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Expanding Servitization in Manufacturing

The services sector has been seizing share of economic output and employment for the last 40 years. Services comprise 80% of U.S. GDP, according to CIA World Factbook. China, too, is a majority services economy today.

Services momentum is further reflected in the Institute for Supply Management’s non-manufacturing report on business, which finds healthy expansion, while its manufacturing index is mired in contraction.

Cue “if you can’t beat ‘em, join ‘em”? 

Not exactly. At a macroeconomic level, goods and services are intrinsically linked; there is not a zero-sum contest, but a win-win opportunity to continue to expand the pie of value creation. For U.S. goods producers, “servitization” at a more micro-level has actually been trending in manufacturing growth and profitability for years.

Instead of simply creating goods, and leaving third-parties to deal with the end-customer later in the value chain, leaders in servitization have been evolving toward customer-centricity, expanding product and services capabilities, and deepening customer relationships. Spare parts, repairs, maintenance, field service, and other support are all part of servitization in the manufacturing sector.

Rolls-Royce engines, Caterpillar equipment, and Xerox photocopiers rank among the early exemplars that found scale in this space. Heavy machinery are not the only examples; consumers know flat-screen TVs arrive already networked to stream and printers offer replacement ink subscriptions. What is different as we usher in 2020 is the availability data from Internet of Things (IIOT) to ignite and empower services innovation in exciting ways. Connected technology presents opportunities for manufacturers to monitor, transmit, store, analyze, and respond to customer data as never before. 

Servitization may be a clunky term for the latest iteration of a longstanding growth strategy for providing after-market services. Manufacturers must chart a future in which new data-enabled services complement or enhance, not replace, production by building customer loyalty and lifetime value. Services are integral to sector competitiveness, offering a path to differentiate and meet rising customer expectations in a digital world.

Nearly 15 years ago, a Harvard Business Review article on “Winning in the Aftermarket” lamented that “despite the aftermarket’s obvious charms, most organizations squander its potential.” Complexity in services businesses is a challenge. A more recent study of servitization literature in International Journal of Production and Operations Management finds little change. Although there is increasing global awareness of the importance of services to manufacturers, it concludes, “some topics, especially related to servitization transformation [i.e., organizational change in the business], remain undeveloped.” Manufacturers still face significant barriers to executing on servitization strategy. It’s a challenge that begs the insight and best practice from established industry leaders.