Our job is to sell more than just the box....We’re in the services business to expand our pie.
—Jack Welch, CEO, General Electric, 1996
Jack Welch recognized early on that many of GE’s traditional markets for manufactured goods were likely to yield only slow growth and slim profits. His response was to embark on a strategy based on providing services to customers after the sale was made. That strategy not only enhanced GE’s competitive differentiation but also significantly boosted the company’s revenues and profitability. For 2008, GE reported revenues of more than $35 billion from product-related services—and those services generated an average operational profit margin of more than 25 percent.
In 1981, Rolls-Royce generated some 20 percent of its revenues from after-sales services. By declaring the service business a high priority and aligning its strategy accordingly, the company was able to expand its service business impressively from 1981 through 2008. Today, more than 50 percent of Rolls-Royce’s revenues are derived from its service businesses. The company’s success in services has defined its growth story—and boosted its profitability significantly.
Inspired by the success of these and other pioneering manufacturers, a number of industrial goods companies have attempted to make the shift from pure manufacturing organizations to organizations with an added focus on after-sales services, such as preventive maintenance; spare-parts supply; repairs, retrofits, and upgrades; and disposal and recycling. But many companies are struggling in that effort, and few are reaping the full extent of the expected rewards. Part of the problem is that these companies tend to see their product-based businesses as central to their identity and their service businesses as tangential. As a consequence, their service businesses are often undermanaged, undertalented, and underdeveloped. In short, many industrial-goods companies are effectively ignoring a potential source of stable revenues and cash flows—precisely when they need them most.
Particularly in today’s economy, with traditional manufacturers facing declines in sales of 20 to 50 percent—as well as intense competition, shorter product life cycles, and faster imitation of their innovations—companies that design and manage effective service businesses can enjoy manifold advantages:
Stable revenue streams that smooth out the cyclicality of the product-based business
Additional revenues at higher margins, which can compensate for production that has moved offshore
Competitive differentiation and additional barriers to entry
Enhanced customer loyalty and stronger relationships throughout the product life cycle
A benchmarking study conducted by The Boston Consulting Group of 50 manufacturers of industrial machinery that also provide after-sales services confirmed the attractiveness of service businesses for industrial goods companies. On average, the service businesses of the companies in our sample accounted for about 30 percent of their revenues—and contributed more than 50 percent of their total operating profits, at a profit margin of 24 percent. Among the top-quartile companies, services contributed an average 47 percent of revenues and earned average profit margins of 36 percent.
After-sales services can often be a source of deep insight into customers, supporting retention and providing additional market share and profitability. Some examples:
An engine manufacturer offers superior spare-parts logistics in conjunction with high-quality services and IT connections to help lock in customers during the current financial crisis
A lighting manufacturer provides a unique value proposition by emphasizing consulting services
A printing-machine manufacturer bundles services with its consumables to create a noncyclical business
Another OEM overcomes sales weakness due to funding constraints by leveraging its financial-services offering
In short, manufacturers cannot afford to neglect the opportunity presented by after-sales services—or to risk losing ground in this arena to competitors. Service must become part of the CEO’s agenda. But creating service businesses—and running them effectively—is far from simple. Companies pursuing this strategy are wrestling with a range of strategic, organizational, and operational issues. In this report, we offer advice—based on insights gained from our work with leading companies in a wide range of industries around the globe, as well as from our benchmarking study—on how best to address these challenges, achieve service excellence, and generate higher revenues and profits. The first step in taking services seriously is to understand the company’s particular service business: how it differs from the traditional product-related business and which factors are key to its success.
Dr. Alp Karabas
2020, November, 11
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