According to the German government (11/2019), the German economy is currently going through a weak phase. Although a more severe downturn, or worse, a recession, is not expected at present, there are not yet any signs of an economic turnaround for the better.
The current observable relaunch of old cost-cutting measures can, at best, be a mere part of the solution. Such a focus would fall short because, for example, digitization levers for cost reduction are not addressed and the potentials of the service side of the business are not taken into account.
The declining growth rates are currently giving many manufacturers food for thought. At management level, discussions about alternative ways of increasing earnings are on the rise. Expansion of the service business aspects appears particularly promising, as it requires significantly less investment than the development of product. In addition, it is also less dependent on economic cycles and enables the generation of noticeably higher margins, especially in times of crisis.
How can companies increase their profitability by expanding their services and what are the foundations and success patterns for the further development of the growth driver “service?”
Jan Ulrik Holsten, partner at enomyc, addresses this topic in this article. In part 1 of the series “Service as a Growth Driver,” you can learn how to identify success patterns for building your service business and how to further expand both your service strategy and service portfolio.
BEYOND DAY-TO-DAY BUSINESS: HOW STRATEGY AND PORTFOLIO DEVELOPMENT CONTRIBUTE TO FUTURE GROWTH
Successful companies have recognized the importance of their service business and attach at least the same importance to it as to the product side of the business. The often-cited transformation “from product to solution provider” is typically a first step in this direction.
For some companies, the former core business with products has, in the meantime, even fallen behind that of the service aspects in terms of importance and more or less only functions as an engine driving the service business. Well-known examples are companies such as Nespresso, HP, and IBM.
But what does it mean in definitive terms to attach appropriate or equal importance to the service aspects of a business as to the product side of the business, and what are the implications of this requirement for management?
The answer is actually very simple: management is required to reassess decision-making routines against the background of profitability, sustainability, and competitiveness and, if necessary, to reinvent itself.
This logic is particularly clear when making investment decisions: for example, the special considerations that are specific to the service business can lead to the allocation of investment funds for new products being split differently if the “return on investment calculation” takes into account not only the value contribution of the new product itself, but also that of the product-related service revenues.
If the service business is to be further expanded outside the traditional maintenance business – for example, by expanding infrastructures or making acquisitions – it may even lead to services and new products competing for scarce investment funds, giving preference to the service business.
The more attention the service business receives from a company’s management, the more relevance is then attached when compared to the product side of the business, which correlates to the much higher probability that this company also has if an independent service strategy is in place. In practical terms, this means that the service strategy is already part of the corporate strategy. It forms the basis for successfully positioning the service business in this process.
The development of the service strategy requires healthy pragmatism and a certain hands-on approach. Experience has shown that it has advantages compared to a detached analysis. “A Strategy that is anchored in reality” is the motto under which not only the target image should be described, but, above all, also the correct way to achieve it.
A good service strategy is no different from any other segment strategy in terms of content. It is all about the question of which services can and should be used to build up a competitive advantage, that will open up new opportunities in markets and with which customers. The focus is therefore on the following question.
Future growth in services will be achieved less through the acquisition of new customers and more through offering new services. Successful service-oriented companies know this and regularly and systematically address the further development of their service portfolios.
The further development of the service portfolio is also accompanied by special challenges. Thus, digitization plays a very important role. Many possibilities only arise by using sensor and actuator technologies in conjunction with suitable data transmission bandwidths and intelligent evaluation models. Even though many of these examples of digital-based services are already being regarded as relics, many companies are nevertheless still struggling with their implementation:
Companies that succeed in further developing their service portfolio in an innovative and digital way and thus generate added value for their customers will be among the winners in the market in the future.
Which new developments are also important? How does product development and management need to be aligned, and what are the requirements for service-based sales? We will look at this in greater detail shortly.