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Chances and Limitations of New Business Model Generation by Servitization

von Claus Wimbsberger (Autor)

Seminararbeit 2012 19 Seiten

Ingenieurwissenschaften - Wirtschaftsingenieurwesen


Table of contents

List of figures

List of tables

1 Introduction

2 Evolution and Definition of Servitization

3 Case Study IBM: Chances and Limitations of Servitization
3.1 Initial business structure and the development towards servitization
3.2 Chances arising from the adoption of servitization
3.2.1 Strategic rationale
3.2.2 Economic rationale
3.3 Limitations of new business generation by servitization
3.3.1 Limitational factorl: Thepeople inside the company
3.3.2 Limitationalfactorll: Thepeople outside the company

4 Discussion & Conclusion


List of figures

Fig. 1: IBM Worldwide Revenues (&USB) by Quarter Q103-Q109

List of tables

Table 1: Elements of a market package

1 Introduction

In the course of globalization, many manufacturing companies in developed econo­mies have to face fierce challenges arising from the competitiveness of emerging economies in the Middle and Far East (Neely A. , 2007). The fact that US manufac­turers have to cut the costs of their products by 30% in order to compete with Chinese producers can be pointed out as a very illustrative example for this development (Wu, Yue, & Sim, 2006). Therefore, manufacturers no longer solely focus on the goods they produce, but aim to restructure their business model by extending the range of activities assigned to the product’s whole life cycle, including market research, prod­uct development, manufacturing, sales, service after sales, product recalls, etc. (Yue & Cheng, 2002). Here, especially services are gaining importance in the industrial sector. By including them in their total offering, manufacturers have the opportunity to generate various advantages: facilitating the sales of their goods; lengthen custom­er relationships; creating growth opportunities in matured markets; balancing the ef­fects of economic cycles with different cash-flows; and responding to the demand (Brax S. , 2005). Such an approach is also known as ‘servitization’ among the eco­nomic circles (Wang & Fu, 2010).

2 Evolution and Definition of Servitization

In analogy to many other developments in all kinds of businesses, the idea of combin­ing products and services is not a new one (Slepniov, Waehrens, & Johansen, 2010). In fact, ‘Servitization’ is based on an evolutionary process which can be divided into three main stages: ‘Goods or Services’, ‘Goods + Services’ and ‘Goods + Services + Support + Knowledge + Self Service’ (Vandermerwe & Rada, 1988).

Stage 1: Goods or Services

The philosophy corresponding to this stage is quite congruent with the basic assump­tions of the Goods-dominant logic which describes goods as tangible units of outputs being embedded with value during manufacturing. The aim of this approach is to maximize the profit by means of efficient production and distribution of goods. Therefore, goods should be standardized, produced away from the market and inven­toried until demanded. In contrast, services are characterized by intangibility, hetero­geneity, inseparability (simultaneous production and consumption) and perishability (hence non-storable or transportable) (Vargo, 2008). On this basis, especially before the 1950s, companies defined themselves either as manufacturers (e.g. Ford Motors) or as service providers (e.g. Merrill Lynch) (Magnusson & Stratton, 2001).

Stage 2: Goods + Services

The second stage is characterized by the convergence of manufacturing and service companies. Thus, companies being specialised on the production of goods integrated service solutions into their portfolio, whereas service companies tried to expand their range of supply by the integration of tangible products (Koch, 2010). The origin of this approach can be traced back to the 1960s when, according to Davies, Brady, & Hobday (2006), firms began to adopt ‘systems selling’ strategies. This term can be defined as the provision of a combination of “hardware components” (products) and a “software” component like technological and market know-how (Spring & Araujo, 2009). More precisely, the customer does not just buy a system, but the “expectations of benefits” a system provides for customers over time, such as an operating chemical plant or telecommunication system (Davies, Brady, & Hobday, 2007).

Stage 3: Goods+Services+Support+Knowledge+Self Service

The third evolutionary stage, whose development has not been completed by now, describes the actual characteristics of ‘Servitization’ (Koch, 2010). Vandermerwe & Rada (1988) were the first to coin this terminology and defined it as “market packages or ‘bundles’ of customer-focused combinations of goods, services, support, self-service and knowledge”. In order to illustrate the meaning of the particualar elements of this definition, a short example, based on the market package ‘computer’ supplied by an servitizing manufacturer, shall be presented (Vandermerwe & Rada, 1988):

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Elements of a market package

3 Case Study IBM: Chances and Limitations of Servitization

In the course of turning to services, many companies like GE, Siemens or HP have achieved success with this approach. (Sawhney, Balasubramanian, & Krishnan, 2004). However, there are many cases of companies that despite making the transi- tion into services did not get the expected correspondingly high returns (Baines, Lightfoot, Benedettini, & Kay, 2004). In fact, the proportion of servitized companies going bankrupt is bigger than might be expected (Neely A. , 2007). In the course of this paper, the underlying principles for the success respectively the failure of ser- vitizing firms will be determined. Therefore, a case study will be applied. It deals with IBM and its development from a pure manufacturer to a highly profitable sup­plier of integrated solution, but also points out the limitations challenging the compa­ny’s move to servitization.

3.1 Initial business structure and the development towards servitization

IBM adapted the idea of servitization by incorporating ‘Integrated solutions’ into its business. This term can be defined as “a business model for the supply of capital goods based on the provision of products and services as integrated solutions to indi­vidual customer’s needs” (Davies et al., 2007). In the 1980s, IBM had the in-house capabilities to supply low-cost, standardized bundles of personal computer hardware, software and service support (Davies A. , 2004). However many smaller specialized companies supplying modular components, which could be added to IBM computers, entered the industry and successfully challenged IBM’s dominant position (Baldwin & Clark, 2000). IBM was divided in 20 largely independent business units at this time - each with own strategies and some in the process of moving towards spin-off or sale (IBM, 2011). But instead of aiming to a vertical disintegration by turning IBM into a group of individual component suppliers, IBM’s CEO decided in 1993 to focus on the provision of integrated solutions for a customer’s computing requirements. The introduction of this strategy can be regarded as the initial spark for all further developments towards the application of servitization at IBM (Davies et al., 2007; Gerstner, 2002).

3.2 Chances arising from the adoption of servitization

Based on the above mentioned developments in the business history of IBM, the rev­enues IBM obtained from services (43%) overtook hardware and technology (42%) for the first time in the company’s history in 2001 (Gerstner, 2002). In the following, the key advantages of servitization leading to its success respectively the chances arising from the application of this approach will be determined and furthermore evaluated to what extend they have been playing a role in the case of IBM’s moving to services. In this way, the insights from various literary sources are used in order to create a structural framework for this research. This framework consists, according to the findings of Neely (2008), of the two main dimensions ‘Strategic rationale’ and ‘Economic rationale’ being divided in several sub-categories.

3.2.1 Strategic rationale

Barriers to competitors

The first aspect to be mentioned in the context of strategic rationales is the setting up of barriers to competitors as the risk of customers being wooed away can be mini­mized by means of providing services (Vandermerwe & Rada, 1988). This competi­tive advantage is reasoned by an increased difficulty to imitate services compared to products arising from the nature of services, being less visible and more labour de­pendent (Oliva & Kallenberg, 2003). As mentioned above, IBM provides integrated solutions to meet its customers’ needs. Trying to become successful in this business, a solutions integrator has to gain control of the channel to market at first, which may be regarded as an essential point, since any attempts to move downstream towards the customer will be blocked if a competitor controls the customer interface. IBM re­solved channel conflicts by acquiring one of its competitors - PwC Consulting - for the purpose of consolidating its control of global IT markets (Davies, Brady, & Hobday, 2006). With 30000 employees and offices in 52 countries, PwC Consulting brought additional depth and leadership capabilities to IBM’s services-led business. IBM created the world’s largest consulting service organization - Business Consult­ing Services - following this acquisition (Jover, Maglione, Ocharsky, Sony, & Regis, 2005). As a result, companies like Cable & Wireless failed in moving into service businesses because PwC used its scale and global reputations to exploit and control the channels to global business customers C & W originally had wanted to reach (Davies, Brady, & Hobday, 2006).

Customer dependency

Another important aspect in the context of strategic rationales deals with the creation of customer dependency (Vandermerwe & Rada, 1988). In contrast to the simple sell­ing of products, servitization involves a mindset shift, transforming customer rela­tionships from transactional to relational (Turunen & Toivonen, 2011). Thus, servitz- ing firms aim to strengthen allegiance (Wise & Baumgartner, 1999) and lengthen relationships (Brax S. , 2005) with their customers, which becomes especially obvi­ous in the case of the outsourcing of functions an organization formerly handled on its own. An illustrative example for this approach is Eastman Kodak’s decision to hire IBM to design, build and manage a new state-of-the-art data processing centre (Davies, Brady, & Hobday, 2006). This form of outsourcing enabled Kodak to con­centrate available resources on its core competencies while IBM delivered the non­core activities (George, Nunamaker Jr., & Valacich, 1992). However, Kodak largely lost its control over the operations being executed on the data in the data processing centre by giving away its IT division and became very dependent on IBM’s know how to manage its tasks. Nevertheless, it should be mentioned that this agreement is still beneficial for both companies and is not intended to be cancelled in the near fu­ture (IBM, 2011).

Fulfilment of customer’s needs

Going downstream towards the customer, manufacturers need to expand their defini­tion of the value chain by shifting their focus from operational excellence to the cus­tomer (Wise & Baumgartner, 1999). As a consequence, a key success factor for ser­vitization is the adoption of a strong customer centricity, which means providing cus­tomers with more tailored and integrated solutions instead of plain products (Heikkilä & Brax, 2010). According to the characteristics of servitization, this approach is not just limited to ensuring the proper function of a customer’s product but to pursue effi­ciency and effectiveness of the end-user’s processes related to the supplied product with the aim to establish a high reputation among clients (Oliva & Kallenberg, 2003). In its role of a customer-centric company, IBM allows each corporate customer to individually select the level of service that addresses his needs. These range from individual packages to full solutions and encompass all aspects of a customer’s IT requirements, from designing and integrating systems to managing and running com­puters (Davies A. , 2004). To a greater degree, IBM even incorporates its rivals’ products into the solution it offers in case of it is not able to supply the most state-of- the art or absolutely appropriate components (Miller, Hope, Eisenstat, Foote, & Galbraith, 2002). For example, in the case of integrating a server in a data centre solu­tion, the outsourcing and consulting people at IBM would suggest a Hewlett-Packard server if it makes more sense for the customer (Galbraith, 2002).

3.2.2 Economic rationale

A further important motivation for manufacturing institutions to implement a serviti­zation strategy is the economic benefits which may be derived from its characteristics (Gebauer & Friedli, 2005). Subsequently, especially the implications being connected to the above mentioned long-term relationships shall be taken into particular account.



ISBN (eBook)
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Institution / Hochschule
Friedrich-Alexander-Universität Erlangen-Nürnberg
chances limatations business model generation servitization


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    Claus Wimbsberger (Autor)


Titel: Chances and Limitations of New Business Model Generation by Servitization