Servitization – Challenges for SMEs

08 July 2019

Written by Valerija Olsevska

The changing landscape of the industrial market driven by IoT technologies and move of big players into the field of services opens doors or in some cases even pushes SMEs to explore servitization. To define shortly, servitization is a shift from the traditional product-based business model to the provision of integrated product-service solutions, ranging from product-supporting services (spare parts, repairs) to more advanced services focused on supporting a customer (remote maintenance, consultancy, pay-per-use, pay-per-performance).

The journey of an SME towards servitization possesses slightly different (or more prominent) challenges than one of a larger manufacturer. Early realization of those can help SMEs to think about pre-steps that are required to enable advanced services. Below we summarized some of the issues worth to keep in mind while considering servitization opportunities.

Finance and revenue model

Business models based on delivering product-service solutions change the perspective about the costs and revenues arising during the product lifecycle. The research showed that servitized SMEs often struggle to monetize on services, as they keep focus on product sales and use services as a marketing tool rather than a separate revenue stream.[1] Subsequently, the service is not priced properly, and overall service revenue is hard to estimate

Yet the initial investment in the shift of revenue model and product ownership can put a (temporary) strain on an SME. To overcome this pressure, smaller players are advised to first invest in building a network of companies to enlarge the installed base. Alternatively, careful calculation can help to determine whether services should become a core business or a separate service organization.

Customer relationship

Servitization promotes different – more relational and customer-centred, interaction. That challenges manufacturers to establish customer “touch-points”, spanning throughout the product lifecycle and go beyond transaction-based interactions. To deliver advanced services a company needs to integrate its business processes into a wide range of these customer “touch‐points” – co-locate its service facilities, adopt tools to facilitate communication and data streams, think of performance measures of individual customers and finally build the proactive mindset of “front-line” personnel.

However, industrial SMEs seldomly have internal resources devoted to market and customer research. As a result, the path towards customer-centricity might be hindered by the lack of a deep understanding of the exact needs, processes and bottlenecks of a customer .

Business partners and a new value chain

What typically also distinguishes SMEs from larger companies is that they often sell and deliver through a network of distributors and partners, and, in case of adding new services, require additional resources to fill capability or capacity gaps. Since the service provision is less straightforward than product delivery, an orchestrated network of suitable partners becomes a critical element in building up the service network. An ultimate success of such value network depends largely on the ability to handle business relationships – capability to identify, co-create and rely on various network actors.

Conclusion

The business impact of servitization without doubt is substantial. How can manufacturing SMEs succeed and not fall behind their larger counterparts? SMEs have a benefit to be agile and carry the transformation faster, if the right settings are prepared and a company is willing to change. Building awareness and deep understanding what a service orientation means is already a big step forward. An SME can start investing into right competences it lacks, such as customer-orientation and partnerships that would create pre-conditions for servitization opportunities.

[1] Technopolis Group, Dialogic and University of Cambridge. (2018). The study on the potential of servitisation and other forms of product-service provision for EU SMEs. Technopolis Group, CapGemini Invent, European Digital SME Alliance. (2018).  https://publications.europa.eu/en/publication-detail/-/publication/0d1ed8aa-8649-11e8-ac6a-01aa75ed71a1/language-en

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