Dissertation: Only few manufacturers are able to profit from services – Study investigates how successful firms exploit their capabilities

Posted on 11/09/17.

It has been estimated that only 20% of the product-oriented firms are able to succeed in service business, notes Tuomas Huikkola

According to Tuomas Huikkola’s doctoral thesis “Escaping the commoditization trap by going downstream: How does a manufacturer manage its capabilities to create wealth from solutions?” the service business has been viewed whether as a goldmine or a lifeguard for the western technology companies in the era of product commoditization. The dissertation consists of four empirical articles. Qualitative comparative case study method has been applied in the articles. Several Finnish technology companies that have pursued successful servitization strategies have been studied in the thesis.

– It has been estimated that only 20% of the product-oriented firms are able to succeed in service business, notes Huikkola. He will defend his thesis at the University of Vaasa.

The doctoral dissertation reveals that service business requires different capabilities than product business.

– In order to be successful in service business, you truly need to understand your customer’s business and how to develop it. It also requires continuous collaboration and co-creation with your strategic accounts. For instance, it has been acknowledged that IBM’s tremendous success has been based on its ex-CEO Louis Gerstner’s ability to identify IBM’s customers’ key value drivers.

One way to understand customers better is to recruit professionals and executives straight from the customer industries.

– At its best, this forces manufacturer to review the key problems related to its product-oriented culture. For example, IBM’s Gerstner was recruited from the IBM’s customer industry.

Manufacturer may be tempted to consider services as a money making machine. Huikkola says that this is partly illusion. The key strength of the service business is its predictability.

– Management team should emphasize the stability of income over the profits. Even though the margins are typically higher in services than in product business, product business typically enables manufacturer to generate more revenues and profits in so-called good times, states Huikkola.

The nature of sales work changes

Regarding to the dissertation, entering the service/solution business requires changes particularly from the sales management.

– Sales cycles are typically longer in service business and purchasing decisions are made higher up in the customer’s hierarchy. Old product sales force is not always capable of selling services and solutions because the selling arguments and styles change remarkably. When selling to the customer’s top managers, financial benefits are emphasized, and technical details are diminished respectively. This requires whether training the old sales force to sell services or recruiting new ones, tells Huikkola.

According to Huikkola, sales force should be able to offer solutions that help manufacturer’s customers to generate financial advantages.

– Technology company should be able to identify, quantify, communicate, and verify customer’s key value drivers such as equipment’s total cost of ownership or profits generated during the product life-cycle.

– This protects company from the severe price competition as the customer considers supplier more alike a partner, reminds Huikkola.

Strategic renewal requires organizational unlearning

Based on the results of the dissertation, the key challenge for the top management is to balance between the firm’s short- and long-term objectives. In the short-term, new initiatives may seem like throwing money whereas in the long-term, overinvesting in existing business may hinder firm’s success in the future.

– To some extent, it is good to be a bit paranoid regarding to existing business’ continuance because sooner or later every firm has to change.

According to Huikkola, management team and owners should step back from the situation of not strangling risky initiatives, which may be important in the future. On the other hand, managers should create some rules for resource allocation.

– Managers can decide that the dedicated percentage value of the firm’s profit can be allocated to risky initiatives. Another example could be that personnel are allowed to spend some of their working hours to progress their own projects, Huikkola exemplifies.

– Even though these types of strategic practices may be more popular in the software sector, these types of proposals may sound very radical for the manufacturing companies’ executives. However, the existing working methods need shaking, new procedures should be reviewed open-mindedly, and the old models may need to be rejected also in the traditional manufacturing sector, says Huikkola.

Public defense

The public examination of M.Sc. Tuomas Huikkola’s doctoral dissertation Escaping the commoditization trap by going downstream: How does a manufacturer manage its capabilities to create wealth from solutions? will be held on Friday 15 September at 12 o´clock in auditorium Nissi (Tritonia). The field of Huikkola’s dissertation is Management.

Professor Heiko Gebauer (EAWAG) will act as opponent and professor Marko Kohtamäki (University of Vaasa) as custos.

Further information

Tuomas Huikkola, tel +358 29 449 8448, E-mail: tuomas.huikkola(ät)uva.fi

Huikkola, Tuomas (2017). Escaping the commoditization trap by going downstream: How does a manufacturer manage its capabilities to create wealth from solutions? Acta Wasaensia, 382.

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