With the globalization leveling the playing field around the world, manufacturing companies are faced with the new reality where they can no longer compete on price, and differentiation options are limited. As a response to this new challenge, companies are rethinking the way they do business and shift their attention from merely selling products to offering solutions that combine products and services. Up to 60% of manufacturing firms are now offering services, and anywhere from 30 to 50% of their revenues come from services. This process is known as servitization. Apart from creating a new revenue stream for the manufacturing companies, servitization helps with customer relationships, erects barriers for competition, increases product life cycle, and increases differentiation, often locking customers in. Yet, for manufacturing companies switching to services is hard, and they may need help along the way. Where can this help come from?
What the scholars say
In the era of open innovation, more and more companies turn to their customers to seek input into the new product development process. The spread of information technologies makes it easy and inexpensive. The same approach – customer participation – can help manufacturing companies launch and sustain their servitization efforts, says Sergey Anokhin, an Entrepreneurship Professor from Kent State University. Involving customers in the new service development process not only helps with learning customer preferences and identifying the emerging trends to differentiate the offerings, but it also escalates customers’ commitment to the company.
Engaging customers in new service development may be especially effective when customers’ needs are complex. Rather than investing in making educated but costly guesses about what’s important to their clients, says Professor Sergey Anokhin, companies would be wise to hear from their current and potential customers firsthand. Working with customers in this fashion is not easy, and requires time and commitment. For this reason, customer participation is most likely to benefit companies when competition in the industry is not overly intense. Otherwise, firms have to spend the bulk of their efforts tracking competitors and may not have the resources to utilize customers’ input adequately.
To test these ideas in practice, an international research group of Dr. Todd Morgan (Western Michigan University), Dr. Sergey Anokhin (Kent State University) and Dr. Joakim Wincent (Lulea University of Technology in Sweden) studied the servitization efforts of 226 manufacturing companies in the U.S. The sample consisted of mature manufacturing firms whose involvement in servitization was aimed at increasing their performance under the growing market pressure. The results fully supported the group’s expectations. Indeed, involving the customers in new service development process leads to the sufficiently improved new service performance. This is a very significant finding, and decision makers should take notice of the positive role of customer engagement on servitization efforts outcomes. On the flip side, not involving customers in the servitization efforts is a crucial mistake. The effect was especially strong when customer needs were complex, and when competitive pressure was relatively low. This latter condition allowed companies to experiment with various ways to engage and learn from their customers, suggests Dr. Anokhin.
This study is among the first to investigate the effects of customer involvement on the effectiveness of manufacturing firms’ servitization efforts. It presents clear evidence of the positive role that customers may play in the planned transition from pure manufacturing to the combined manufacturing-service business models. The study has also identified contexts where engaging customers is particularly effective – situations where customer needs are complex and where competitive pressure is relatively low to allow for experimentation with alternative business models and inputs. Decision makers would benefit from harnessing the power of their customers to move their business forward, concludes Dr. Sergey Anokhin.
The article created in April 2018