Service: How Organizational Anchoring Works

While the demand for garden furniture is rising, Lufthansa is waving the “homecoming guarantee” flag, clearly demonstrating that homogeneous customer needs can be identified and translated into intelligent and profitable services, especially in times of crisis.  

Which service has inspired you most recently and why?  

We have also asked Jan Ulrik Holsten, partner at enomyc, this question in our current podcast episode. He says, “Especially in times of crisis, when purchasing power is decreasing, the demand on the ‘customer journey’ increases. Brands and companies should now increasingly implement services or further develop their existing service portfolio.”

How can the service business be organizationally anchored in the company, and what requirements result from this for service sales?

Mr. Holsten, what is important to you personally in service?

Service is always good for me when I have a real service experience, meaning when I am enthusiastic and feel motivated to engage the services. This is not always the case. That’s why, loosely based on Herzberg, I differentiate between services that I call the hygiene factor – that is, services that you can tell if they are bad or not – and services that help to differentiate and spark the experience.

Which service performance has impressed you most recently?

There are a few. I think it is first important to differentiate between services offered in B2B or B2C – although they all have one thing in common: service aims to satisfy customers in every respect. In B2B the price–performance ratio plays a greater role than in B2C. People sometimes behave irrationally from an economic point of view when it comes to realizing personal preferences, so service performance is more important than price.

To give an example from B2B: I worked for a company that manufactures packaging machines for the pharmaceutical industry, which are sold worldwide. This poses great challenges for service; for example, regarding response times, languages, and local presence. One of the company’s recipes for success was to expand digitalization technologies in the field of machine maintenance and servicing. 

The buzzwords here are predictive maintenance and augmented reality. For example, a pair of glasses was developed that enabled technicians at headquarters to see what service technicians saw 10,000 kilometers away. The whole thing was supplemented by process concepts such as intelligent spare-parts stocking so that individual customers could benefit from an overall stocking strategy.

Can you give further examples from B2C? Which companies do you think do it right?

From an entrepreneurial point of view, two other examples immediately come to mind; Nespresso and HP have benefited from their service business by bringing a technology to market at a low cost – in this case espresso machines and printers – and by building their service business on the consumer products their customers rely on: espresso capsules and printer cartridges. As a result, both brands have realized a significantly higher margin than would have been possible by selling the hardware.

Personally, I find some of the services offered by online retailers convincing. Take Amazon: this industry giant gives me the opportunity to look at products in detail, compare them, check their availability, and read reviews from other buyers. I can also view my purchasing history at any time so that I can buy products again simply by clicking. This is something that convinces me. Another example comes from the railway industry: I would usually tend to expect to have my ticket controlled as a first order of business after having boarding but instead am greeted in a friendly way, am asked what I would like to drink, and am served at my seat – that creates a good feeling.

Let’s remember the term service desert, coined by Prof. Hermann Simon in 1995. Do you think that service provision in Germany has developed positively since then?

Hermann Simon is one of the pioneers who has explicitly – especially in his books on hidden champions – addressed the question of how service can contribute to the further development of business models. In the 1990s, the term service desert was quite justified in many industries. Many will remember: if you were looking for a particular item of clothing, for example, you would go to a textile store in the hope of finding it. If you found it, you stood at the checkout for a long time, bought it, and left. That was the shopping experience at the time.

Today, the service experience is completely different; the stationary retail trade offers a much greater variety of products so that desired products can be found – keyword: one-stop shop. Opening hours are extended – even on the weekends. There are combinations, such as shops in conjunction with cafés, so that customers can combine their shopping with an experience. Purchased goods do not necessarily have to be taken along but are also sent home in comfort. And there are now many more amenities.

Nevertheless, many companies continue to underestimate the impact of a service-based business model. The topic of "Service as a growth driver in times of crisis" was recently addressed. In your opinion, why should companies now of all times be focusing more on the possibilities of a service-based business model?

There are two reasons for this: firstly, service has always been and will remain an noncyclic business. In times of economic downturn, the service business benefits to a greater extent. In the industrial sector, companies can decide whether to invest in an investment product or in maintenance and service instead. Take a manufacturer of agricultural machinery: in this sector, it is traditionally observed that the useful life of original equipment is significantly extended in times of crisis. A product that was otherwise used for an average of three years is sometimes used for twice as long in times of crisis. For this to work, machines must be maintained and optimized during this time.

The second component is given by the coronavirus pandemic itself: companies discover digitization for themselves or discover what digitization enables them to do in times of crisis. I believe that digital business models have received an enormous boost from the coronavirus crisis. With a view to stationary trade, many consumers will consider whether they want to stand in line at the shop door in the future, only to find a limited range of products, limited qualified advice, and a tendency to pay for overpriced goods – and all this combined with the fear of being infected.

Can the losses that are incurred due to lack of investment in new products be offset by the service business?

Usually there is a latent conflict in sales between the so-called new or main product and the service product. At the moment a new product is sold, only few services can be sold. Conversely, a main product is required in order to sell services at all. The industry refers here to an installed base or a machine population that is in the market and thus defines the relevant market or market size for which services can be provided. Companies need clear rules at the process level on how they want to deal with such a seemingly conflictual situation.

It seems that many companies tend to run service as a subdivision, or that it is only treated stepmotherly. In your opinion, does it make sense organizationally to install service as a separate unit within the company – consistently with its own service sales department?

There’s no general answer to that question. It depends on the convictions of the management, the strategy the company pursues, the degree of process maturity, and the people who work there.

However, if a company, which is strongly product focused, pursues the goal of significantly expanding its service business, then it is important to anchor it organizationally on an equal footing with the product business. This can be done by removing service from a function where it is usually located – often called sales and service – and transferring it to an independent unit. Companies do this in very different ways. The continuum ranges from the establishment of an independent function to a legally independent unit.

In the past, a study of more than 80 companies in the B2B sector was conducted, and they were tested on two criteria: on the one hand, the organizational anchoring of the service portfolio and on the other hand, the active, professional development of this portfolio. What were the findings?
We looked at the performance of the companies in terms of service, but also overall, and then divided these companies into different classes. We spoke of high performers and low performers. We then took a closer look at the characteristics of different service features. In the next step, we used a correlation analysis to determine which characteristics characterize a high performer and which characterize a low performer.

To the findings: it was noticed that the differences in profitability between high performers and low performers were significant. We found that with an average EBIT margin – in this industry it was seven percent – the service business offered a much higher margin: the average was 18 percent, and at its peak it was over 37 percent. 

If you consider that the service ratio of the companies considered was on average ten to 15 percent – but for companies that operate the service business professionally, it is 25 percent – then it is easy to deduce mathematically what profitability potential is also possible for low performers. On average, we have identified a potential for EBIT improvement of six percentage points. That is enormous!

What recommendations for action do you derive from this for companies?
The most striking correlations suggested that a successful service business in industry should be organizationally anchored as a profit center equivalent to the main product business. This is an important prerequisite for obtaining equal access to scarce resources such as investments and budgets.

On the other hand, it was shown that companies that consistently and professionally developed their service portfolio were significantly more successful than others. In addition to pure further development, differentiation also plays an important role here; it allows a company to be able to better serve individual preference structures on the customer side through product variation in service.

How can large enterprises respond to changing customer needs and provide a service experience for their customers?

It can often be observed that especially smaller companies and start-ups have made service their business model. It is therefore not surprising that large companies are sometimes specifically looking for such start-ups in order to expand their own service competence through acquisition.

Otherwise, the development of service products follows the same rules of the game as in the main product: apply classic marketing instruments to identify customer needs and then develop service products based on these needs. Customer needs can be determined by direct and indirect surveys. As a rule, different analyses are applied to the survey results, all of which have one goal: to understand how customers differ in their preference structures and where there is congruence. Today, customer segments and their homogeneous needs can be derived from these analyses much better than in the past and can be transferred to product or service development.

Lufthansa has thus identified a homogeneous customer need and has derived a new service from it: the homecoming guarantee. What do you think of this offer?

This is an excellent example of a successful service and shows how a company succeeds in transforming a homogeneous customer need into a service from a crisis. I think many people feel the need to travel by plane for their holidays despite the coronavirus pandemic. And most of them are probably also aware that a change in the risk situation and local regulations can lead to a stranding in the holiday destination. Lufthansa’s offer makes a significant contribution to risk minimization. The offer also provides a good business opportunity for Lufthansa, and I am sure it will bring the company one or two new customers in these difficult times.

Would this service offer be an incentive for you personally to fly on holiday?
Clearly, yes. Even though I am undecided at the moment whether I want to travel and go on holiday this year at all. But for me, too, it would be a significant package of additional security. So if I were to travel by plane, I would think very carefully about which airline I would do so with.

Thank you very much for the interview, Mr. Holsten.