Manufacturing companies, in response to global competition, have increasingly shifted from manufacturing products to offering industrial product-services.  This paper evaluates which strategy offers the greatest return.

Mastering the Transition to Product-Service Provision: Insights into Business Models, Learning Activities, and Capabilities – Parida, Rönnberg Sjödin,Kohtamäki

Manufacturing companies now offer a range of services from simple add-on services such as phone assistance to complex value-added services such as operating the product for the customer. However, little is known about the extent and effect of this transition.

The authors of this paper identified a number of factors that have motivated this:

• Offering product-services can lead to financial benefits in the form of higher profit margins and more stable income;
• Adding service components to physical products offers strategic benefits in the form of increased inimitability;
• Adding service components has been found to increase the market attractiveness of the product component, leading to increased sales growth.

The authors conducted a study to explore what kinds of product-services companies are offering and how they are using creative business models to generate value from those product-service systems.

They conducted a mixed-methods study, eliciting quantitative and qualitative data via a web-based survey of more than 100 Finnish companies and subsequent detailed case studies of 11 Finnish and Swedish companies.

The statistical analysis suggests that a thorough and comprehensive organisational transformation is required to generate significant financial value.

Qualitative data offers insights into how market leaders have successfully navigated the organisational challenges of such a transformation to offer successful product-service systems.

Four distinctive capabilities identified

Based on the data the authors outline four distinctive capabilities and associated key learning activities required to facilitate a successful transition toward becoming a high-value industrial product-service provider:

• Business Model Design
• Network Management
• Integrated Development
• Service Delivery Network Management.

The authors report that providing customers with simple add-on services offer a limited financial impact on company revenues but more advanced services such as maintenance, R&D support and functional services are significantly associated with positive financial performance.

Although basic services are necessary, and may be a required first step in venturing in to product service offerings, they are not revenue generators. Therefore companies must develop a diverse portfolio of product-services to promote a successful transition and secure future revenue generation.

In conclusion 

The front-runner companies studied by the authors all faced a challenging path in their transformation in to successful product service providers and their development of the four key capabilities were integral to their success.

The study results suggest that manufacturing companies which neglect to invest resources in managing the transition toward a product-service orientation risk long-term market competitiveness.

Read the paper – Vinit Parida, David Rönnberg Sjödin, Joakim Wincent & Marko Kohtamäki (2014) Mastering the Transition to Product-Service Provision: Insights into Business Models, Learning Activities, and Capabilities, Research-Technology Management, 57:3, 44-52, DOI: 10.5437/08956308X5703227

Review by R&D Today editor.