Saturday, 13 April 2013

Beyond Servitization: What's Next?

I received an e-mail out of the blue from the leader of a company in Taiwan who asked the very thought provoking question "what is your prediction for the next revolutionary business model after the servitization of manufacturing". Rather than reply privately I thought I'd offer some public thoughts.

The first to say is that I don't think "servitization" is a business model - instead I see servitization as a transformation journey. Servitization is concerned with building the organisational capabilities and processes required to design, deliver and innovate high-performance product-service solutions. A business model is slightly different - it defines how you create and capture value through appropriate value propositions and delivery systems that operate within a broader ecosystem. A good business model also considers the risk or accountability spread that your organisation is exposed to through this combination of value proposition, value delivery system and ecosystem evolution.

Having said this, I understand the point behind the question, namely what business model options do manufacturing firms face post servitization? I'd break my answer to this question into two parts. First, I would think about the elements of the business model and ask what scope is there for change in terms of: (i) the value proposition; (ii) the value delivery system; (iii) accountability spread; and (iv) the ecosystem. Second, I'd think about whether there may be radically different business models at the aggregate level. The answer to the second question is relatively short, so I'll start with this one and simply say "I think its unlikely that we'll see radically different generic business models". Indeed one could argue that today's seemingly different business models are a rehash of old models. Take, for example, business that make money by attracting eyeballs and selling advertising - Google, Facebook, etc. Well TVs and newspapers have been doing that for years. The medium is different, but the base business model is the same.

So let me move to the more detailed level. Here I think we will see innovation - particularly in terms of the value delivery system; the accountability spread and the ecosystem. When it comes to value propositions I think most people understand the shift to outcomes - that organisations have to think clearly about what outcomes their customers really want and how they can then deliver these outcomes, rather than products or services. Where there's scope for innovation is in the value delivery system. Increasingly technology is playing a role in allowing organisations to innovate the way they configure the resources they use to deliver their products and services. Remote asset monitoring and diagnosis - using sensors and satellite infrastructure to monitor assets in the field and then diagnose potential maintenance requirements is becoming more widespread. In the education world, remotely monitoring student progress through online courses and intervening only when students seem to be going off track, allows schools and universities to focus teacher and faculty time on those students who most need support. Remote health monitoring technologies are revolutionising medicine and healthcare. Wearable devices can monitor the vital signs of individual patients letting doctors and hospitals intervene only when necessary. In essence the first wave of business model innovation we are seeing concerns  innovations in the value delivery system - looking for new ways of combining and configuring resources to ensure value is delivered to customers as efficiently as possible.

The second theme we'll see is a greater understanding of the risk and associated accountability spread. As organisations innovate their business models and take responsibility for outcomes they also take on risk. As they innovate their value delivery systems, often partnering with others, they reduce their own level of control. Both of these activities increase the risk or exposure of the contracting organisation. Too often today organisations cope with this increased risk and exposure by increasing their prices (and hence safety margins). Technology will help organisations get a better handle on the risks they really face and how these risks can be mitigated and as a consequence we'll get more sophisticated about how we price risk.

The third and final theme we'll see is greater innovation at the level of the ecosystem. Competition won't solely focus on your direct competitors. Instead firms will explore what role they should play in the broader ecosystem and how they can shape the ecosystem. Apple is one of my favourite examples here. By opening up the technology required to develop apps, Apple has encouraged a community of apps developers. If you have a large community of apps developers then you get lots of cheap apps - the individual apps end up competing on price as there's always a similar app to yours on offer. So the hardware - the iPad, iPod and Mac - becomes more valuable because it is the route to access lots of cheap Apps. When it comes to business model innovation we'll see more and more firms thinking this way - how do we shape the ecosystem to help us better create and capture value.

So back to the original question - "what is your prediction for the next revolutionary business model after the servitization of manufacturing". The short answer is that I don't believe we'll see radically new business models, but I do think we'll see radical innovations in the elements that make up business models - particularly in terms of the the value delivery systems, the accountability spread and the broader ecosystem.

Tuesday, 9 April 2013

The Installed Base: How Well Do You Understand the Opportunity?

In a previous blog I talked about the reasons why firms servitize. One important reason is the installed base - the ratio of new product sales to installed equipment. In mature industries these ratios can be significant. Figures often quoted include an installed base of 13:1 for cars, 15:1 for civilian aircraft and 22:1 for trains. That is for every new train sold, 22 are already in operation and available for service and support. Consider that trains have a working life of between twenty and thirty years and you can see why the installed base offers a significant business opportunity. Indeed in many sectors, the rule of thumb used is that a product will consume 3-4 times its original purchase value through its operating life in terms of spares and consumables.  So a $1 million dollar piece of construction equipment will consume between $3-4 million in consumables and spares over its thirty year operating life.

Researchers at the Cambridge Service Alliance have recently been looking at the installed based, seeing what data we can gather to understand the size of the installed base in different sectors. Our preliminary analysis suggests that the traditionally quoted figures underplay the size of the installed base in some sectors, especially aerospace. Take, for example, US aerospace - in 1995 there were 212,000 US aircraft in operation (both military and civil). In the same year 2,441 new aircraft were shipped, giving an installed base ratio of 87:1. By 2005 there were 246,000 US aircraft in operation, with 5,426 new aircraft shipped, giving an installed base ratio of 53:1.

While both figures (87:1 and 53:1) are considerably higher than the figure traditional quoted (15:1), the reduction in the ratio is interesting. One might expect that the installed base ratio would increase over time. New products are sold at a rate that is faster than old products are retired, but in the case of aerospace, underlying market growth has a significant impact. The number of new civil aircraft sold per year, for example, effectively doubled between 1995 and 2005, and it is this market growth (in civil aircraft) that brings down the installed base ratio. Even so, an installed base ratio of 53:1 highlights the significant opportunity that exists.

The story in the automotive sector is rather different. Here we see slight growth in the installed base ratio between 2003-2008, from 13.5:1 in 2003 up to 14.7:1 in 2008. This growth is driven by an increase in the installed base of passenger vehicles, with 13 million new vehicles being registered in Europe in 2008 and 198 million in operation. A key issue in the passenger vehicle market is the rate of retirement of existing products. Given the relative maturity of this sector, new cars are often replacements for existing cars and so as new sales are secured, old cars are retired. For this reason it is unlikely that we'll see significant growth in the automotive sector in the installed base unless product life cycles increase and/or consumers decide to reduce the rate at which they replace their cars.

So this brief analysis suggests three issues to consider; (i) understanding the size and potential of the installed base matters; (ii) in some sectors the installed base ratio will not change significantly, as the market matures and product replacement becomes the predominant reason for new product sales; and (iii) significant market growth can reduce the installed base ratio, although even so the installed base can be an attractive market segment.