service business development in manufacturing companies

Service Business Development in Manufacturing Companies

Heiko Gebauer

Department Innovation Research in Utility Sectors - Eawag: Swiss Federal Institute of Aquatic Science and Technology

University of St.Gallen (Switzerland)

Karlstad University (Sweden)

Cranfield University

Agenda

1. Attention-based and cognitive perspective on the service business development

2. Environment-strategy & strategy-structure configurations

3. Capability perspective on service business development

4. Service business development in China

Cranfield UniversityMeaning of services in manufacturing companies

Theoretical perspectives Practical illustration

-Transition from product manufacturers to services providers

-Moving downstream towards services

-Servitisation in the manufacturing sector

-Service business development

-Capital equipment manufactures moving towards high-value solutions

-Product-service-systems

- Logistic support and technical advice

- Construction and design of components

- Design of small volume cars

- Outsourcing services for manufacturing small volume cars

Selected sources: Wise and Baumgartner, 1998; Davies (2004), Vandermerwe and Rada, 1988, Oliva and Kallenberg (2003), Mathyssens and Vandendempt (1998 and 2008), Neely (2008), Brown, Gustafsson, Witell, 2009

Cranfield UniversityWhy should companies move into the service business?

Sources: Mathieu, 2001, IBM Annual reports, Simon, 1993

"The [service] market is bigger than we ever

dreamt“, Jack Welch the former CEO of General

Electric

Siemens announced the goal to create 50% of the

total revenue through services

IBM extended the service business (1993, 35.7% to. 60.2% of revenue

attributed to services in 2003).

Anecdotal evidences

Service opportunities

Marketing Financial Strategic

- Augmenting the product offering

- More intense customer relationship

- Additional revenue- Higher profitability than

products- More resistant to

economic cycles

- Adressing more comprehensive customer needs

- Co-created competences as resource barrier


ThyssenKrupp sells its industrial service business because it could not create synergies with its other business units.

Comau increased the share of service revenue from 14 to 19% (2005-2008), but the corporate revenue declined about 29%

Dürr provided outsourcing services, but the corresponding challenges led to the decision to sell the service unit.

In business practice, companies face the “service paradox”

Anecdotal challenges Industry challenges

- Service offerings are mainly restricted to basic services for the installed product base

- Investments in the service business do not create the corresponding returns leading to the “service paradox”

- Service are often given “free” during the negotiation of the product

- Service approach lack sufficient professionalization and systematization

- Despite expectations of about 50% revenues created through service, most companies still achieve less than 20%

Sources: Belz et al. 1997, Gebauer et al. 2005, Neu and Brown 2005


Understanding the complexity of service business development

Service business is more complex than the product business

Sources: Cohen et al. 2006

Parameter Product business Service business

Nature of demand More predictable, can better forecast

Always unpredictable, sporadic

Required response Standard, can be scheduled

as soon as possible

Number of product generations

Limited 10 to 15 times higher

Cranfield UniversityContributions

a) An investigation of the relationship between behavioral processes, motivation, investments in the service business and service revenue (together with Elgar Fleisch)

b) An attention-based view on service orientation in the business strategy of manufacturing companies

Cranfield UniversityFrom behavioral processes to overall profitability (1)

Behavioral processes

Level of managerial motivation

Investments in the service business

Share of service revenue

Overall profitability

H1 H2 H3 H4







H1 H2 H3 H4

38.7%

26.6%

19.1%

4.5%

11.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0-10% 10-20% 20-30% 30-40% over 40%Share of service revenue to total revenue

Fraction of companies sampled (n=199)







H1 H2 H3 H4

27.7%

33.9%

21.7%

12.2%

4.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0-5% 5-10% 10-15% 15-20% over 20%Share of investment in the service business on total investments

Fraction of companies sampled (n=199)


Our managers have not regnized the financial opportunities of an extended service businessOur managers are highly risk averse on exploiting the strategic oppportunities of servicesOur managers tend to set overambitious goals for extending the service businessOur managers have shown to overemphasis obvious causalities

Factor 1: Behavioral proceses

Cronbach AlphaFactor loadingFactor (construct) and item description¹item

1234

Our managers put a high valence on extending the service businessOur managers expect that their effort in extending the service business will succeed in more service revenue

Factor 2: Managerial motivation

56

What is the share of investmenst in service to total investments?Our managers invest substantially resources in extending the service business

78

What is the share of service revenue on total revenue?The services that we offer contribute substantially towards overall enterprise revenue

Factor 4: Share of service revenue

910

Average return on sales of the business unit over the last three years.Average return on sales in comparison to industry average.

Factor 5: Overall profitability

1112

¹ All items were measured on a 5-point scale (1 = lowest score, 5 = highest score). Exept for item 7, 9, 11 and 12 asked on a Likert-type scale (with the anchors 1 = totally disagree and 5 = totally agree). Item 7 was measured on a Likert-type scale with 1 = 0-5%, 2 = 5-10%. 3 = 10-15%, 4 =15-20% and 5=more than 20%. Item 9 was measured on a Likert-type scale with 1 = 0-10%, 2 = 10-20%. 3 = 20-30%, 4 = 30-40 and 5=more than 40%. Item 11 was measured on a Likert-type scale with 1 = negative, 2 = 0-2.5%. 3 = 2.5-5%, 4 = 5-7.5 and 5=more than 7.5%. Item 12 was measured on a Likert-type scale with 1 = very much below the industry average and 5 = very much above industry average.

0.780.820.670.86

0.87

0.840.83

0.81

0.920.97

0.95

0.900.82

0.87

0.740.72

0.78

Factor 3: Investments in the service business







H2: β =.352, p ≤ .01 H3: β =.479, p ≤ .05 H4: β =.493, p ≤.01H1: β =.-501, p ≤ .011 2 3 4


a) An investigation of the relationship between behavioral processes, motivation, investments in the service business and service revenue (together with Elgar Fleisch)

b) An attention-based view on service orientation in the business strategy of manufacturing companies

Cranfield UniversityAttention-based theory of the firm

Model of attention and firm behavior Key triggers

• Focus of attention

• Situated attention

• Structural distribution of attention

Source: Ocasio, 1997

Cranfield UniversityResearch model

Source: Gebauer (2009)

Strategy-formulation perspective

Service orientationof the business

strategy

Competitive intensity

Customer expectations


H1 (+)

H2 (+)

H3 (+)

Focus of attention

H4 (+) and H5 (+)

Situated attention

H6 (+)

Strategy-implementation perspective

H - Hypothesis

Cranfield UniversityResearch model

Source: Gebauer (2009)

Strategy-formulation perspective

Service orientationof the business

strategy

Competitive intensity

Customer expectations


H1 (+)

H2 (+)

H3 (+)

Focus of attention

H4 (+) and H5 (+)

Situated attention

H6 (+)

Strategy-implementation perspective

H - Hypothesis

Hypothesis can not be rejected


Agenda






a) Identifying service strategies in product manufacturing companies by exploring environment–strategy configurations

b) Match or mismatch: strategy-structure configuration in the service business in the service business of manufacturing companies (together with Anders Gustafsson, Bo Edvardsson, and Lars Witell)

Cranfield UniversityResearch framework (1)Configuration of external environment and strategy

External environment •Competitive intensity in the product field

•Competitive intensity in the service field

•Market growth•Customer’s price sensitivity

•Customer’s strategic options for operating the product

Strategy•Cost leadership•Product differentiation•Service differentiation•Service marketing differentiation

•Service offering

Cranfield UniversityResultsThe eight cluster emerging from the external environment constructs and strategy constructs match to four configurations• After-sales service providers• Customer support service providers• Outsourcing partners• Development partners


a) Identifying service strategies in product manufacturing companies by exploring environment–strategy configurations

b) Match or mismatch: strategy-structure configuration in the service business in the service business of manufacturing companies (together with Anders Gustafsson, Bo Edvardsson, and Lars Witell)

Cranfield UniversityResearch framework (2)Configuration of service strategy and organizational design elements

Service Strategies

•Basic services for the installed base (after-sales services)

•Advanced services for avoiding failures on the installed base

•Design & construction services•Operational services (outsourcing services

Organizational design elements

Corporate culturea) Abstract value of services,b) Role understanding,

Human resourcesc) Personnel recruitingd) Personnel traininge) Personnel compensation

Organizational structuref) Distinction product and service

organizationg) Proximity to customers

Cranfield UniversityResultsFour matching configurations were identified


Service orientation in organizational design elements¹A – abstract value of services, B – role understanding, C – personnel recruiting, D – training, E – compensation, F – distinction product and service organization, G –proximity to customers

A

B

C

DE

F

G

0

0.5

1

Organizational design elements for implementing the service strategies

After-sales service providers

Customer support service providers

Development partners

Outsourcing partners

A

B

C

DE

F

G

0

0.5

1A

B

C

DE

F

G

0

0.5

1

A

B

C

DE

F

G

0

0.5

1

Legend (0 – low, 1 – high – cluster means)¹

Source: Gebauer, Gustafsson, Edvardsson and Witell (forthcoming 2010), Neu and Brown (2005 and 2008)

Cranfield UniversityImplement the strategy by adaptating typical factors on organizational design

Corporate culture

Values of providing services

Role of employees

Human resource management

Personnel recruitment

Personnel training

Organizational structure

Integration of business unit responsibility

Intra-& interfirm collaboration

Global service infrastructure

After-sales service provider

Customer support service provider

Outsourcing Partner

Development partner

Service Strategy

Cranfield UniversityDefining different service packages for customers

TRUMPF ServicePlus NaSa The extended night / saturday telephone hotline for support outside normal office hours.

TRUMPF ServicePlus Tele The online-connection for efficient services and higher availability of machinery.

TRUMPF ServicePlus Classic All preventive maintenance for one flat-rate.

TRUMPF ServicePlus Special All preventive maintenance and remedy of all ocurring breakdowns for one flat-rate.

TRUMPF ServicePlus Premium All-in-one – the extensive service for a TRUMPF machine.

TRUMPF ServicePlus Extra The special services for more convenience.

Cranfield UniversityTriggers for improving the service excellenceEstablish a separate service organization

SIG Pack

BU Systems BU Stand. Mach.

SIG Pack ...

Service

Service

SIG Pack ...

SIG Pack ...

BU Service

Business CC

Logistics

Profit & Loss ResponsibilityOperative Leadership of Service-HubsDefinition of standardisedProcesses / IT InfrastructureProduct-ManagementResonsibility of localservice business– Service-Sales– Spare parts Management– Fieldservice– Modernization– Hand over management

IT / Prozesse

Prod. Manag.

Sales andService-Hubs

SIG Pack ...

Service

Service

SIG Pack ...

BU Systems BU Stand. Mach.

Quelle: R. Hänggi, 2003

Cranfield UniversityInvesting in an international service infrastructure

Third Level Support•Document services and database information support•Extended training support•Extended trouble shooting with qualified engineers•Technology and process support•Project support•Spare part stock for most used parts•Repair and Manufacturing of spare parts•Sales support

HQ

First Level Support (service base)•Local contact / language•Basic helps on phone•Local engineer support•Spare part order handling

Second Level Support (subsidiary)•Hotline support•Preventive service programs•Basic training programs•Trouble shooting on side•Replacement parts on stock for urgent help•Spare part order handling•Commissioning and start up handling

Cranfield UniversityABB and NOKIA

Cranfield UniversitySucceeding through the service strategies opens-up the potential of providing solutions



Development partner

Outsourcing partner

Source: Gebauer, Fischer and Fleisch (2010)

Solution provider•Key capabilities: •Balancing different business models

•Integration of different business models

•Flexibility across different business models

•Customer proximity to understanding requirements according to the business model


Agenda






a) Exploitation or exploration in service business development?: Insights from a dynamic capabilities perspective (together with Thomas Fischer Thomas, Ren Guanjin and Mike Gregory)

b) Capability perspective on service business development in small and medium suppliers (together with Marco Paiola and Bo Edvardsson)


Two different approaches for the service business development

Characteristics Exploitation Exploration

Type of organizational change

Incremental improvements of the existing strategic stage

Radical, jump towards new strategic stage

Primary addressed service opportunity (customer activity chain)

Temporal expansion within the primary customer activity chain

Spatial reconfiguration within the adjacent customer activity chain

Value constellations Value-adding to existing value constellations

Defining new value constellations

Service-oriented performance improvements

10% to 27% of share of service revenue within a period of 10 to 12 years.

From less than 20% to more than 40% share of service revenue within about 5 years

Cranfield UniversityExploitation or exploration: How to approach the service opportunities?

Adapted from Sawhney, 2004, Fischer, Gebauer, Guanjie, Gregory and Fleisch. (forthcoming 2010)

Reconfiguration

Extension

How do service opportunities

appear?)

Primary customer activities

Where do service opportunities appear?

Supplementary customer activities

SalesPre-Sales After-sales

Exploration

• Radical improvement

• New value constellation

• Dynamiccapabilities

Exploitation

• Incremental improvements

• Value-adding to existing value constellation

• Development of operational capabilities

Cranfield UniversityExploitation and the corresponding service strategies



Development partner

Outsourcing partner

Source: Gebauer, Fischer and Fleisch (forthcoming 2010)

Cranfield UniversityExploration and forming a new value constellation

After-sales service provider or customer support

service provider

New value constellation capturing nearly all customer

activities

Hilti has formed a new value constellation through its fleet management

Dynamic capabilities- Sensing opportunities beyond existing

industry barriers- Seizing the business model- Reconfiguring companies assets and

structure

Cranfield UniversityService business development

Phase 3:Making use of the service expansion along the adjacent customer activity chain

Phase 2:Creating a new value constellation

Phase 1:Integrating basic services into the product price

Exploration

Exploitation

Phase 3:Making use of the service expansion along the primary customer activity chain

Phase 2:Separating product and service business to extend service profit and revenue

Phase 1Integrating basic services into theproduct price

Cranfield UniversityService business development

Phase 2:Creating a new value constellation

Exploration and dynamic capabilities

Sensing • Create markets, new customer value opportunities, and shape market behavior

• Past competitive behavior function as hurdles for re-shaping the market structure.

• Opened-up beyond traditional value chain logic and industry borders

Seizing • Strategic vision of new value opportunities

• Sophisticated approach to decision-making under high uncertainty

• ‘Umbrella strategies' for the new value constellations

• Risk management routines

Reconfiguring • Reconfigure internal organizational design factors

• Reconfigure business relationships with external

• Integrate or reintegrate service and product

• Customers buy and value is not a product or service but utility


a) Exploitation or exploration in service business development?: Insights from a dynamic capabilities perspective (together with Thomas Fischer Thomas, Ren Guanjin and Mike Gregory)

b) Capability perspective on service business development in small and medium suppliers (together with Marco Paiola and Bo Edvardsson)

Cranfield UniversityExisting research concentrates on OEMs

Endcustomer

OEM(Original

equipment manufacturer)

1st tiersupplier

2nd tiersupplier

3rd tier supplier

Focus of existing research• OEMs moving into the aftermarket• OEMs possessing strong resource

positions

• Very few evidences how small and medium suppliers can exploit the potential of service business development

Sources: Matthyssens and Vandendempt, 2008; Fang, Palmatier, and Steenkamp, 2008; Oliva and Kallenberg, 2003; Davies, 2004; Neu and Brown, 2005; Raddats and Easingwood, 2010; Windahl and Lakemond, 2010.

Sources: Matthyssens, Vandenbempt and Weynst, 2009; Gebauer, Paiola, Edvardsson, 2010

Cranfield UniversityFollowing factors motivate research on SMSs (small and medium suppliers)Small and medium suppliers Research motivation

• Scope of product and service components necessary to provide solutions might correspond with the competence-base of MNEs, but is most probably beyond the organizational boundaries of SMSs

• SMSs might not reach the critical mass, which is needed by the service business to become profitable

• OEMs are in superior market position to offer services throughout a long life cycle

Sources: Wise and Baumgartner, 1999; Davies, 2004; Oliva and Kallenberg, 2003; Gebauer , Fleisch and Friedli, 2005; Auguste, Harmon and Pandit, 2006; Gebauer, Paiola, Edvardsson, 2010.

Source: Picture is free-licensed by Gettyimages

Cranfield UniversityDeepening the theoretical concept onservice business development is necessary

Success factors Organizational capabilities

Source: Picture is free-licensed by Gettyimages

• Organizational structures, human resources, corporate culture, measurement & rewards, service business development

• Organizational capabilities, in general, originate from the resource-based view

• Organizational capabilities are twofold, including operational and dynamic capabilities

• Operational capabilities enable a company to earn a living in a relatively stable business environment

• Dynamic capabilities encapsulate the evolutionary nature of resources and capabilities (sense, seize, reconfigure)

Sources: Penrose, 1959; Barney, 1991; Zollo and Winter, 2002; Eisenhardt and Martin, 2000; Teece et al., 1997; Zahra and George, 2002; Winter, 2003.

Sources: Wise and Baumgartner, 1999; Davies, 2004; Oliva and Kallenberg, 2003; Gebauer , Fleisch and Friedli, 2005; Auguste, Harmon and Pandit, 2006; Gebauer, Paiola, Edvardsson, 2010.

Cranfield UniversityFocus is on qualitative research

Research question Research methodology

How organizational capabilities of small and

medium suppliers co-evolve with the service business development?

•Interpretative multiple-case study approach relying on a range of supplier industries in four European countries (Germany, Italy, Sweden and Switzerland)

•Setting was chosen on conceptual grounds rather than for its representativeness

•Qualitative data was obtained between 2001 and 2009 through longitudinal action research with three of the nine participating SMSs and interviews with the remaining six SMSs

•Analysis includes within-case analysis and cross-case analysis

•As the capabilities emerged inductively from the field work, we turned to the previous research conceptually substantiated the capabilities and their interrelation with service business development.

Cranfield UniversityDynamic and operational capabilities are conceptualized in the following way

Dynamic capabilities Operational capabilities

Organizational routines

Individual cognition and skills

External Internal

Sensing

Seizing

Reconfiguring

Based on: Teece 2007; Stefano, Peteraf, Verona, 2010.

Individuals’ specialized competencies

Cross-functional

Broad-functional

Activity-related

Specialized

Single-Task

Based on: Grant, 1996.

Cranfield UniversityOur results indicate three differenttrajectories of service business development (1)

Trajectories for the service business development

Key characteristics

Alpha: Enhancing relational value to the existing supplier-buyer

relationships

Beta: Financial value-seeking behavior in existing and new supplier-buyer relationships

Gamma: Radical leap towards a new value

constellation downstream in the value chain

Number of SMSs 6 2 1

Strategic intension

• Exploiting service opportunities in supplier-buyer relationship

• Exploiting service opportunities for additional service revenues and profits

• Exploring untested service market

Business logic • Changing incrementally from transaction- to relationship-oriented business logic

• Changing incrementally from transaction-orientation for products to transaction-orientation for products and service

• New customers in adjacent value-added steps

• Forming radically a new value network

Competitive advantages

• Co-produced relational-competencies

• Co-produced service-competencies

• Competencies co-produced within the value network

Financial indicators

• Services create 10% price premium for products

• Services create about 15% of the total revenue

• Service achieves margin leverage of two compared to product revenue

• Services create additional revenues and create about 25% of revenue

• Service revenue achieves margin leverage of three compared to product revenue

Cranfield UniversityDynamic capabilities for the trajectories

Alpha Beta Gamma

Sensing • Timely and reactively• Incremental

improvements• Marketing opportunities in

customer relationships

• Breaking with the preoccupations

• More counter-cycle• Financial opportunities

• Opening-up to strategic opportunities• Market structure endogenous• Substituting theory-in-use• Emphasizing new value propositions• Driving the structure of the market

and shaping the market behaviorSeizing • Balancing costs for

services and quality of supplier-buyer relationship

• Defining the value associated with the new services

• Value-based prices for each service

• Verifying willingness to demand and pay for the services

• Value propositions as utility, which product and service does for the customers

• ‚Umbrella strategies' with various scenarios

• Anticipating how each scenario would affect value creation logics

• Mobilizing other network player• Visioning a value network, which

forms new value constellationsRecon-figuring

• Corporate culture, human resources and measurement systems

• Corporate culture, human resources, organizational structures, and innovation process

• Corporate culture, human resources, organizational structures, and innovation process inside the single supplier

• Orchestrating reconfiguration activities of other network actors

Cranfield UniversityOperational capabilities for the trajectories

Alpha Beta Gamma

Corporate culture

• Behavioral roles of trusted adviser and “whatever-it-takes” philosophy

• Services as potential source of revenue and profits

• Behavior roles of a reliable service providers and "whatever-is-paid and valued" philosophy

• Openess to re-structure the value chain and value constellations

• Roles on breaking and critically reconsidering industry recipe

• Roles on providing reliable solutions

Human resources

• Learn more quickly the nature of customer's service expectations

• Rewarding “whatever-it-takes philosophy

• Convince customer's to pay for services

• Rewarding outstanding financial performance (rewarding the "whatever-is-paid and valued" philosophy)

• Partnering competencies to create collaborative learning relationships

• Developing behavioral competencies to learn quickly to provide integrated solutions through a network of business partners

• Rewarding cooperation's with business partners and solving customer problems in collaboration with business partners

Organ-izational structure

• Service teams with profit-and-loss responsibilities

• Solution teams with profit-and-loss responsibilities

• inter-company collaboration with business partners

Measurement systems

• Erratic re-calculation of customer profitability

• Set of financial and non-financial indicators for the service teams

• Set of financial and non-financial indicators for the solution teams

Innovation process

• Milestones and assessments of the financial benefits

• Opening-up the innovation process to business partners

• Integrating product and service innovation into solution innovation processes

Cranfield UniversityOur study offers following insights

Managerial implications

Limitations

Described guidelines are managerial guidance for implementing one of the three trajectories

Future research should obtain additional qualitative data to replicate our findings

Analysis of dynamic and operational capabilities is limited when it comes to understand the potential path dependence leading

Theoretical implications

By concentrating on SMSs, we could also depart from the previous focus on considering the service business development as a single firm effort.

Trajectory Alpha and Beta entail network insights by describing the reconfiguration of capabilities between SMSs and their distributors.

Gamma shows how cooperating with new business partners forms a new network.

The dominating trajectory Alpha results from a familiarity, propinquity and maturity traps.

High path dependence for each trajectory

Source: Matthyssen and Vandendempt (2008)


Agenda






a) Global approach to the service business in manufacturing companies

b) Business-to-business marketing as a key factor for increasing service revenue in China (together with Chunzhi Wang, Bernold Beckenbauer, Regine Krempl) and Spare parts logistics in China (together with Gunther Kuzca and Chunzhi Wang)


Global challenges in internationalizing the service business

Establishing a globalservice infrastructure

Service business development in China


Establishing a global service infrastructure

Global levelOrganizational distinctiveness between product

and service business

Market levelResponsiveness local

requirement

Integration Separation

Low (1) Integrated and ethnocentric global service approach (4) Separated and

geocentric global service structure

Medium

High ( 2) Integrated and polycentric global service structure

(3) Separated and polycentric global service structure


(1) Integrated and ethnocentric global service approach

M1

M2

M3

C

C

Service organization is integrated as a cost center in the business unit for products

Market organizations (M)

Central

Customers (C)

De-central

Description

Service offering:• Basic services for the installed base• Advanced technical support• Part delivery from central warehouse

Configuration

• Service organization is integrated as a cost center in the business unit for products

• Central product organization controls marketing, sales, services, manufacturing, R&D, accounting/finance, and human resources

• Market organizations (sales agent or subsidiaries) sell products and provide customer service to augment the product during the sales phase of the product

• The central service organization provides basic services for the installed base and advanced technical support

• Services are included in the product price

• Market organization has low decision-making authority

• The central organization communicates intensively with the local organization

Product organization

Service organization

……

Service offering:• Customer

serviceC


(2) Integrated and polycentric global service structure

M1

M2

M3

C

C

Service organization is integrated as a cost center in the business unit for products


Central

Customers (C)

De-central

Service offering:First-level and second- level support• Customer service• Basic services for

the installed base• Maintenance

servicesParts delivery from local warehouse

Service offering:• Third level support

Product organization

Service organization

DescriptionConfiguration

• Service organization is integrated as a cost center in the business unit for products

• The market organizations are a relatively independent units and control product sales, provision of customer service, basic services for the installed base, few maintenance services, and human resources.

• Market organizations set-up local warehouses for spare parts delivery.

• The third level support remains in the central organization

• Key positions are obtained by local sales and service employees

• Central service organization has relatively low authority and decision making competencies

• Volume of communication and information from the central to the market organization and among different market organizations is low

• Services are included in the product price

……

C


(3) Separated and polycentric global service structure

M1

BUProduct

M2

M3

C

C

Separate business unit (BU) for services with own profit-and-loss

responsibility


Central

Customers (C)

De-central

BU Services

Service offering:First-level and second- level support• Customer service• Basic services for

the installed base• Maintenance

servicesParts delivery from local warehouse

M1

Service offering:• Third level support


• Service organization is an independent business unit with its own profit-and-loss responsibility

• The business unit for services controls the service development, spare parts logisticss, and service support functions.

• In each country remains a single market organizations that is still responsible for the product and service business, but the cost and revenue structure clearly distinguish between product and service business.

• Market organization provides first- and second level support (customer service, basic services, maintenance services, whereas the separated central service organization takes over the responsibility to provide third level support.

• Services are charged separately facilitating service profitability.

• Relatively low decision-making authority remains in the central service organization.

• Little communication between central business unit for services and local service centers and among the local service centers of different market organization.

……

C

Cranfield University(4) Separated and geocentric global service structure

BUProduct

C

M2

M3

C

C

Market organizations (M)¹

Central

Customers (C)

De-central

BU Services

Service offering:First-level support¹• Customer service• Basic services for

the installed base• Preventive services

and service contracts

M1

Service-Hub

Service offering:• Third level

supportService offering:• Second-level

support• Parts delivery from

regional warehouse


• Collaborative approach between both central business units (products and services) and the market organizations. To enhance the collaborative approach, the manufacturing companies reported to install regional functions.

• Regional warehouses are established• Service hubs provide second-level support• Market organizations concentrate on selling preventive

services and service contracts.• The service hubs facilitate the information flows between

the central and local organization and promotes the exchange of experiences among the different market organizations.

• Service hubs decide about the degree of standardization of the service offer and balance between the transferability of services across market organizations versus customization for individual customers.

• Companies recruit and develop the best employees everywhere in the world for key positions across the global service network.

• The managing directors of the different market organizations and the head of the business unit services are typically part of the management team of the hub.

¹According to market size and maturity, large market organizations can offer both 1st and 2nd level service offerings.

Regional

Large markets

M1

Other markets

Separate business unit (BU) for services with own profit-and-loss

responsibility


a) Global approach to the service business in manufacturing companies

b) Business-to-business marketing as a key factor for increasing service revenue in China (together with Chunzhi Wang, Bernold Beckenbauer, Regine Krempl) and Spare parts logistics in China (together with Gunther Kuzca and Chunzhi Wang)

Cranfield UniversityManufacturing companies achieve lower shares of service revenue in total revenue in China

0

5

10

15

20

25

European service organizations of Swiss

equipment manufacturing

companies

Chinese service organizations of Swiss

equipment manufacturing

companies

21.2

10.3

Service revenue as a percentage of total revenue, operating margin [in percent]

8.2

5.1

Percentage of service revenue on total revenue

Operating margin

Cranfield UniversityEffects of Chinese cultural characteristics on service management (1/2)

Service strategies

Cultural characteristics

Effects on service management


Long-term orientation

Establishing a binding relationship corresponds with supporting customer's purchase decision by offering customer service for "free".

Guanxi, renqing and mianzi

Service managers deliberately use "free" customer services for establishing a guanxi network and "giving face" to their customers.


Long-term orientation

Chinese service managers also use the "free-of-charge" approach for related services.


Service managers deliberately use "free" product-related services for establishing a guanxi network and "giving face" to their customers.

Power distance The high power distance in China limits the empowerment of service managers and service technicians to offer product-related services proactively.


Service managers and service technicians are highly reluctant to change their mindsets.

Cranfield UniversityEffects of Chinese cultural characteristics on service management (2/2)

Service strategies

Cultural characteristics

Effects on service management

Uncertainty avoidance

The preference for personal relationships limits the implementation of contractual arrangements for pricing equipment availability

Power distance Establishing a long-term relationship by using a "free-of-charge" approach for product-related services reduces the risk perceived by customers when they consider the purchase of equipment availability



Service managers support customers to improve all processes associated with a company’s product. In this case, they “give face” to their customers by praising customers' reputations


Service managers deliberately use "free" product-related services for establishing a guanxi network and "giving face" to their customers.


The guanxi network supports a reputation and personal relationships with its customers.

Family as the base economic actor

The fact that the base economic actor is the family rather than the firm leads to a high fluctuation among service staff.

Cranfield UniversityIncreasing spare parts logistic performance (1)

(1) Direct export of spare parts from Europe to

customers in China (Asia).

(2) Provision of spare parts from local warehouses and warehouses

replenished from Europe to customers in China (Asia)

Advantages - Low inventory and working capital costs.

- Low operating costs for the central warehouse in Europe.

- High availability of spare parts at the central warehouse.

- Short delivery times for parts available locally.

- High customer satisfaction due to short delivery times.

- Low logistics costs due to replenishment shipments from Europe to Asia rather than single express deliveries.

Disadvantages - High logistics costs due to express transport mode.

- Long delivery times caused by customs clearance delays.

- Low customer satisfaction due to long delivery times.

- High inventory and working capital costs.

- High costs for operating and maintaining a network of local warehouses.

- Limited availability of spare parts at the local warehouses.

Existing spare parts logistic concepts are insuffficient for the Chinese market

Cranfield UniversityIncreasing spare parts logistic performance (2)Combination of bonded and non-bonded stock could solve various challenges

Japan

Singapore*

India

Thailand

Beijing

TaiwanHong Kong

CSC AsiaShanghai

Korea

*SEA is in charge of the following countries:Malaysia VietnamIndia PhilippinesPakistan MyanmarIndonesia AustraliaNew Zeland

Spare parts center in Europe

Local warehousesHub ( bonded / non-bonded)


63

Detailed processes

Delivery (physically)Document / Value transfer

Europe

SAPValue1

Europe

SAPValue1

Logistics partner /

WMSBonded stock

Logistics partner /

WMSBonded stock

End User in China

End User in China

Non-bonded stockValue 3 =

Value 2 + duty + fees

Sales Co.

Customs authoritiesCustoms

authoritiesIT-Link

Invoice for services

Delivery

Delivery

Temporary

Borrowing (only China)

Invoice (local currency)

Value3+freight+margin+VAT

Defective part

Pay

me

nt

VA

T +

d

utie

s

Vir

tua

l tr

ans

fer

of

pa

rt

Invoice (USD) Value 2

Value1 + freight + margin

Customs border

Defective part by log. partner

Credit note (USD)For defective part

Daily process Monthly/weekly process process

service business development in manufacturing companies

Business

extended service business

industrial service business

service business development3

service business development1

service orientation

service unit

service paradoxservice

business practice