Many firms are increasingly including services, alongside products, in their market offerings.
For instance, Apple started as a computer manufacturer, but now obtains 22% of its revenue from services (up from essentially zero a dozen years ago). It has recently announced a whole new slew of subscription services: Apple Arcade (games), Apple TV+ (movies and series), Apple News+ (digital magazines), and Apple Card (payments).
These services are expected to drive its share of revenue and profits from services even higher in the future.
This strategy, known as servitisation, has proven highly profitable and effective for some firms, but has produced mixed results, and even downright failure for others. How should managers decide which services can be successfully offered with this strategy?
Product-oriented services vs. customer-oriented services
To shed light on this issue, Esade professors Ivanka Visnijc and Dimo Ringov, and KU Leuven professor Sam Arts, examined how firm industry conditions shape choices regarding two distinctly different types of services that draw on different skills.
The first type of service, product-oriented services, are services performed on the product (such as installation, warranty, maintenance, and customisation) that leverage primarily a firm's product-related technological skills.
Customer-oriented services go beyond product functioning and operation
The second type of service, customer-oriented services, are services (such as management consulting, financing, logistics, media, and entertainment) that go beyond product functioning and operation, and primarily leverage a firm's customer network and customer-related skills.
Technological uncertainty versus value generation uncertainty
In industries with high technological uncertainty and where the probability of achieving a particular goal cannot be known in advance based on the experience or scientific/technological knowledge available (for example, industries that require considerable research and development, are in early stages of product lifecycle, or are intensely competitive) firms should prioritise product-oriented services.
In this way, they can address technological uncertainty by leveraging and reinforcing skills in their product technology.
In industries characterised by high technological uncertainty, firms should prioritise product-oriented services to address technological uncertainty
In contrast, in industry environments such as the later stages of the product industry lifecycle, the primary challenge firms face is how to continue to create and capture value from technologies that offer decreasing marginal utility from performance improvements to customers.
In these kinds of environments, firms should offer customer-oriented services that help address value generation uncertainty by leveraging customer-related skills, and by using the revenue and knowledge derived from customer-oriented services to diversify into new technological and product/service areas.
What do companies do?
Analysing comprehensive longitudinal data on 410 publicly-listed US firms from manufacturing and software industries over a period of 21 years (1990 to 2011), the authors found strong empirical evidence that firms are more likely to offer product-oriented services in industry environments characterised by high technological uncertainty (such as in the early stage of the industry life cycle, under conditions of high R&D intensity, and/or intense competition).
In contrast, firms are significantly more likely to offer customer-oriented services in environments characterised by value generation uncertainty (such as in the later stages of an industry life cycle and in highly cyclical industries).
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