Viewpoint -- Winning Through Services

Dec. 21, 2004
Manufacturers that offer more than products will redefine competition.

Wracked by destructive market share battles and global competition, some manufacturers are finding profits in a revolutionary new strategy: selling services to business customers. As service companies, manufacturers market their technical knowledge, business skills, manufacturing expertise and logistics capabilities on a fee-for-service basis, independent of product sales. They offer consulting, outsourcing, business model change, efficiency gains, contract logistics and other big-ticket services. These service-manufacturers will reap substantial economic rewards as they grow profitable new lines of business. Ultimately, service manufacturers will redefine competition. Product-only manufacturers will find their options limited as they differentiate solely on product features and attempt to fund growth solely on product margins. Service-manufacturers will find they have pricing flexibility as service revenues grow and command extreme customer loyalty as they directly impact the customers bottom line. All of this is possible because business customers must find breakthrough solutions as they face their own ever-increasing competition. Faster and better is the mantra. If business customers cant get it done with their own employees, they are increasingly willing to look outside for help. And, when customers buy services, they are demanding tangible results -- cost cutting, launching new products, doing business online, entering new markets, and going global, to name a few. Manufacturers are in a unique position to sell services down the supply chain because they understand the customers business as only another business can. They understand the short-term focus on profits created by Wall Street because they live it every day. Manufacturers know its hard to get organizations to change direction because they have wrestled with their own largess. Most importantly, they have deep insights into the customers processes and applications because for years they researched, designed and supported products to meet those needs. Who are the new service-manufacturers? So far, only a small club of elite manufacturers has successfully launched service businesses. Two examples are IBMs Global Services and Caterpillars CAT Logistics. IBM, finding the market for computing and networking equipment less and less attractive, now earns 40% of its sales through services that help companies become successful at e-business. Caterpillar developed a world-class parts delivery capability to keep its earthmoving equipment working in some of the most remote corners of the world. CAT Logistics now sells that ability and delivers over $16 billion of client products all around the globe. To be sure, IBM and Caterpillar have built their success on some serious advantages. Both have world-class brand names that can open doors to senior management and immediately establish credibility. Their sheer size and long market tenure convinces customers they are not taking risks. Caterpillar and IBM also have a large base of existing customers and suppliers, providing a ready opportunity for mining service clients. How should manufacturers create service strategies? Successful service strategies will require manufacturers to rethink traditional approaches to sales, marketing and product development, but they dont need to start from scratch. Four basic strategies for winning through services have emerged: Strategic services -- large dollar engagements, often in the millions, that deliver even larger economic returns for customers. Strategic services are often built initially on flagship products that are central to the customers business. In the long run, however, its not the products that carry services forward. Rather, its the growth or efficiency the service delivers. In fact, manufacturers that offer strategic services will find that they need to guarantee brand and product neutrality. Customers will not allow them to pull or pitch their own products at the expense of customer gains. A la carte services -- many manufacturers will find that they have the beginnings of a service in place today. For example, many manufacturers charge for expedited delivery. Others bill-out field technicians on a time and material basis. Still others will develop and build custom products, but require the customer to cover part of the development and production costs. Analyzing existing charges is the first step toward building an a la carte service strategy. If customers are willing to pay, they are signaling that they perceive value. Like-minded customers in similar situations should be targets for similar offerings. Manufacturers can go further by adding new offerings that round out a menu of service offerings. Joint services -- manufacturers facing consolidating channels may find advantage in partnering with large distributors. The goal is to achieve a balance, where both parties bring something to the table. By working together, a new formula for building share of mind in the channel is developed. Channel control gives way to cooperation, a necessity when national distributors are able to command customer loyalty. Joint services are best developed through cooperation. One approach is for a manufacturer to call together employees from a customer and a distributor to find new solutions to old problems. Direct selling manufacturers can pursue a similar method by substituting a third-party logistics provider (3PL) for a distributor. In recent years, 3PLs have shown a tremendous ability to assume a wider range of supply-chain activities. Facilitated services -- many manufacturers continue to rely on a supply chain made up of small distributors or retailers. By packaging services for these small partners to sell, manufacturers can help them survive while building increased channel loyalty and power. For example, a manufacturer of pumps might develop electronics and software to capture equipment performance data. This information can be gathered locally by the distributor or remotely over the Internet. Service opportunities begin when the information is ported into a solution: predictive maintenance, asset management or process improvement. The manufacturers channel partners can offer branded services, reinforcing the manufacturers market position while enhancing their own business profitability. While the returns of successful service strategies for individual manufacturers may be large, there is a potentially more significant outcome: for fee services have the potential to restructure the supply chain. As customers are presented with new buying alternatives, they will become the arbiters of change. Their decisions, and their willingness to pay for new solutions, will become a powerful force. New activities added to the supply chain may become common place, and existing roles may migrate among manufacturers, distributors and third-party logistics providers. The net result could be a higher level of value delivered to the customer by a new, better-organized, and more efficient supply chain. Mark Dancer is vice president of Philadelphia-based Pembroke Consulting, a management consulting firm specializing in strategy, channels and business marketing. He can be reached at [email protected].

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