although, the act of infusing products with services has been around for more than 100 years, also known as tertiarization (Kohtamaki et al. 2018). Examples can be found worldwide, as observed by Goodwin (2018):
• The largest taxi company does not own any cars (Uber)
• The largest accommodation provider owns no real estate (Airbnb)
• The fastest-growing TV network lays no cables and hardly creates any content (Netflix)

Servitization has emerged in both, business and science practice, as a concept to fundamentally change the understanding of business models in manufacturing (Neely 2008). Argue that the potential impact on firms – who successfully servitize – can be as significant as lean manufacturing (LM) or just-in-time production (JIT). It can be added, that servitization happens away from the previous product-oriented structure, which must be in place beforehand. Therefore, servitization can be used by product providers to complement their offer portfolios with additional services.

Overcoming the service paradox

Many manufacturers fail to realize expected benefits and become victims of the „Service paradox” whereas investments in service businesses do not yield in higher returns. Gebauer et al. (2005) confirmed this phenomenon which was illustrated in the following figure using three steps. In the first step, the product is infused with substantial investments into employees and infrastructure resulting in a higher value distribution (i.e. the share of the revenue from services increases in relation to the total turnover). This leads to step two, where the expansion of the range of services should ideally be enabled. However, this is where the paradox kicks in as those investments mentioned above do not yield in higher returns as indicated through the dotted lines. Manufacturers thus fail to capture the created value through additional services. An increase in the service awareness and associated risks along with enhanced internal organizational structures, which support the service BM, reduces the pitfall of lower revenue (Neely 2008). This solution for overcoming the service paradox is furthermore supported by Tempelmayr et al. (2018), as they found, that the ability to price services is of crucial importance for successful servitization.

Figure 1: Model by Tempelmayr et al.
Source: Tempelmayr et al. (2018)

Importance of business models for servitization

Business models (BMs) provide the framework for this study to build a uniform basis for further elaboration on this topic. To understand how a company operates, it is of crucial importance to understand the underlying model that guides all operations and tasks. The explanation of business models is reflected at this point because servitization requires a shift of business models away from product-centered business models (PBM) to service-centred business models (SBM). Within this paper, the business model canvas (BMC) by Osterwalder et al. (2005) will be used to differentiate BMs accordingly. Questions, companies should ask themselves to categorize their business model using the BMC, are:
• Value proposition: How do we create value?
• Market factors: Who do we create value for?
• Internal capabilities: What is our source of competence?
• Competitive strategy: How do we competitively position ourselves?
• Economic factors: How we make money?
• Personal factors: What is our time, scope and size ambitions?

Exemplified component: value proposition

The responses to these questions introduced in the previous section (i.e. components) allow a distinction between different business models to be made while the example of value proposition was used in figure 2. The name of the component is illustrated on the left side, followed by its sub-categories. As literature shows, value proposition is one of the main components of every business model, which is why it was exemplified below (DaSilva CA & Trkman 2014). The term is defined as the value which is delivered to the customer and can be seen as a strategic tool that firms can use to communicate how it intends to provide value to the customer (Payne et al. 2017). Assigned to servitization, this means that such business models strive to shift the focus for companies from a pure product orientation to product-service orientation but still need to generate value for customers. Additionally, factors that benefit a service business model were highlighted in red to clarify that they fit the servitization model. Based on the findings on business models, it can be concluded that the implementation of servitization requires a change from the existing business model. The reconfiguration of those components away from pure product orientation towards product-service orientation is unavoidable. Therefore, the first two measures for the successful implementation of servitization were elaborated while it was found that they are of similar importance when compared with each other (Figure 3).

Figure 2: Differentiation of the term value proposition (exemplified)
Source: Authors

Contribution of business models towards servitization

Figure 3: First branch of the AHP: Internal business
Source: Authors

In this section, the paper strives to picture possible business models within the mechanical engineering sector. The business model framework by Morris et al. (2005) will help to differentiate product business models from service business models. To simplify matters, the individual six components introduced before are now condensed to value proposition, value creation & value capture, which serve as main elements for the description of BMs in this paper. The following figure illustrates how the individual components were linked to each other. Within value proposition, the market factors describe how the firm fulfills customer needs. Value creation determines the cost model of a firm and includes necessary resources, structures and processes (internal capabilities) as well as support and development plan for future offerings (competitive strategy). Lastly, the value capture shows the profit formula of all the elements above and determines how to be lucrative.

Figure 4: Adapted and combined business model framework by Morris et al.
Source: Morris et al. (2005)

Without a concrete definition of services, the internal processes, resources and structures cannot be aligned to the implementation strategy or even evaluated. This underlines the importance of customer surveys and marks the third and fourth measure for successful implementation of servitization, namely:
• Defining possible services through customer surveys
• Evaluating services through customer surveys

The following figure illustrates measures number three and four, which is subordinated to the „external business“ branch as external customer surveys are used to gather them.

Figure 5: Second branch of the AHP: External business
Source: Authors

Product service systems: The underlying BM for servitization

The necessity of a product business model during servitization arises from the fact that services can only be applied to existing business models. One reason for this already lies in the word itself, as servitization is commonly defined as the combination of goods (i.e. products) and services. When comparing the characteristics of product and service business models, it quickly becomes clear that there are some commonalities. Both depend on the introduced components of business models, i.e. value proposition, value creation and value capture. Additionally, they fit the established definition of a conceptual tool containing a set of objects, concepts and their relationships to express the business logic of a specific company in a simplified way. Therefore, it makes sense to generate a combination of both, which is also widely known in the literature as product-service-system (PSS) (Chaffey 2009). Figure 6 illustrates the servitization shift, whereas further to the right the picture is viewed, the smaller the share of the pure product in the offer becomes. At the same time, the share of pure service increases. Additionally, one can observe that products are always tangible in the sense that they are physical products. In contrary to that, services are intangible, meaning they are nonmaterial.

Figure 6: Characteristics of PPS
Source: Adapted from Tukker (2003)

Assigned to servitization, this means that significant upfront investments are necessary to build up the necessary infrastructure and expertise within the firm to best serve the customer. Both factors simply have not been present during the existing product-centred business model and are now required to offer services. In terms of investments, a distinction can be made between those for employees and those for infrastructure. The former need training to develop new skills for services. As far as infrastructure is concerned, it is particularly important to provide the equipment necessary for services. Maintenance services, for example, require the necessary hardware and software, while the disposal of machines may require separate scrapping equipment. From a holistic point of view, investments are the most important measure, as no services can be provided without a suitable infrastructure. The following figure illustrates measures number five and six of the AHP. As the last four remaining measures are defined, they can be modelled into the final hierarchy.

Figure 7: Third branch of the AHP: Financial business
Source: Authors

Measures for successful servitization implementation

In the following chapter, the individual steps of the AHP are described and applied for the ranking of all measures which have been identified in the previous chapters. Thus, conclusions can be drawn which measures are of the greatest importance for companies when introducing a servitization model.

Step 1: construction of the hierarchy

First of all, the problem looked at must be modeled as a hierarchy. The following figure shows the modelled hierarchy for this paper where the top level consists of one element which reflects the goal. The bottom shows the necessary measures to implement a servitization strategy, which were worked in this paper. The middle section level reflects the three main categories for evaluating the measures, namely internal, external and financial business.

Figure 8: Final hierarchy model for servitization implementation
Source: Authors

Step 2: pairwise comparison of measures

Secondly, the collected data has to be evaluated and pairwise compared with each other using a pairwise comparison scale. The scale is necessary to show how many times more important one measure is over another measure with respect to the measure which it is compared to. The pairwise comparison for the implementation of servitization, including the importance assessment is illustrated in table 2. The evaluation and pairwise comparison of the individual measures was carried out by the author. The scale is based on the literature research previously carried out and should convert the textual results into numerical ones.
As stated in the introduction of the measures, both the adaption of processes and culture as well as the investments into infrastructure and employees are to be weighted equally in each case. This is represented by an importance rating of 1. The evaluation of 4 in the definition of services versus the adaptation of processes results from the fact that a concrete service must already exist for the adaptation in order to design the process accordingly. In contrast, the service can only be evaluated after the introduction, which is why the adaptation, with a rating of 6, was classified more important here. In general, the evaluation measure received mainly low ratings, when comparing its importance with other measures, as it’s of the least importance for manufacturers when introducing servitization. The main focus is simply on other measures – which, however, will shift after the introduction, since an evaluation of the services is indispensable for a long-term continuation of the business model.
The great importance of the investments in infrastructure and employees is also reflected in the numerical evaluation. For this reason, the measures were consistently evaluated with a value between 7 and 9 when compared with other measures. The only exception is the definition of the services. As with adaptation, targeted investment in infrastructure and employees first requires a concrete service. This direct comparison results in a slightly reduced result of the importance of investments with a rating of 5 for the employees and 4 for the infrastructure. At the same time, it also becomes apparent that the employees have been given a higher priority throughout the whole comparison scale. The reason for this is the fact that employees are part of each individual measure. They are required to perform services at all, as they are also familiar with the existing product portfolio. Therefore, they are best suited for servitization. The importance is further underlined by the fact that employees will continue to be required for all future service activities, let it be selling services or monitoring the quality through customer feedback. One can conclude that the omnipresence of the employee can only be supported on a long-term and sustainable basis through targeted investments (Tempelmayr et al. 2018).
However, it should be noted that these measures must be linked to an introduction of servitization within the mechanical engineering industry. All results and the resulting measures were influenced by this limitation.

Figure 9: Pairwise comparison scale for implementing a servitization model
Source: Authors

Step 3: calculation of the importance

Through the calculation of the eigenvalue for each matrix, pairwise comparisons of measures are carried out. One can observe that, if the importance of measure i (mi) is aji then measure j (mj) is 1/aij more important (aji=1/aij). The importance, in general, can have values from 1 to 9. The comparison matrix is created to determine the weight of priority without considering other alternatives. The calculation is based on the assumption that decisions are made rational. This means, that if measure A is ranked higher than measure B and measure B is ranked higher than measure C than consequently, measure A is ranked higher than measure C. To overcome this drawback, AHP asks for a consistency check of its ranked measures. This is achieved by calculating the Consistency Ratio (CR). The following table shows that with six measures, a random consistency index of 1,24 must be chosen to calculate the consistency.

Table 2: Consistency indices for randomly generated matrices by Saaty
Source: Saaty (2011)

Step 4: consistency check and ranking of measures

The consistency ratio is defined as CR=CI/RI. The calculated CR should always be smaller than 0.1 to be consistent, which means to be free of contradictions (Saaty 2011). The AHP applies a pairwise comparison matrix to interpret qualitative findings from gathered data. Therefore, qualitative data is transferred to quantitative values through calculation. The process results in an easily interpretable and quantitative ranking based on the total score of each measure, as seen in figure 9. Matrix 1 on the top shows the pairwise comparison of the measures, including the goal to be achieved, taken from figure 8. Matrix 2 on the bottom was used to carry out the calculation of normalized values for each measure. Afterward, a summary of the respective row was calculated to evaluate the score, which is the summary of the row in relation to the number of measures (n). This corresponds to the percentage of importance of this measure that can be used to rank it: The higher the percentage, the more important the measure. Additionally, the consistency check was carried out, which yields a CI/RI-ratio of less than 0.1.

Figure 10: Analytical Hierarchy Process on the example of the implementation of servitization
Source: Authors

Conclusion

This paper examined the implementation of a servitization model within the mechanical engineering industry while it was found, that this change of the business model comes with several challenges namely the service paradox, contradicting approaches to the market and a fundamental change in procedures and approaches in day-to-day business. Ranking of six key measures according to their importance of implementation – to overcome the challenges mentioned above – turned out to be the main problem of this article.
As derived from Figure 9, the paper suggests that at the beginning of the process, the focus has to be set on a major change in the mindset of the workforce and the organizational culture through investments into employees in order to succeed with the servitization model. In addition, significant investments must be made in infrastructure and resources to enable services at all. Defining the services offered is of mediocre importance. Adapting existing processes away from a product-centric view towards a service-oriented view is, in this case, indispensable, but not of the highest relevance. Evidently, the evaluation of services is of less importance during the implementation of servitization.

Literatúra/List of References

[1] Baines, T. and Lightfoot, H., 2013. Servitization of the manufacturing firm. In: International Journal of Operations & Production Management. 2013, 34(1), pp. 2-35. ISSN 0144-3577.
[2] Chaffey, D., 2009. E-Business and e-commerce management. Strategy, implementation and practice. Harlow: FT Prentice Hall, 2009. ISBN 978-0-273-71960-1.
[3] DaSilva, C. and Trkman, P., 2014. Business model, what it is and what it is not. In: Long Range Planning. 2014, 47(6), pp. 379-389. ISSN 0024-6301.
[4] Statista – Das Statistik-Portal, 2017. Europäische Union, Anteile der Wirtschaftssektoren am Bruttoinlandsprodukt (BIP) der Mitgliedsstaaten im Jahr 2017. [online]. [cit. 2020-02-07]. Available at: <https,//cutt.ly/krFU56O>
[5] Gebauer, H., Fleisch, E. and Friedli, T., 2005. Overcoming the service paradox in manufacturing companies. In: European Management Journal. 2005, 23, pp. 14-26. ISSN 0263-2373.
[6] Goodwin, TO, 2020. The battle is for the customer interface. How services influence our everyday life. TCRN.ch, 2020. [online]. [cit. 2020-02-07]. Available at: <http,//tcrn.ch/1DI138A>
[7] Kohtamaki, M., Baines, T., Rabetino, R. and Bigdeli, Z. A., 2018. Practices and tools for servitization, managing service transition. Cham: Palgrave Macmillan, 2018. ISBN 978-3-319-76516-7.
[8] Morris, M. H., Schindehutte, M. and Allen, J., 2005. The entrepreneur’s business model, toward a unified perspective. In: Journal of Business Research. 2005, 58(6), pp. 726-735. ISSN 0148-2963.
[9] Neely, A., 2008. Exploring the financial consequences of the servitization of manufacturing. In: Operations Management Research. 2008, 1(2), pp. 103-118. ISSN 1936-9735.
[10] Osterwalder, A., Pigneur, Y. and Tucci, Ch., 2005. Clarifying business models, origins, present and future of the concept. In: Communications of the Association for Information Systems. 2005, 15, pp. 751-775. ISSN 1529-3181.
[11] Payne, A., Frow, P. and Eggert, A., 2017. The customer value proposition, evolution, development, and application in marketing. In: Journal of the Academy of Marketing Science. 2017, 45(4), pp. 467-489. ISSN 0092-0703.
[12] Saaty, T. L. and Vargas, L., 2011. Models, methods, concepts & applications of the analytic hierarchy process. New York: Springer-Verlag, 2011. ISBN 9781461356677.
[13] Tempelmayr, D., Stadlmann, Ch., Mang, S., Überwimmer, M. and Ehrlinger, D., 2018. A framework of capabilities and business dimensions influencing servitization based upon service dominant logic. Proceedings of the SERVSIG Conference, pp. 23-27.
[14] Tukker, A., 2003. Eight types of product-service system. Eight ways to sustainability? In: Business Strategy and the Environment. 2003, 13(4), pp. 246-260. ISSN 1099-0836.
[15] Vandermerwe, S. and Rada, J., 1988. Servitization of business. Adding value by adding services. In: European Management Journal. 1988, 6(4), pp. 314-24. ISSN 0263-2373.

Kľúčové slová/Key Words

service science, implementation, servitization, priority, AHP, business model
veda o službách, implementácia, servitizácia, priority, AHP, obchodný model

JEL klasifikácia/JEL Classification

D23, M31

Résumé

Priority servitizácie v strojárskom priemysle

Cieľ príspevku
Potreba uceleného rámca pre servitizáciu a diskusiu a klasifikáciu súvisiacich opatrení na rozvoj stratégie v oblasti servitizácie s cieľom rozšíriť oblasti podnikania v strojárenstve je jednoznačná. Toto je obzvlášť dôležité, pretože servitizácia musí zohľadniť ako podnikateľské modely, tak aj organizačné zmeny. Tento príspevok sa preto zameriava na vyhodnotenie opatrení na implementáciu stratégie servitizácie, ktoré sú zoradené podľa dôležitosti vykonávania.
Dizajn, metodika a prístup
Návrh prieskumu je dvojaký a pozostáva z kroku zberu údajov a analýzy údajov. Kým prvý krok bol vykonaný systematickým literárnym výskumom, druhá časť bola zameraná na analýzu zhromaždených informácií vrátane klasifikácie vyvodených záverov. To sa dosiahlo prostredníctvom Analytického hierarchického procesu (AHP). AHP je jedným z najkomplexnejších rámcov, ktoré sa považujú na multikriteriálne rozhodovanie. Táto metóda umožňuje posúdiť problém ako kvantitatívne, tak aj kvalitatívne.
Zistenia
Tento príspevok naznačuje, že na začiatku procesu servitizácie je potrebné sa zamerať na zásadnú zmenu v postoji pracovnej sily a organizačnej kultúry, aby sa podarilo uspieť v servitizačnom modeli. Okrem toho sa musia vynaložiť značné investície do infraštruktúry a zdrojov na poskytovanie služieb. Definovanie ponúkaných služieb je stredne dôležité. Prispôsobenie existujúcich procesov zameraných na produkt smerom k procesom orientovaných na služby je v tomto prípade nevyhnutné, ale nemá najvyšší význam. Je zrejmé, že hodnotenie služieb je menej dôležité počas implementácie servitizácie.
Obmedzenia výskumu
Pretože príspevok je primárne založený na výskume literatúry a následnom analytickom porovnaní prostredníctvom AHP, potrebný je ďalší výskum na rozšírenie a potvrdenie platnosti rámca a zistených opatrení.
Praktické dôsledky
Tento dokument sa zaoberá obchodným problémom, ktorého význam sa v nasledujúcich rokoch bude zvyšovať. Potrebné bude rozvinúť súčasné stratégie so zameraním viac na obchodné modely orientované na služby. Odlíšenie sa od konkurencie a rozšírenie ponuky služieb a výrobkov významne podporuje dlhodobé prežitie spoločnosti, ktoré je poháňané rastom a udržateľnosťou.

Kontakt na autorov/Address

BSc Patrick Großpötzl, Degree program Production and Management, Upper Austria University of Applied Sciences, School of Management, Wehrgrabengasse 1-3, 4400 Steyr, Austria, e-mail: [email protected]

FH-Prof. Dr. Ing. Ulrich Seiler, Degree program Production and Management, Upper Austria University of Applied Sciences, School of Management, Wehrgrabengasse 1-3, 4400 Steyr, Austria, e-mail: [email protected]

FH-Prof. DI Dr. Margarethe Überwimmer, Degree program Global Sales and Marketing, Upper Austria University of Applied Sciences, School of Management, Wehrgrabengasse 1-3, 4400 Steyr, Austria, e-mail: [email protected]

Recenzované/Reviewed

26. February 2020 / 9. March 2020