How to Organise for Servitization

Manufacturers are focusing more on “how" to servitize: How to accelerate servitization and stay ahead of the pack? How to escape from business-as-usual?

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Summary

For the next years, many manufacturers will focus more on “how” to servitize: How to make these innovations successful? How to accelerate these transitions and stay ahead of the pack? How to escape from business-as-usual? How to prepare the organisation for such journeys?

In this article, I will share an overview of critical challenges and strategies for servitization.

Servitization is a different ball game

Many manufacturing businesses have made good progress in building a common understanding and commitment to business innovation, including servitization. They have allocated resources and funding for servitization, but are experiencing that servitization is a different ball game from usual innovations like product development, sales improvements, process improvement. They face new challenges, such as:

• “Political” discussions when deciding on initiatives and investment in which the loudest voice often wins.
• New risks from uncertainty and unpredictable trends.
• Forces towards business-as-usual, with signs like “not invented here”, “that does not work in our industry”, “our clients don’t want that” and/or “this is not our core business”.

We hear and read a lot about new (digital) technologies, new disruptive business models and servitization. Often we see that most of the interest and attention goes towards the technologies. However, the real challenges are about organisational and human aspects:

• How to translate these general insights into concrete and relevant initiatives?
• How to overcome the challenges and obstacles and increase momentum?

We should have more balance in our focus between the different aspects, including the organisation and business model. 

In essence, servitization is all about innovating your business model, particularly when you move beyond purely product related services like maintenance, repair, spare parts and product training. The more our offerings and pricing become more performance-based offerings and the more our solutions are helping clients to improve their processes and outcome beyond the impact of reliable equipment, the more we need to change our value proposition, our brand, our operating model, financial model and go-to-market approach. 

Servitization requires us to rethink our value proposition, our target market, our position in the value chain and our position in the competitive landscape. We will be facing new opportunities and new risks.

This also requires us to be open to new thinking, new mindsets and different strategies for innovation and change.

The problem: One innovation approach doesn’t fit all innovations

Too often, we see successful strategies for one type of innovation being applied to other types of innovation and therefore fail.

Read more about Service Innovation in our

Ultimate Guide for Service Innovation

I will explain this using the Hybrid Innovation Matrix as a framework. This framework helps to recognise different types of innovation based on respective typical challenges and pitfalls and to choose the best strategy for each type of innovation.

About the Hybrid Innovation Matrix”

The Hybrid Innovation Matrix differentiates four types of innovation with the respective challenges and strategies along two dimensions.

Along the horizontal axis, we differentiate innovations within the existing business logic from those developing new business logic. In every industry and business we have prevailing business logic, which is a set of common patterns, knowledge, experiences and frameworks of thinking. We use this logic to understand our environment and make decisions. This common business logic defines how we act, learn and change.

Our brains are hardwired to maintain a cognitive framework to rapidly assess our environment, filter information and make decisions. This results in a strong bias towards protecting the established business logic.

Along the vertical axis, we have the relative size of the innovation or change. In the left column, we differentiate incremental improvements from the more radical innovations that push the boundaries. In the right column, we differentiate reconfiguring and extending an existing business model from developing completely new solutions and markets with completely new business models.

I will elaborate on the two quadrants of the Hybrid Innovation Matrix which are most relevant to servitization and briefly describe the other two quadrants.

Adaptive and Incremental Improvements

“Adaptive and Incremental Improvements” is all about continuously optimizing the performance of existing products, services and operations in small steps. Every industry has its common recipe of annual improvement of functionality, performance, speed, cost etc.

Examples include the usual improvement initiatives from departments like product development and marketing

• capturing and processing customer feedback
• adding new features to products and services
• PDCA, Lean, Kaizen and similar approaches to improve the quality and efficiency of operations

How servitization fits in:

As this is not the quadrant in which servitization takes place, I will not elaborate on this quadrant.

Pushing the Frontiers

“Pushing Frontiers” is about bigger innovations within the common business logic.

In every industry, we have common pathways of how the performance of products and services develop and how (latent) customer demands evolve.  We can learn from the best practices and results from others in our own industry.

Typical examples are:

• How advanced technology continues to develop in the world of semiconductors
• How there are hybrid and electric transmissions in cars
• How we now have FaceID on our phones
• How we become more predictive in sales, supply chain, manufacturing and maintenance with digital capabilities

How servitization fits in:

The early phases of the servitization journey fit in this quadrant. The service offering focuses on managing availability and condition of equipment in a more predictive manner, by investing in data collection, predictive algorithms et cetera.

Challenges:

Innovations in this quadrant often impact a large base of stakeholders in the organisation, advancing the knowledge in various disciplines, and involve serious investments with uncertain bets on the outcome.

A key challenge is to avoid obstacles at all levels in the organisation and a narrow focus on, for example, only products or technology. More specifically, the challenges in the different phases of an innovation process are as follows

During the Discovery Phase:

• Knowledge gaps between different stakeholders and decision-makers, because of the higher levels of expertise of the innovation teams
• Finding strategic knowledge inside and outside the company
• Understanding a wider spectrum of (latent) customer needs beyond functional
• A too narrow focus, for example on product technology, financial control or internal processes
• Too much focus on the usual innovations which many competitors do as well, and therefore hardly add differentiation and making it difficult to monetise

During the Decision-Making Phase:

• Mitigating risks from an uncertain outcome with higher upfront investments
• Lack of digital and service mindset
• “Political” battles or polarised discussions because of:
  • The more qualitative arguments
  • Uncertainty of outcome
  • Lack of new expertise

During the Implementation Phase:

• Limited capacity to implement change fluidly in the operating organisation
• Lack of required expertise and knowledge
• Lack of digital and service mindset

Reconfiguring and Extending the Business Model

“Reconfiguring and Extending the Business model” involves a combination of entering new markets, applying new technologies, encountering new competitors and facing new political actors. These are new aspects, different from common and dominant business logic in a business or industry.

Typical examples are:

• Low-cost airlines with a new value proposition and operating models
• Some computer manufacturers, like Dell, selling directly to the end-clients
• Storage solutions moving to cloud services
• Truck manufacturers reducing fuel consumption by influencing truck drivers
• A manufacturer of kidney dialysis equipment operating entire dialysis centres in hospitals

How servitization fits in:

As you can see from the examples, the more advanced phases of servitization, which extend the value offering beyond product availability or condition, perfectly fit in this quadrant.

Challenges:

The main challenge is to widen a peripheral vision escaping from the established dominant business logic. The challenges in the different phases of an innovation process are as follows:

During the Discovery Phase:

• Being open to new knowledge, patterns, ideas and opportunities without being pulled back into business-as-usual by forces such as colleagues, clients, vendors, service suppliers and investors
• Recognising weak signals of potential trends, threats and opportunities, and when these become emergent
• Mitigating “conflict” with mainstream research activities
• Understanding and recognising potential market disruption from immature and emerging alternatives (often at the low end of the market)

During the Decision-Making Phase:

• Limited knowledge and uncertainty about unpredictable developments
• Battles between stakeholders in operating organisation and innovation organisation
• Canceling the best initiatives because they did not deliver short-term financial results, in favour of initiatives closer to business-as-usual with quicker results
• Not considering weak signals for potential threats, like market disruption
• Fear of cannibalism

During the Implementation Phase:

• Embedding new knowledge throughout the organisation
• Building new mindsets and competencies
• Mitigating “conflict” with mainstream operations
• Existing clients may not like the new solutions (yet)

Co-evolution of New Solutions and Markets

“Co-evolution of new solutions and markets” is about the radically new emerging solutions. Here, we see many different solutions and ideas popping up, while it is still unclear which of the competing alternatives will emerge and become the dominant solution.

Current examples of innovations in this quadrant are renewable energy, data-driven healthcare, mobility (including self-driving cars), Google Maps rapidly pushing away TomTom, and tachographs gradually being replaced by cloud-based applications. Other examples are personal computers displacing mini-computers and digital photography displacing analogue photography.

How servitization fits in:

I will not elaborate any further on this quadrant, as servitization in principle is not about developing these radical solutions. However, in some industries there are actual opportunities and threats in this quadrant, in which servitization could play a role (like the Google Maps versus TomTom).

In Summary – the human factors are critical

Reviewing the challenges described above, it all boils down to the human factor. How do people behave in certain circumstances like pressure to perform, risk, uncertainty, lack of experience or insights and being in a professional network that protects the status-quo. 

Therefore, we need to adjust how we innovate, which whom we innovate and how we (do not) steer them. 

The solution: Differentiate innovation strategies with a focus on human aspects

The challenges I described concentrate on the human factors for successful discovery, decision-making and implementation. They are quite different for each type of innovation in the Hybrid Innovation Matrix, which means we need different strategies to be successful.

I will now describe the best practices for the two types of innovation which are most relevant for servitization.

Pushing Frontiers

The name of the game here is “Managing a wider portfolio, including higher risk projects”. The following practices will help accelerate the innovations that push the frontiers – in the three different phases of these innovations.

In general:

• Establish a clear and compelling direction in which the company is heading and how that relates to the developments in the industry and market
• Build a shared concern on developments in the industry and the importance of adapting to it
• Establish cross-functional and dedicated teams of experts for specific initiatives
• Establish dedicated project management

During the Discovery Phase:

• Use advanced techniques for finding (latent) opportunities, such as design-thinking and empathic design
• Involve external experts (consultants and new partners)

During the Decision-Making Phase:

• Strong involvement from top management
• Maintain a balanced portfolio of different types of innovations
• Apply a stage gate and review process, with clear criteria, such as;
  • What initiatives should be higher risk initiatives pushing the frontiers
  • In which domains to push frontiers (technology, products, services, customer experience etc.)
  • Success criteria for go/no-go for the next phases
  • Level of investment in different types of initiatives
• Educate stakeholders on the decision level
• Invest in further research first
• Develop solid business cases, supported by solid information
• Use advanced risk-assessment techniques

During the Implementation Phase:

• Lean startup and agile development techniques
• Co-develop with your best clients
• Early involvement of stakeholders from various functions
• Develop the digital and service mindsets

Be aware for the following common Pitfalls:

• Using incremental improvement techniques such as PDCA and customer feedback programmes
• Not having dedicated innovation teams

RE-CONFIGURATION AND EXTENDING BUSINESS MODELS

The name of the game here is running “Entrepreneurial satellite teams”.

In General:

• Add a transformative direction of the company, which is fairly open
• Build a shared concern for developing business models for the next growth curves
• Be flexible and embrace the unpredictable
• De-couple the entrepreneurial and multi-disciplinary teams from the mainstream organisation
• Allow addressing different markets or segments for (first) success

In the different phases, the following practices will help a lot

During the Discovery Phase:

• Avoid being to targeted in your search assignments
• Use techniques to reframe and think in “new boxes”
• Build new and broad expertise networks outside your industry
• Experiment and learn
• Involve external experts and parties through contracting or outsourcing
• Scout for successful initiatives in the market
• Develop scenarios around weak signals

During the Decision-Making Phase:

• Reframe opportunities and threats
• Decentralise decision-making
• Decide on vision and scenarios, not on short term results
• Rapid prototyping
• Acquisition of early successes in the market
• Allow competing initiatives to be pursued

During the Implementation Phase:

• Keep the new business in entrepreneurial satellite teams
• Let the innovation teams use Lean Startup and Agile approaches
• Co-create with the most interesting (potential) clients

Avoid the following common Pitfalls

• Decision-making and resource allocation by senior leadership in the operating organisation, as their main focus is protecting the current business lines and avoid risks for these business lines
• Using input from existing customer feedback programmes and allowing these insights to drive the innovation
• Decision-making based on business cases and stage-gate reviews
• Early integration into the current operating organisation or business model

Conclusion and takeaways

An increasing number of manufacturing companies commit to servitization and business model innovation and allocate resources to it.

However, many struggle to keep a high pace and escape from business-as-usual. The main reason is, that they have not developed the necessary innovation strategies and approaches to thrive in today’s disruptive industries.

A hybrid innovation strategy, based on the Hybrid Innovation Matrix, focusses on the human factors of your servitization journey and will make the difference between success and failure!

If you want to boost momentum for servitization;

• Share this with your colleagues
• Assess the ideas, initiatives, progress and obstacles with the Hybrid Innovation Matrix
• Build a shared concern for the need for ongoing innovations in each of the quadrants
• Put the organisational and human aspects on the strategic agenda

It is a great time to be in manufacturing. We are facing exciting opportunities to make manufacturing a stronger backbone of our service-oriented economies. We have a unique opportunity to make manufacturing a great place to work and to invest in.