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Europtvn Mannyement lournal Volume 6 No 4

0 European Managemrnt journal 1988


1SSN 0263-2373 $3.00

Servitization of Business:
Adding Value by Adding Services

Sandra Vandermerwe
Director, MBA Programme and Faculty Member, International Marketing and Services

Juan Rada
Director-General and Faculty Member, International Management Institute (IMI), Geneva

More and more corporations throughout the world are adding value to their core corporate offerings through
services. The trend is pervading almost all industries, is customer demand-driven, and perceived by
corporations as sharpening their competitive edges.

Modern corporations are increasingly offering fuller market packages or “bundles” of customer-focussed
combinations of goods, services, support, self-service, and knowledge. But services are beginning to
dominate.

This movement is termed the “servitization of business” by authors Sandra Vandermerwe and Juan Rada,
and is clearly a powerful new feature of total market strategy being adopted by the best companies. It is
leading to new relationships between them and their customers.

Giving many real-life examples, the authors assess the main motives driving corporations to servitization,
and point out that its cumulative effects are changing the competitive dynamics in which managers will have
to operate. The special challenge for top managers is how to blend services into the overall strategies of the
company.

Services is dominating the economies of the world of developing services to create and keep customers
and much of the strategic thinking of business. We and thereby sustain a competitive advantage.
only have to look at the switch in emphasis in
computer technology from hardware to software to Part of the surge in services is a more holistic
appreciate that more and more corporations are add- approach by managers to their businesses and their -
ing value to their core corporate offerings through customers problems. It is no longer valid for either
services. And in the process many industries and industries or individual corporations to draw sim-
firms are experiencing a shift in their core business plistic distinctions between goods and services or
and revenue generation. assume they can do one without the other. Most
firms today, are to a lesser or greater extent, in
both. Much of this is due to managers looking at
Services is no longer a separate category for managers their customers needs as a whole, moving from the
to consider, but rather an all pervasive part of their old and outdated focus on goods or services to
strategic mission and corporate planning. The best integrated “bundles” or systems, as they are some-
companies of the future will be those who find ways times referred to, with services in the lead role.
SERVITIZATION OF BUSINESS 315

Not so long ago, many of the executives, who are almost all aspects in the operations of service
pushing for extended services in their companies providers.
would have said “no“ to services outside their
traditional business. They would have argued that Many services are already built into goods. I’hoto-
they did not have the proper skills, that it was too copiers pioneered the process whereby in the not-
costly - anyway customers would never pay. Today too-distant future artificial intelligence (A.I.) will
they are part of a wave consciously driving their make it possible for firms to anticipate failure and
companies into services to gain competitive ground. repair the damage without customers knowing that
anything went wrong.
We call this movement the “servitization” of business.
We believe it will have a critical impact on the way The point however is that a larger component of the
m,lnagers think, act, and do business in the future. added value in customer offerings is going into ser-
It M,ill continue to make the dividing line between vices. And since the primary objectives of business
traditional manufacturers and service companies less is to create wealth by creating value, “servitization”
clcbar and change some of the relationships and of business is very much a top management issue. It
competitive dynamics in which business operates. gets firms beyond “servicing” where a good is
repaired or maintained by the manufacturer or
This article is based on interviews with senior “moments of truth” where the firm comes face-to-
executives of both service and manufacturing com- face with its customer. It involves a different
panies. Our aim is to emphasize the growing strategic thrust, level of organizational complexity
importance of services in corporate strategy and and an order where the old traditional managerial
demonstrate some of the key advantages and recipes no longer fit.
competitive impacts. The main question we want to
leave with readers is this: what can they be doing
stl J tegically different around services? The Move to “Servitization”

“Servitization” is happening in almost all industries


on a global scale. Swept up by the forces of
On Definitions and No-Definitions deregulation, technology, globalization and fierce
competitive pressure, both service companies and
A lot of energy has gone into trying to define manufacturers are moving more dramatically into
services and already many authors have identified services.
tht: various definitional problems, an issue outside
tht! scope of this study. For the purposes of this Cleaning companies, for instance, are into a kaleido-
article we take the view that services are performed scope of service activities including; security, energy
rather than produced and are essentially intangible. saving, building repairs and alterations, plumbing,
carpet replacement, refurbishing, as well as cleaning
At the same time we recognize that the relationship and general maintenance. American Express is
be:\veen goods and services is a complex one today. rapidly becoming more of a merchant. Using direct
Firstly there is a good deal of substitution between mail to cardholders, they sell some $500 million a
goods and services. Yesterday’s barber services are year in electronic gear, furniture, jewelry, luggage,
today’s electronic razor. A diagnosis that previously and fur coats.
needed a visit to the doctor now can to an extent, be
obtained through medical diagnostic technology. Manufacturers have of course always been in
services, but nowhere near the extent to which they
There is as well total complementarity. It’s hardly are involved in them today. Mainly, industrial com-
ne,cessary to say that essentially all products produce panies provided “servicing”. Now there is a trend to
services and that companies buy goods in order to create specialist services around the products they
produce services - cars, buses, trains, elevators and make, sell their knowhow, and set up special
planes to get people from one place to another and companies and units for these new service activities.
X-ray machines, scanners, instruments, buildings
and beds to produce health services. The “servitization” of business has probably evolved
in three overlapping stages.
M;~ny information services are embodied and carried
in goods. This “materialization”, while not a new
Stage I: Goods or ScrzCces
phenomenon, is growing and becoming more capital
intensive. This is changing the nature of the service, In the past we talked about companies being in hoods
its delivery, potential for internationalization, and or serzu’ces. Fundamentally companies fit into one or
316 SANDRA VANDERMERWE, JUAN RADA

other camp and managers were comfortable saying produce their own services, co-produce and co-
so. deliver services with the firm, or set up new
operations. Many industrial support service systems
literally revolve around anything necessary to keep
Stage 2: Goods + Services
customers operating effectively.
Then came advanced technology and other converg-
ing trends. Conventional definitions no longer Knowledge - affectionally known as “know-how”,
stuck. It was obvious that most companies needed “know-why”, “know-what”, these are the brain-
both goods and services. Manufacturers, in particular intensive and more creative aspects of the package. It
the computer companies demonstrated the insepar- is more than just data or information. It is knowhow -
ability of goods and services for once and for all. enriched information like individual consumer prob-
And the fate of those companies, who like mortal lem solving activities. It is an accumulation of what
Christians, discover too late that the body and soul is known by individuals within the company.
can only be separated after death!
In looking at the evolution of “servitization” it is
Meanwhile, the classic service companies, like banks obvious that manufacturers have come in from the
began to use more product to facilitate and deliver product end, whereas service companies have come
their services and take more control in the design from the service end. Take the examples shown in
specification of the products used to produce and Figure 1.
deliver these services.
It is probably better to illustrate the ‘bundle’ as we
have done in Figure 2, because the ingredients
Stage 3: Goods + Services + Support + Knowledge +
overlap and are interconnectd and the border lines
Self Service
are therefore often fuzzy and indistinct.
We have now moved into another stage. One where
firms offer ‘bundles’ consisting of customer-focused Each of the modules within the “bundle” can be
combinations of goods, services, support, self service, and free-standing. Some companies recommend it on the
knowledge. Services dominate this era. basis that customers need to be able to choose what
they want and may not want the whole package.
Let’s look at each of the modules in more detail: Others argue that since the idea is to create an
integrated “bundle”, although it is not always
Goods - in essence this is the hardware. Sometimes practical, it is usually desirable to offer everything
it is made by another manufacturer. For example a and knit the elements as tightly together as possible.
chemical manufacturer in milk additives in Europe The obvious advantage is that it sets up barriers to
now offer farmers a detailed proposal on all aspects competition. This will however influence pricing
of running a farm to improve productivity. This strategy as the more closely knit, the more likely
includes goods and equipment and techniques to that the cost/price will be incorporated into the price
implement their feeding system. of the product or service.

Services - these are the services around the goods or It is however unusual for a company today to only
delivered by the goods. Examples range from be involved in one aspect of the total package. They
fashion forecasts offered to retail stores by manufac- may not necessarily offer each separate ingredient
turers of textile chemical to financial facilities made themselves, particularly on a worldwide basis, in
available by automobile manufacturers to their which case they use alliances and partnerships with
dealers. third parties. But more so than ever before there is a
conscious effort to offer a fuller market package. As
Self-Service - this isn’t new but consumers are being one Swedish banker put it: “Transactions today are
encouraged more and more to self-serve. Much of pretty automatic. Customers can help themselves to
this has to do with having the facilitating technology money. But when they need advice or support and
with the object to deliver a better service. The other need to talk we must be there.”
reason is to offset some of the costs to the customer.
One courier predicts that by the year 1990 nearly In some instances modules within the “bundle” are
half their consumers will monitor their own parcel standardized. In others highly customized. This
enquiries through their own electronic mail systems. depends entirely on the individual circumstances.
Either way, both service corporations and manufac-
Support - support ranges from training to remote turing companies are moving toward these “bundles”
maintenance systems. An important part of this is and this is colouring and shaping their strategies
the support given to consumers to use products, and relationships.
SERVITIZATION OF BUSINESS 317

PRODUCT + SERVICE + KNOWLEDGE + SUPPORT + SELFSERVICE

i I 1 1 I
Computers Maintenance Applications Training Self diagnosis

INFORMATION + SERVICE + SUPPORT t PRODUCT + SELF SERVICE + KNOWLEDGE

I I . ! I I
Data Transmission Training Receiver units Retrieval & Applications
data manipulation

Figure 1

Figure 2
318 SANDRA VANDERMERWE, JUAN RADA

Customers are Driving Servitization tank, maintain the furnace and organize group
deliveries - they attend to the entire process.
“Servitization” is largely being driven by customers.
In that sense its no different from any other market- Then there is the fact that customers demand more
driven approach to corporate strategy. Previously customization. The more information customers get,
though, the focus was on customers needs and the more customization they want. Facilitated by
satisfying these needs mainly through core business technology, client specific services and services to
activities. Now the emphasis is more on establishing deliver custom-tailored goods are becoming the
and maintaining a relationship between the corpor- norm.
ations and their customer base through broader
offerings. Users are becoming more powerful in decisions. In
some industries customers are using their application
The difference is subtle (and sometimes not so knowledge and taking a lead role in the specification
subtle). Volvo for example essentially manufactured of suppliers market offerings. This is likely to happen
cars. Today they are in the entire gamut of activities in three dimensional standards for Computer Added
associated with the automobile transportation experi- Design (CAD), as it did with Manufacturing Auto-
ences of their customers from finance and insurance mation Protocol (MAP), which was specified by both
to gas stations and roadside assistance networks, General Motors and a group of users (although rival
including towaway and other emergency systems. groups are now emerging.)
One executive from an international accounting firm
points out that: “Of the (so-called) big 8 accounting Customers are more receptive to technology. This in-
firms in the UK, only 3 call themselves accountants. creases the potential for providing services. By 1989,
We are international business advisors.” its expected that a total of 40% of all UK medical
practices will be linked to computer systems, which
The other discernable trend is that through services will radically change the way doctors work and the
firms are moving further down the distribution services they can provide their patients. Already
chain. Instead of only concentrating on distributors about 30% of the consumers in France are involved
and other middlemen they are giving increasing in some form of medical self diagnosis. Electronic-
attention to end users, actively seeking opportun- Point-of-Sale technology is diffusing rapidly and
ities to get to know their problems and provide becoming more sophisticated. In Switzerland, most
services to create derived goodwill and demand. customers go to self-serve gas stations. In Britain,
petrol pumps “talk” to customers to warn them that
There’s no doubt that today’s customers demand they are putting diesel into their cars. Travellers will
more services. They don’t want less products, but be seen using automatic ticketing and boarding
they do want the services that assist them make the machines more often at airports.
right decisions, get the product when and where they
want it, utilize what they’ve bought to its full potential These are only some examples to illustrate the huge
and cope when things go wrong. Customers are also potential for firms to deliver new services and
more critical and more difficult to please. They want deliver services differently.
things more quickly and more conveniently. This too
pushes firms towards “servitization”. Technology enables firms to transport services in
“real-time”. New computerized communication sys-
Customers have a better bargaining base. More tems in the USA mean that retailers and auto-dealers
informed than ever before, consumers know their can get credit approval and insurance cover within
options and are exercising them more vigorously. minutes. With integrated digital networks and voice,
Technology is largely responsible for this as now data, image and photographic transmission, estate
services are more transparent. Comparative infor- agents will bring three-dimensional pictures of
mation is more easily available on what firms offer, homes into the living rooms of their customers.
to whom and at what price. This too has given
consumers more clout. Minitel, which operates in France and is expanding
into Canada and Germany, has over three million
New generation airplanes for instance, once in consumers in France, who not only have, but also use
airports, can now hook up to computers to get prices their terminals to buy from over 2000 services -cars
on fuel and exchange rates. Decisions can be made, to theater tickets, business conferencing to household
there and then, on where to fill up next. Increasingly, goods, information ranging from the weather, train,
domestic energy companies are giving customers bus and plane schedules to university courses. In
services to get fuel into their homes. They clean the the future they plan through A.I. for users to be able
SERVITIZATION OF BUSINESS 319

to communicate with the system from portable “Knowing first” that a customer wants something or
Minitels in their cars. has bought something, is causing unprecedented
channel warfare and reaction. For instance, some
“Servitization” has enormous strategic implications banks in the UK and Germany are taking over estate
for the firm and for others. Take the Minitel agencies to protet their mortgage business - these
phenomenon. Instead of retailers spending effort agencies have begun to offer the financing.
getting customers into stores, their energy must now
be directed into getting the goods to their homes. The principle of using extended services to block out
This involves, amongst other things: new transport- competition, making entry too costly and complex,
ation systems, which some automobile companies is being used by a variety of industries. An
art already working on, delivery units to get the American oil company for example now has 4000
goods into the homes (probably with freeze and dealer stations on line. They intend to offer them
heciting facilities), electronic banking hookups, new accounting functions, information on price changes,
merchandising and packaging from the manufac- travel services and mechanical fault diagnostic
turers, to say nothing of the mechanics of allocating services, an array of services designed to benefit the
sp,lce in catalogues and distribution of information. customer and keep competition for their core busi-
Of course many retailers will not go that route. ness out.
Hc,b\,ever they will not be unaffected. They will have
to adapt to the changed competitive environment
Setting Up Barriers To Third-Parties
and find alternate ways to reposition themselves.
Third parties are mushrooming, between companies
Lei.‘s first examine some of the advantages executives and their customers. Particularly in complex and
ha,Je experienced moving into more services. Then highly specialized and customized markets. The
we can look at some of the competitive implications. computer, pharmaceutical, and insurance industries
are examples.

Servitization as a Competitive Tool These intermediaries are perceived as objective


consultants close to customers and with specialized
It’s not easy to make one general statement about know-how about a wide range of suppliers. They are
wh\r firms are servitizing so vigorously. Many find therefore potentially powerful. Technology makes it
that the natural progression of their business takes easy to get, customize and deliver information. But
thtm into services. Some executives see services as it’s easier for everyone. Traditional barriers are
an obvious way to create new opportunities. For therefore less difficult to break down. In Europe, for
otkrers, in more mature industries it’s a differenti- example, six doctors got together and collected a
ation tool, to extend their product’s life cycle and massive database on the therapeutic effects of
kecap business from dying off. relevant drugs on the market.

Either way, opportunities are increasingly coming A number of companies work closely with these inter-
from services. Take Guiness Peat Aviation based in mediaries. Others respond by selling knowledge and
Ire and. They buy planes from the major manufac- know-how that they have accumulated in-house or
turers, who prefer not to provide financial facilities from multiple sources.
and lease them to the small regional and commuter
airlines. They go one step further by adding a fully
Setting Up Barriers Tu Customers
tra ned flight and maintenance crew.
Companies use services to block out competition
Not surprisingly though, the overriding motive from their own customers. Or put differently they
drit.ing “servitization” is to gain a competitive edge. offer “bundles” with a high input of services either
Here are the main reasons executives themselves so efficiently, due to an accumulation of their ex-
offl?r, a list, by no means mutually exclusive. perience, or so economically, due to the economies
they have built up so that it simply doesn’t pay their
customers to do it themselves.
Set’iirg U,v Bclrriers To Competitors
Services can minimize the risk of customers being Every time a non-bank goes into financial services,
wooed by competitors. The earlier on in the client’s banking loses a customer and gains a competitor.
decision process services are offered, the better. This Some banks have coped with this by offering
way a dialogue and relationship builds up, which services so that customers use the corporation in a
adds leverage to influence decisions and maintain different way. J.P. Morgan runs an advertisement
customer loyalty. which says, “Some might say encouraging clients to
320 SANDRA VANDERMERWE. JUAN RADA

be competitors is the height of folly. We feel dependency through a partnership between the
otherwise.” They, like many other banks, have company and its customers rather than try to control
actively assisted their international customers in customers.
setting up their own in-house banks to become
better treasury managers. Others take on a new role,
like wholesaling, which Bankers Trust have done, or Differenfiating The Market Offering
offer specialized market information to select groups.
SAS use an array of services to differentiate itself.
They focus on the chain of travel events, beginning
Offering more services may make it unnecessary for
with a person’s initial inquiry about a trip all the way
customers to move in. Lexitech, an international
through to the time they get back home, and have
linguistic service company now goes beyond trans-
created what they call the “total travel package”
lation for their customers. For their pharmaceutical
which consists of everything from limousines through
clients, they have a data bank on agreed translations
to check-in counters in hotels. Recently on their
of all the technical words being used’ in medicine
Intercontinental flights they introduced a new Euro-
worldwide. Their next step is to connect their global
class concept: “sleepclass” for sleeping with plenty
translation network to an electronic mail service.
of food, drink, and entertainment, and “work-class”
where there is more privacy, lighter meals, work-
The Society for Worldwide Interbank Financial
room, portable computers and so on.
Telecommunication (S.W.I.F.T.), the Belgian trans-
action cooperative operating in 64 countries was
DHL, the Hong Kong based courier business, are
conceived as a system for transferring banking
pushing ahead into services to distinguish them-
instructions between banks worldwide. They then
selves from competitors. In addition to core services,
expanded into interbranch message transfer. They
they offer a high quality telex and laser printing
have continued to add state-of-the-art hardware and
bureau out of London. They also do bulk remailing
software to discourage customers from growing their
for “letters in a hurry”, where costs prohibit courier
own private interbank and interbranch networks -
treatment. Bulk bags of mail are sent by air and
from a banking school to global risk management,
posted in countries where the postal process is
cash management, information distribution and
efficient and cheap, as close to destination as
payment systems.
possible.

Creating Dependency The result, is of course, a snowball effect. Postal


administrations are now poised to go into the small
Many executives express this in different ways. The
parcel and letter courier business. Those who
suggestion is that it is difficult to create dependency
haven’t already moved in. In Europe, more than a
with product-intensive offerings, and that the more
hundred have linked into an Express Mail Service,
firms can offer “bundles” as we described the
and more countries are coming in, including the
greater the chances of a high dependency between
USSR, a feat no other couriers have managed.
the company and its customers. American Hospital
Supply set the classic example with their electronic
order-entry system. They demonstrated that they
Diffusing New Innovations
could do a better job of inventory control and pur-
chasing than their customers could. Through their Services are also being used by industrial and con-
rich information system, they have a purchasing and sumer companies to diffuse innovations. Multitech
inventory system setup for hospitals who are now (now called Acer) a Taiwanese computer manufac-
dependent on it. turer used this technique to get their personal
computers accepted in Taiwan. They went into
Some executives in industrial or business-to-business publishing and education activities from school
situations warn that customers may resent overde- children to business enterpreneurs. The net result -
pendency if it reduces their freedom and they don’t 50% market share.
readily see the benefits. Scandinavian Airline Systems
(SAS) had this experience when they bought into the Many industrial companies do the same. DSM RIM
largest travel agency in Sweden. They have sold the Nylon, in the Netherlands, use services to assist
major portion of this off and replaced it with a nylon manufacturers to convert to a new chemical
collaborative “help desk” arrangement with travel product innovation which requires a change in their
agents and a SAS team at head office offering help to injection moulding process. Their services now
the travel agents and their clients with complicated range from assessing the feasibility of the system
trips and costs. The most important lesson to be through to training personnel although their core
learnt from this is that the object should be to create business is the chemical itself.
SERVITIZATION OF BUSINESS 321

R&D and Market Research tivity throughout the service process in much the
same way as the traditional manufacturing model
Many companies report that by offering companies
does. For instance, an oil company offering a
services they in fact are able to get a better
wide range of services to customers when they
understanding of whether they themselves are on
arrive at the gas station location, in order firstly to
the right track. Many companies are for instance
differentiate its stations, and, secondly, to make
sending teams into their customer corporations for
full use of its customer base, has done a lot of
lon;g periods of time at the R&D phase in order to
time-and-motion research to figure out how the
work jointly on a project.
logistics can be improved.
Because services are increasingly being embodied
Whereas the object is to find solutions to customers
in and delivered by goods, it is easy to standardize
problems, very often they find solutions to their
core elements of services. It is also possible to trade
own. One executive had this to say: “When we were
these services without either the customer or the
able through out new services to get that close to the
company having to leave home in the typical
customer and see the workings of their business and
manufacturing export mode. Take McGraw Hill,
production process in more detail we found that we
who are now selling diskettes internationally
had probably been making the wrong products for
through mail order.
15 years!”
Manufacturers are selling more services and in
the process having to reconstruct their organiz-
ations and create service-centered models. This is
Servitization Is Changing the Competitive Dynamics a huge subject area in itself. Suffice here to say
that for many manufacturers the experience can
The cumulative effects of “servitization” is changing be a difficult one, since there is both resistance
the competitive dynamics in which managers will from inside the company and a re-education job
have to operate. to be done with customers.
Manufacturers are also finding that they are
selling (and exporting) their know-how to affiliate
The Dividing Line Between Traditional Manufacturers
companies abroad and in some instances to non-
Ano’ Classic Service Companies Is Becoming Less Clear
affiliated firms both locally and abroad. In essence
Manufacturers and service companies are thinking they therefore become a service corporation.
and behaving like one another. They are also Some manufacturers, as they move into a consult-
becoming closer rivals. Let’s look at some reasons ing mode, offering a more comprehensive portfolio
whv this is happening: of services to provide solutions to problems, find
that they have to get to know competitive
1. C;ervice companies have been industrializing their products and some executives talk of a time,
processes for some time. Macdonalds is famous when, in addition to recommending their own
for it, but is by no means unique. The aim is to products, they may have to recommend others as
get consistency and maintain quality control well, and even supply them.
especially where the services are highly labour
intensive. This reflects on image, especially if the
Companies Are Competing With New And Unusual
company is offering services worldwide and has
Rivals
to rely on third parties. Then there is whole
question of creating economies through processes The “servitization” phenomenon has added to a
that are highly structured and repetitive. whole lot of other trends impacting on business
2. Service companies are now doing their own R&D today all of which are contributing to a much more
and specifications and many are manufacturing complex competitive environment. Companies are
or subcontracting out the goods that deliver their indeed competing with new and unusual rivals to a
services. Union Bank of Switzerland (UBS) was greater extent and adjusting their strategic thrust
respoonsible for the technology for the first fully accordingly. Here are some of the main trends:
automated bank. Reuters designs its own tech-
nology for its visual display units and screens, Sometimes they compete with themselves. What is
and manufactures as well. DHL designs its own happening here is that traditional goods manufac-
computer and telecom network in order to track turers are finding that the products they have been
the movement of parcels it carries. making for decades are being replaced by “bundles”
3. Cervice corporations are also borrowing and of which ever-larger portions are services. For
adapting engineering and operation research tech- instance a lock manufacturer found that customers
r(iques. Since services are essentially a process the wanted more than just protection - they really
emphasis is on finding ways to improve produc- needed information on the comings-and-goings of
322 SANDRA VANDERMERWE, JUAN RADA

personnel. The company is now in a sophisticated A joint venture between a well known German
array of goods and services, marketing electronic automobile manufacturer and a large American
safety and access systems. credit corporation, has created what they call a top-
to-bottom finance system for dealers throughout the
Sometimes they compete with their ozun customers. country. This system includes: finance for land
Johnson Wax, who make floor wax products, acquisition, building construction, working capital,
decided that they could clean floors better than the long term leasing and retail sales and inventory
building service contractors. So they went into the management.
international cleaning business. When a global
publisher went into the electronic information busi- This blurring effect we have described means as well
ness, they. found they were not so much competing that knowledge and experience in one industry be-
with other data processing companies, as their own comes a springboard to another, again complicating
customers and they had to adjust their strategy the competitive dynamics. The computer, telecom-
accordingly. munications and consumer electronics industries are
merging. Will for example some of the Japanese
Sometimes they compete with their suppliers. This can based companies use their knowledge and network
sometimes lead to schizophrenic relationships. Pacific in consumer electronics to go into computer or
telecommunication services?
Bell relies on AT&T as their largest supplier of
equipment and technology. Yet AT&T is also their
customer and competitor, as they use Pacific’s
network and compete on long distance services and
Back to Strategic Basics
communication networks for large multinationals.
“Servitization” poses its own special challenges for
Sometimes they compete zuith other industries. By getting top management. Mainly how to blend services into
into extended services corporations and industries the overall strategies of the company. Up to now,
begin to spill over into businesses and sectors services have not been sufficiently integrated into
outside their usual domain. This we refer to as corporate competitive analysis and strategy design.
“intergeneric” competition - a blurring between tra- It has been seen as part of the marketing effort and
ditional industries and companies making competing often an unpaid and expensive activity.
more complex. Take banks. For a start it’s almost
impossible today to define a bank. Sears Roebuck, in This is changing, at a different pace depending on
the USA, and Marks & Spencer have taken a chunk the industry and the corporation, the perceived need
of retail banking. In Europe, some of the top manu- and risk, and whether top management takes a
facturers like ASEA, British Petroleum, General proactive or reactive stand.
Electric Company, Peugeot, Renault and Volvo, are
also the top. banks. Benneton, the Italian clothing The real question is this. Once top management
manufacturer, is now in banking and in the USA recognizes the need to get into services how do they
there are firms like, Westinghouse Electric, Xerox, make decisions like: how far to go? What services to
Philip Morris, Eastman Kodak, IBM, Caterpillar and choose? When is more services too much?
AT&T. The Japanese Post Office is reputed to have
the largest consumer deposit base in the world. The answers we believe can be found if we revert
back to the basics and answer these fundamental
Sometimes they compete zoith families of industries or questions:
companies. As companies seek ways to offer more
services to the market, they search for networks
Whnt Blrsiness Are We In?
partnerships or alliances to assist. The lock company
we mentioned earlier went into the systems business The world has changed but most of the principles
with an insurance company, an important stake- have not. Still the assumption holds, that the
holder in the security business. Airlines in Europe, company who has the broadest, but most realistic
in theory competitors, now offer a joint credit card view of its business is best attuned to what its
and in Europe there are two groups presently customer wants and therefore best able to offer the
undertaking reservation and information network most appropriate goods and services. Even if it
projects: one called Amadeus, the other Gallileo. means moving out of traditional areas, learning new
Both are said to be destined to be the most skills and shaking the existing order.
sophisticated in the world.
What are the boundaries of a business? They are the
Here is another case to illustrate the point: boundaries the customer defines. How far should a
SERVITIZATION OF BUSINESS 323

company extend the limits of its business? As far their own business they become vulnerable. Firms
(perhaps only as far) as customers needs go. may try to overcome this by maintaining a close
working relationship with the service supplier or go
The point is that to understand the nature of these into a different operating mode like franchising.
needs in today’s environment, modern managers Similarly when customers don’t use services to their
must switch gears mentally and anticipate that full potential because they don’t know how or why,
services will play an increasingly important role in the manufacturer becomes vulnerable. Hence the
their business. need to create a service-centred business philosophy.

Whl, t Business Could We Be OI? Who Else Could Be 112It?

Today with service infrastructure like data highways, There is an idea that it is easier to go into services
teleports or satellites communication centres, Local than manufacturing, or rather that it is cheaper. This
Are,1 Networks (LANS), value added networks of course is changing as the service business
(VANS), ISDNs, service zones and service parks, the becomes more technology intensive. But still this
ans\ver to this question in theory is “anything”. notion plus the fact that there are huge spillovers
Operations are spanning all corners of the globe and and synergistic opportunities today, means that
technology makes the transportation of services competition in services can come from almost
easier. With increased liberalization, opportunities anyone. With barriers to trade in services steadily
for adding scope and value through services will breaking down, they can also come from anywhere.
continue to increase on a worldwide scale.
Managers need to assess who is likely to offer
Sorre companies have been in services for decades, services and the impact this could have on their
but in a marginal way. Today, these self-same competitive position. Pioneers will have to figure out
corporations find that it is the service end of the how to differentiate their “bundles” and creative
business accounting for increasing amounts of barriers. Where competitors are already offering key
revenue and profits. services, companies will have to find a way to add
value.
An Interesting paradox: while companies are eagerly
moling into services they are simultaneously dis-
What Business Do We Wrrr?t To Be lo?
pensing with many internal services, like cleaning,
catering and maintenance. This closes the loop and The ongoing corporate struggle to satisfy customers
leaves opportunities free for outsiders. The overall better than competitors, continues worldwide. But
effec:t is a shift to where efficiencies and economies something is different. Managers are giving much
can create the most overall value. more attention to solving their customers’ problems.
They find that it’s no longer enough to do better
than what they already do. Cost and quality
Whnt Business Shozdd We Be In?
differences are becoming more difficult to sustain.
This question has to do with the objectives and Besides, customers are demanding more.
resources of a company and whether firms have the
capabilities and facilities to forge into services. Some It is the companies with the know-how and the
executives believe firmly in sticking to what they ability to capture and transmit this know-how in a
kno>K best and leaving the rest to other companies. competitive and profitable way who will win be-
The advantage they argue is that resources and cause it is from there that the higher value added is
energies are left free to focus and do what they can more likely to come.
do better than anyone else.
Something is missing though. There is still one more
This of course can and does work, provided question, What business do we want to be in?
customers are ultimately getting the services from
someone. If not, the danger is that companies and Is teleconferencing a natural extension of business
whcle industries can lose out. Some services are so for an airline? Should a business catering company
fundamental to products or services today, they go into computer and audiovisual services or spend
cannot be ignored. Can they be handled externally their energy finding new markets to whom to sell
or through some alliance? Or must the company more catering? Perhaps, they too should seriously
take a lead role? look at teleconferencing. 7 Different individuals will
answer this question differently. More significantly
How the service is delivered should be considered different executives from the airline and catering
here. When companies don’t control services vital to industry will answer it differently based on their
324 SANDRA VANDERMERWE, JUAN RADA

own reality of what they want for themselves and responds to the “servitization” trend and to what
their corporations. extent is their own free choice. Or is it?

Notes
We know from experience that the introduction of
one innovation doesn’t automatically lead to total The authors are grateful to The Society for Worldwide
substitution. We also know that as a general rule Interbank Financial Telecommunications (S.W.I.F.T.)
companies should probably stick to what they know for their contribution in funding part of the research
and do best. In the end, how quickly a company for this project.