Framing the challenges of the transformation in three industries towards service business

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1 Framing the challenges of the transformation in three industries towards service business Valjakka T., Nuutinen, M., Lappalainen I., Airola M. & Ahonen T. VTT Technical Research Centre of Finland

2 2 Aims of the presentation To present a multidisciplinary framework for supporting industrial service business transformation Framework is targeted to evaluate the development state of the company to analyse the transformation in three different industries; installed base manufacturing, technical trade and pulp and paper Research question: What are the main challenges in the transformation from product- to customer- and service-oriented way of doing business in these three industries?

3 3 Content of the presentation Background: Three perspectives Methodology and cases Main empirical results Discussion Tentative integrated framework for evaluation

4 4 Three perspectives 1) Industrial service culture and capability Industrial service culture: an organisation s learned manner of responding to perceived changes in the demands of the core task when aiming at developing the service business. (cf. Reiman and Oedewald 2002, p. 27). Industrial service capability: a visible side of the culture, consists of commonly developed operational, cognitive (and cultural) solutions 2) Business model renewal: Business model is a management tool describing the value an organization offers to its customers and how it captures some of the value for itself. 3) Uncertainty management: Several uncertainties are embedded in the creation of new business and innovations. In this context, we are able to exploit the risk management methodology in new ways while identifying the business opportunities and potential threats.

5 5 Service Culture and Capability Approach - Service culture + Old core task General & confining to existing core task Understanding service business - + Special & potential Management practices and supportive tools - + Strong control & divisional optimatisation New core task Flexible, end result & value orientated Sepated, function based Development practices and supportive tools - + Common, integrative & cross functional Customer relation - + Short term, Transaction based Long term, development oriented Technology/product-oriented Customer value-/service-oriented Nuutinen et al. 2010; 2011

6 6 Generic business model overview INFRASTRUCTURE CORE CAPABILITIES PARTNER NETWORK VALUE CONFIGURATION OFFER VALUE PROPOSITION CUSTOMER RELATIONSHIP DISTRIBUTION CHANNEL CUSTOMER TARGET CUSTOMER COST STRUCTURE FINANCE REVENUE STREAMS A business model describes the value an organization offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value and relationship capital with the goal of generating profitable and sustainable revenue streams. Osterwalder, 2006

7 7 Business model renewal Three main steps: 1) Developing a strong customer value proposition (CVP); how to satisfy a real customer who needs to get a real job done ; 2) Defining how your company will fulfil that need at a profit (other elements of the model); and 3) Comparing the model to the current one and seeing how much it has to be changed. Johnson, M.W., Christensen, C.M. and Kagermann, H., 2008

8 8 Methodology Multiple case study (15 cases) with the action research approach was conducted (e.g., Argyris and Schön, 1996; Eisenhardt 1989) The data utilized is from Tekes Serve programme projects ServO, Besel, Proform, ServTek and ServChange (years ) Data was collected: participatory observations in workshops and company working groups drafting memos from our most important perceptions and reflections interviews of key persons and feedback discussions with participants Qualitative analysis was conducted in three main phases: Single cases: case-specific features Industry specific features (challenges) Cross case analysis: similarities and differences

9 9 15 case companies (all b2b) Industry Size Characteristics Typical services offered personnel Turnover Installed base manufacturing 6 cases over M - 900M Technology- and production orientation Maintenance and other life cycle services Technical trade 7 cases M - 70M Heterogenic industry Customer and sales orientation Consultative selling, wholesaling, logistics Pulp and paper 2 cases Over 4000 Over 3500M Volume and process intensive Service utilizer Product quality related services

10 10 Main challenges of installed base manufacturing industry Industrial service culture Business models Uncertainty management Conceptions of the core task mainly related to product or technology innovations. Need for broader service offering is recognized. Typically development of service business is considered as beneficial but not yet vital. Technological leadership is strongly valued by customers and company personnel. Two types of firms were found: Strong product-oriented culture and Product+Serviceoriented culture Good general understanding of service business, but differences between companies in company-specific understanding on business and pricing models etc. Finding balance with present competences, strengths, customer needs and future (service) business potentials Separate product and service offerings (some examples on integrative, solution based offerings) Understanding of customers core operations, production, and business process Earning model and profit formula (e.g. capital investment vs. profit sharing) Risk for service paradox still high Product development process are often carefully thought over and systematically planned, however, the fuzzy front-end has not been specifically addressed. Models for uncertainty management at this stage are either lacking or underutilized. Increasing customer understanding and data gathering provides the front-end processes with increasing amount of new knowledge and information.

11 11 Main challenges of technical trade Industrial service culture Business models Uncertainty management Typically still strong product-oriented culture, but more service-oriented culture is emerging. Customers are highly valued but there are contradictions within companies concerning the best way of approaching customers ( services as added vs. valueadded services ) Two main types were identified: Personnel typically still consider core task as product selling but managers are searching broader role in customers business. Product selling and services are seen and operated separately with different aims, business models and units. Sales orientation (salespeople on commission) encourages safe selling Understanding of customers core operations, production, and business process Customer orientation is seen as service Target to become more customer-oriented but little freedom of action (subsidiaries) Earning model and profit formula ( services included vs. profitable service business ) Broader understanding of customers processes is under development, making it increasingly easier to identify new possibilities. Identification of new business opportunities is somewhat integrated in the current approaches but procedures and incentives regarding the services are not clear The changing role of the company may cause uncertainty in responsibilities and for instance undesirable competition in the value chain (brand owner- importer-service provider)

12 12 Main challenges of pulp and paper Industrial service culture Conceptions of the core task are mainly related to physical product although there are suspicions on its competitiveness in the future. Developing better products and production systems still broadly considered as a main strategy to better competitiveness. The role of a service utilizer more familiar than a service provider. Services are not yet strongly valued because of their vagueness. Business models Uncertainty management Service business often regarded so different that separate ventures have established to pursue the new possibilities The current customer-base vs. end user, understanding the value chain and customer needs and expectations (CVP) Earning model and profit formula (mindset in high volume low price) Emerging new ideas and breakthroughs regarding new solutions and add-ons based on the physical products take place while creation of service concepts is a challenge. No wide success in applying service business models in the industry Obtaining new knowledge about the requirements of companies value chains and customers is a challenge, however, itoffers a solid ground for creating new service innovations.

13 13 Discussion Theoretical implications The study increases understanding of characteristics and challenges relating to service business transformation of each three industries The multidisciplinary frame aiming at combining three approaches is still tentative (see next slide) The results of the study are promising but require further research and development in terms of both empirical and theoretical verification Practical implications The study provides self evaluation and benchmarking opportunities across industries for companies Aims at developing a practical assessment tool to support identifying relevant challenges and potentials related to the industrial service business transformation.

14 14 Tentative integrative framework - for evaluating service business transformation in the company COMPANY-SPESIFIC SERVICE BUSINESS UNDERSTANDING VALUE-ORINTED & FLEXIBLE MANAGEMENT PRACTICES INTEGRATIVE DEVELOPMENT PRACTICES DEVELOPMENT-ORIENTED CUSTOMER RELATIONSHIPS PRINCIPLES OF VALUE CREATION IDENTIFYING BUSINESS OPPORTUNITIES SHARED GOALS AND RESPONSIBILITIES SUITABLE EARNING MODELS TOWARDS INTEGRAL OFFERING ORGANISATION AND RESPONSIBILITIES EXECUTION OF CUSTOMER PROMISES REWARDS AND INCENTIVES COLLABORATION AND COMMUNICATION TOOLS CO-CREATION WITH CUSTOMERS INTERNAL AND EXTERNAL NETWORKÌNG PROACTIVE AND SYSTEMATIC PROCEDURES SHARED RESPONSIBILITIES COMPANY FROM CUSTOMER S PERSPECTIVE BASIC MOTIVE FOR COOPERATION AWARENESS OF CUSTOMERS BUSINESS WAYS OF UTILIZING COMMON DEVELOPMENT POTENTIALS

15 15 THANK YOU FOR YOUR ATTENTION! MORE INFORMATION:

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