Servitization of Business: An Untapped Growth Opportunity Awaits Bangladesh by S. M. Didarul Hasan, Deputy General Manager, Marketing, M. M. Ispahani Limited
Servitization is getting popular throughout the world as a profitable business model. This servitization strategy has been embraced by the developed countries and the companies operating within sectors where the high installed product bases are a prerequisite, for example, elevators, business machines, printing and packaging machinery, construction equipment, health care, agricultural machinery etc. Over years, this business model is getting popular and being implemented in electronics, lighting, heating, auto and aero engines industries and other sectors as well.
Servitization: What’s There in It?
Now, what is servitization? Before going into servitisation intricacies, the product and service differentiation needs to be clear. Products are usually tangible in nature with some material artefacts (e.g., ball, ballpen, bag or car, boat, plane etc.) while academics term these as goods. On the other hand, service is something that is intangible in nature (e.g., consultancy, doctor’s advice, banking etc.) but service also refers to an offering (e.g., maintenance, repair, insurance etc.). Business community commonly uses the term ‘product’ to mean goods and services both. However, servitisation thus refers to moving from a selling product only (tangible-dominant) business to selling products as service. This also can be put, servitization simply means applying service to a tangible product in order to create additional value or a new offering to a customer. For example, instead of selling a physical air-conditioner alone, an electronics products manufacturer can install and/or sell it as a service. In other words, consumers need not to buy an air-conditioning or any related equipment, rather they will pay for air-conditioning service used at home or office. This business model is also known as ‘product-service system’. Within this business model, the users pay a fixed fee for unit of services consumed. One latest example is, Netflix or any video steaming service.
Instead of buying CD, DVD or physical drives consumers subscribe to watch on-demand contents or the units/hours we are interested.
The Past and The Future
The use of servitization in these kinds of on-demand industries, electric and electronics goods seems an obvious progression while the usage of this is getting popular across sectors. The integration of product and service features which is labelled now as ‘servitization’ is found 150 years back. But this term is first used in a manufacturing operations context in 1988. In last 30 years’ faster progressions towards a service-led orientation of the economies, businesses and industries are getting quicker and fascinating with the dynamic transformation in transportations, communication channels, information technology and digitization. There are different forms of servitization. This has become a vital model for ‘winning in the aftermarket’. For example, when we buy a refrigerator or freezer now, the companies sell the products with an aftersales service. So, when the consumers require a repair, maintenance or servicing they pay for it. This can be said primary level of servitization. The full servitization is, when consumers will not buy the product, rather they will use it under a contract or business model. They will not own the product rather the company will supply to, or maintain on behalf of customers. We can see this business model as well as full servitization is embraced often for manufacturing and industrial products in the developed world. In Bangladesh, we experience only some primary level of servitization; the full servitization business model is still far as of now.
The classic example around the business world is, instead of selling jet engines alone, Rolls-Royce sells ‘Power-by-the-Hour’ or ‘TotalCare’ solutions to the aerospace industry. We all know Rolls-Royce as an auto and aero-engine manufacturer. But they moved from engine selling to a service selling company where they no longer sell the engines only, they sell efficiency through letting the engines used hourly and tracking engine performance real-time. They track data while flights are on the go. Rolls-Royce ensures maintenance and other services in important airports around the world. The recent airplanes can be bought from Airbus or Boeing but the majority of engines are actually from all Rolls Royce. Their ‘Power-by-the-Hour’ has gained traction. Rolls-Royce is now the second largest aero-engine manufacturer after General Electric. Even before the pilots within aircrafts know, the Rolls Royce team can track the performance of the engines and help the pilots by supplying real-time information they need. The airlines (and/or airplanes) companies pay for the hours only when the Rolls Royce engines are in action. Isn’t it interesting? This example and the business model clearly imply that the companies now not only develop and sell the products but also controls the upstream and downstream of the supply chain process through vertical integration.
Servitization Adds to the Competitive Advantage
Servitization has aroused attention as a means of building profitable, strong, long-term customer relations and trust. Servitization is a hot topic around the around world for a few reasons. First, it encourages not to own expensive machinery and equipment which can be used, shared or distributed by a service provider. For example, Siemens stopped producing a lot of their electronic equipment to sell as a product unit, rather they extended these as a service. While studying at the University of Exeter in the UK, I directly experienced two services of this nature. One is, the university does not own the photocopier, printing and scanning machines, rather ‘Xerox’, the largest photocopier company in the world, lets university to use the machine under servitization business model and students pay for the services (print, copy, scan) they use. Here, it is interesting to mention that Xerox’s worldwide strategy moved from selling printers and 
copiers to delivering ‘Document management’.
Another experience is, the university buys the whole LED lighting systems from Philips as-a-service, university does not own the lights. Philips maintains the entire LED lighting system, repair, replacements and servicing. Since these are also IoT-enabled (Internet of Things), the lighting systems have automatic sensors. So, when no people are around the lights get off and on automatically. This saves costs, provides efficiency of energy consumptions and overall maintenance costs come down for the users. Philips installed this IoT-enabled LED lighting system also in some airports around the world, for example, Amsterdam-Schiphol airport where Philips is accountable for the durability and the performance of the system, and by using this energy-efficient lamps the airport uses 50% less electricity for lighting. Therefore, instead of selling only lamps, bulbs, air-conditioning or photocopier the smart electronics and electric equipment companies are turning the product-dominant business into a service.
Second, Servitization offers opportunity to create service-led competitive advantage which only manufacturing-led goods cannot alone create. Because, using manufacturing plants and machinery, any business can produce a product which is more or less duplicatable nowadays; or, these advantages do not sustain long. It offers opportunity for product innovation and setting higher barriers to competition.
Third, servitization helps saving the earth by managing energy efficiency. An article published by the World Economic Forum in 2020 claims that the servitisation model is a key contributor to the system efficiency approach to attain global energy decarbonization. Thus, servitization is now being considered as a force of the Fourth Industrial Revolution, Industry 4.0; and has become a part of digital dialogue in Europe in the recent years.
Last but not the least, it saves capital expenditure (CAPEX) and optimizes operational expenditures (OPEX). Thus, its efficiency leads to profitability. With a lot of other direct financial benefits, servitization offers long-term and sustainable revenue stream to the service providers and expenses benefits to the service users.
The Main Drivers of Servitization
The main drivers of servitization rationale include enhancing reliability and uptime, customer operational involvement, selling new product capabilities and new revenue-generating business (source: Tata Consultancy strategy document). The benefits are aplenty. This is the reason why a research in 2018 finds 48% of the UK manufacturers are planning to increase their investments towards servitization. There are challenges too. When a company thinks of moving into servitization, it needs to manage the resistances come from core business model itself and the supporter of such old-schools. The design thinking workshops, training on servitization business model and the training on how this can add real and ‘advanced’ value to the existing business that needs to be conveyed. The other challenge is, all the manufacturing operations, specially the large and established ones, such as electronics, home appliances or automakers are organized into departments or silos such as – production, engineering, R&D, marketing, supply chain etc. Thus, customer facing attitude, customer’s experience sharing and workshops and training are necessary. Finally, other resistances such as channel resistance and customer inertia will be there in front. So, there has to be plans for such issues handling and behavior change as well.
Recommendations for Bangladesh
Servitization is now widely recognized as a force of innovation and growth of manufacturing and industrial capabilities, facilities and processes that can move from selling products to selling bundled or integrated service offerings to deliver additional value. The western countries are using this a strategy to raise entry barriers against low-income countries. Because service orientations are well-apprehended and managed by the western companies. Now, if our companies in Bangladesh start learning and adopting principles to move from product selling to servitization business model gradually, they will be able to start gaining competitive advantage aganist local and multinational competitions. This learning to be achieved over the time, not overnight. The startups also can integrate with large manufacturing companies to co-create and convert the product-only dimensions into product-service dimensions.
One may contemplate how we can start this. For them, I think, Walton can start designing and developing refrigeration units for hotels, restaurants and retain chain stores where they need chilling chambers to keep meat, fish and other important grocery items fresh every day. Walton also can install centralized and customized air-conditioning system for corporate offices, hospitals, apartment building and/or large and complex units in hotels and restaurants. If Walton cannot do it who can do in Bangladesh? This integration of servitization (product and service bundling) also can help building entry barriers against their competition and this will give them a constant source of revenue stream as well.
Another example can be Runner Automobiles or Honda Bangladesh– they can design engines or sell motorcycles as a service. They will do all the maintenance, repair and own the physical product, consumers will use against a monthly fee. Rahimafrooz and/or Navana can insert microchips or IoT in their batteries which are used by almost all the cars and buses in Bangladesh. Last but not the least, a company, like Energypac, can sell generator as a service under an agreement with the REHAB and/or real estate companies to install services for apartment building, corporate office buildings to help their energy management.
This is a new-world business model. Not a fad to be fade. This is here to stay. The developed countries have embraced it and have begun the journey to a servitized future. They are improvising every day as a source of gaining competitive advantage and superior way of providing customer satisfaction. This is an imperative now. How long will we be falling behind? Sooner rather than later, the businesses need to adopt this, otherwise our businesses are going to be left behind. If we do not start now, when?
