How can companies increase their profitability by expanding their service business? What are the basics and success patterns for the further development of service as a growth driver? These were the questions we addressed last November in the first part of our blog post series on the topic of “Growth Through Service.”
Economically speaking, Germany was on the verge of a recession at that time, but there were also initial signs of recovery. Today, we know that Germany will certainly enter into a recession as a result of the COVID-19 pandemic. Economic experts agree: Germany is in a state of crisis.
The second part of our series of topics will therefore be devoted to service-based business models in times of crisis. What makes service-based business models particularly successful in times of crisis? Why is digitization an important driver for new service products, and how can services be developed in a customer- and value-oriented way?
Expansion of the Service Business as a Strategy for Dealing with the Crisis
Questions about the expected duration and the true extent of the economic impairment cannot be answered in a generalized manner. The cuts imposed by the government on people’s personal rights and freedoms vary too widely from sector to sector. The current situation is characterized by two features:
Firstly, there is no consistent approach in Europe – not even within Germany itself. Instead, there are only fear-based decisions that are weighed up against the image of so-called “system relevance,” geared toward particular interests. The guidelines for the German economy are inconsistent and vary from region to region.
Secondly, though there are a few winners that are coming out ahead, there are mainly losers. While manufacturers of disinfectants, pharmacies, drugstores, food retailers, and online providers (retail and streaming) are among the winners of the crisis, other sectors are badly shaken. The extent and duration of the impairment is difficult to estimate. This holds especially true for the aviation and tourism industry, as well as trade fairs and the cultural and gastronomy sectors.
The approaches and strategies for dealing with the crisis are as different as the degree to which each sector is affected. However, one thing is certain: companies that already had a viable business model before the COVID-19 crisis or that have succeeded in radically developing their business model in recent weeks will survive the current situation – perhaps even emerging from it stronger. The expansion of the service business can make an important contribution to this.
Digital Business Models and Flexible Service Components
How important the role of a digital business model is for the service business was explained in more detail in the first part of the series. In the current situation, service products that manage with significantly less human interaction are receiving a strong tailwind. Functions such as condition monitoring, remote management, and augmented reality are also increasingly gaining acceptance at the CEO level and making the leap from buzzword to business model. Companies that succeed in further developing their service portfolio in an innovative and digital way, thus generating additional value for their customers, will be among the winners in the market in the future.
For the strategic further development of the service portfolio, it is also important to differentiate between the individual service components and make them more flexible according to the modular principle, so that significant value propositions can be established for different preference structures of individual market segments. A profound knowledge of the market helps immensely in this regard. Downstream market segmentation is also an important success factor.
Market Shares through Market Segmentation and Product Differentiation
“One size fits all” only applied to Ford’s Model T, affectionately known as the tin lizzie. To build up long-term competitive advantages, it is crucial to serve the different preference structures of the market with a differentiated service portfolio. To this end, it is necessary to develop service products based on market segmentation. In many companies, product development results from market research and market segmentation. While this process is standard in the new-product business, the same approach also applies to service.
Within the spare-parts business, for example, market segmentation can be the driving force behind the establishment of alternative product lines with different levels of quality that each serve different subsegments of a market. Volkswagen provides a good example of this: the brand has two makes of genuine spare parts – in addition to a premium product, they also have an economy product line in their portfolio. By offering spare parts from the more affordable economy line with a lower warranty scope and a significantly lower price level, VW has succeeded in winning back market shares from suppliers in the independent aftermarket. In the area of classic services, the key lies in the development of a modularized service portfolio (construction kit), which can then be tailored to meet specific needs with different service levels.
Systematic Integration of Service into the Product Development Process
Companies where the knowledge gained from market segmentation is systematically incorporated into the development of new products and services succeed to a much greater extent in keeping the service business in-house. This enables them to charge higher prices than the competition for comparable services. However, systematic and early cooperation between the new product and service business can improve service competitiveness in a completely different way.
The more successful service requirements can be anchored within new product design, the greater the benefits service-oriented organizations can achieve. The most important requirements to be considered from a service perspective are:
- Design for Serviceability: technical preparation for better and more comprehensive services
- Design for Upgradeability: technical preparation of upgrade options
- Design for Service Necessity: customization and increase of technical complexity
- Development of (Proprietary) Monopoly Parts.
The first two initiatives – Design for Serviceability and Design for Upgradeability – are aimed primarily at increasing efficiency in the handling of the subsequent service business. This can increase the company’s own competitiveness compared with alternative providers. The latter two initiatives – Design for Service Necessity and Development of Monopoly Parts – tend to foreclose the market to third-party providers. Common to all initiatives is that the success of implementation is linked to the formulation of clear objectives.
This article only highlights a subtopic of our Corporate Performance Improvement consulting field and is intended to serve as a stimulus for further discussion. Which further developments are also important? How should a service business be anchored organizationally, and what are the requirements for service sales? We will also be reporting on these topics soon.