Dr Christian Kowalkowski, Professor Of Industrial Marketing at Linköping University outlines how two of the biggest trends amongst manufacturers, digitalisation and servitization, are in essence two sides of the same coin and why digitalisation requires more, not less, service and customer centricity than ever before.
The growing digital disruption is blurring industry boundaries and altering established positions of firms. While manufacturers are investing strategically in data gathering and analytics capabilities and in cloud-based platforms, many firms remain concerned about how to best address digital disruption and enable digitalisation.
Last year, General Electric cut expenses by more than 25% at its digital unit responsible for Predix, its software platform for the collection and analysis of data, which previously has been hailed as a revolutionary driver for Industry 4.0. This move highlights the difficulties involved in adopting digital technology in an industrial business. Having worked with B2B firms in diverse industries on designing and implementing service-growth strategies, I have seen both highly successful and unsuccessful cases of what I call ‘digital servitization.’
Why is it so that even many firms that run a profitable field service organisation struggle to implement digitally-enabled services?
Before looking at some key challenges, let us first define what we mean by digital servitization. As a start, we need to distinguish between digitisation, which means turning analogue into digital, and digitalisation, which refers to the use of digital technology to change the business model. A tech-savvy firm with a product-centric mindset may have little difficulty in implementing digitisation, as when record companies moved from selling LPs to CDs.
However, rather than embracing the new digital opportunities that changed the way we interact with music, most record companies then clung on to a product-centric business logic of selling CDs.
Instead of developing business models based on Internet distribution they promoted new physical media like the Super Audio CD. Ironically, their defensive stance—manifested in such things as copy protected CDs—forced many people to illegal downloading in order to conveniently access MP3 music, thereby undermining their product-centric model even further. Digital servitization, then, refers to the utilisation of digital technologies for the transformation whereby a company shifts from a productcentric to a service-centric business model.
Of course, digitally-enabled services are not new; for example, Rolls-Royce’s archetypal solution TotalCare begun in 1997 and BT Rolatruc (since 2000 part of Toyota Material Handling) created its software system BT Compass in 1993, to help its customers improve their performance. Digital technology can be a double-edged sword however. For example, many manufacturers have been carried away by the technical possibilities of telematics without having a clear service business model in mind.
Rather than crafting a compelling value proposition based on enhanced customer performance, it was tempting to give the service away for free with the hope that customers eventually would discover the value of data access and be willing to pay for it.
There are however at least three problems with such a technology-centric approach. First, as the connected installed base grows and the costs of collecting and managing data increase year by year, it becomes increasingly difficult to defend the model unless service sales start to materialise. Second, giving services away for free always reduce the perceived value of the offering in the eyes of the customer. Why should they pay for something that was previously free of charge and that competitors may still be treating as a commodity and giving away?
Third, customers typically do not have the time nor the skills to interpret and act on the data collected. The real value of Big Data only comes once it is processed. By collecting and analysing data from multiple customers, a supplier may know more about the customers’ equipment and operations then they know themselves, which creates opportunities for new advanced advisory services.
The digital dimension of service growth requires purposeful and coordinated effort. As we know, while manufacturing and conventional R&D activities can be centrally managed to achieve efficiency and standardisation, services require increased local responsiveness and closer customer relationships.
"The real value of Big Data only comes once it is processed..."
During digital servitization, however, the central organisation must take a more proactive leading role to ensure platform consistency and data quality, to provide the requisite data science skills, to support local units, and to address cyber security issues. The 2017 large-scale cyberattack (NotPetya) on Danish shipping giant Møller-Maersk, which shut down offices worldwide, illustrates the dangers of inadequately managing the latter issue.
A service manager at Toyota pointed out over ten years ago that service development “is very much IS/IT. Instead of sitting and discussing how to be able to quickly change oil in the truck, there has become very much focus on data.”
Viewing data as “the new oil” is a claim oftentimes heard. Like oil, data is a source of power. It is a resource used to power transformative technologies such as automation, artificial intelligence, and predictive analytics.
However, unlike oil, data also has other properties. We are currently seeing a shift from scarcity of information (data) to abundance of it. Data can be replicated and distributed as marginal cost, and competitive advantage can be achieved by bringing together new datasets, enabling new services. But this also creates new tensions between companies regarding the issues of generation, collection, and utilisation of data. If a customer is generating massive amounts of data that the supplier is collecting, once processed, it can be used for better serving also the customer’s competitors. In other cases, we are seeing completely new companies emerging and collecting data on behalf of their clients.
Digitalisation is beginning to have a profound impact on even the most stable businesses. Customers increasingly expect that a single provider will integrate the system of which the products are part, and that they will do so through one digital interface. Whether the platform provider is one of the established OEMs or a new software entrant might not matter. Competition may come from unexpected sources, as for example when one of the leading international standards organizations in the marine industry recently moved into platform-based services.
Oftentimes, the most formidable threat comes from disruptive innovators outside the traditional industry boundaries. An executive in a leading incumbent firm stressed that her main concern was not the competition from any established player. Instead, what kept her awake at night was the prospect of Amazon entering—and reshaping—the market. While many share the concerns of being overrun by new competitors, the threat is most imminent to those firms that lack service leadership and a clear road map for service growth.
To conclude, no firm can afford not to strategically invest in digitalisation. However, as firms compete in the digital arena, there is a risk that focus shifts too much away from service and customer centricity to new digital initiatives and units. Ten years ago, many executives sang the praises of servitization.
Today, digitalisation is the poster boy for business transformation. Given the rapid pace of innovation, it may be tempting to launch new concepts as soon as the technology is available, rather than waiting until the they have been properly piloted and customer insights gained. To reap the benefits, firms also need to understand the interplay between back end and front end, investing in both back-end development for enhanced efficiency and better-informed decision-making, and front-end initiatives to enable new services and closer customer integration.
Correctly designed and implemented, digital servitization provides benefits for companies, networks, and society at large. Successfully seizing digital opportunities, however, requires more, not less, service and customer centricity than before.
Dr Christian Kowalkowski is professor of industrial marketing at Linköping University, Sweden, and the author of Service Strategy in Action: A Practical Guide for Growing Your B2B Service and Solution Business. Find out more here.