Integrating Manufacturing and Service Revenue Development

Manufacturing is often seen as selling a product but the competitive market indicates they must be more. As global competition increases, product innovation cycles become faster, and imitators copy products companies should seek to create beyond the product. Research by Ivanka Kastalli, Bart Van Looy and Andy Neely from the University of California Berkeley discussed how the concepts of service adoption and service coverage add value and competitiveness.  They analyzed a large international company with growing sales and significant revenue from manufacturing and service functions.

Manufacturing is not simply the building of products but also the raising of value and public interest. A service mentality helps executives understand where their value lays and what customers need in both current and future products to continue sales. The market must continue to drive the options, design, and utility of products.  

To create greater service oriented manufacturing paradigms requires the ability to develop stronger service measures that help influence the product design and development. Even though different metrics are used for manufacturing and service enhancement they have not been well integrated together. This creates two different mindsets when it comes to production and follow up that can damage long-term business. 

The concept of service adoption and service coverage can be seen as breadth and depth. Service adoption entails a quantitative understanding of the amount of customers buy services. Service coverage can be seen as qualitatively understanding the perceived benefits of the service to their customers. 

When customers purchase services they naturally raise value beyond the production of the unit. When that customer buys more services and is satisfied with that service they are engaging in a qualitative assessment with real financial consequences. If companies can encourage more customers to purchase services and higher levels of these services the organization has increased their earning potential beyond the product. 

Open innovation can encourage service development and effectiveness. It affords an opportunity for the customer to provide input on the product and service as well as be a co-creator. When this occurs, business has a better perspective on the overall needs of the customer in a way that is tangible and revenue producing. 

The researchers used Atlas Copco as their case study. The company is in 100 countries, has over 14,000 employees, annual revenues over $4 billion, 40% of revenue from service with rising sales. The first shift in thinking must entail the movement from thinking about service as a support function to an actual revenue generating investment. The second is that conflicting performance measures between product and service need to be bridged to give a better perspective of total organizational development. The customer and their needs should be the driver of the business and understanding what makes them motivated to purchase and willing to return is half the business battle. 

Kastalli, I. et. al. (2013). Steering Manufacturing Firms Towards Service Business Model Innovation. University of California, Berkeley, 56 (1).

Focusing on Selling Experiences versus Products in the New Economy

Service dominated logic or S-D Logic may be a better viewpoint to train managers and teach college students about the nature of modern business. Considering how much society has changed over the past few decades the movement from tangible goods to service offerings creates a fundamental shift in the economic system. This fundamental shift should be incorporated into training and education so that decision-makers can master new economic conditions.

A total of 75% of all business revenue is currently service oriented while 80% of the GNP is service related (Ford & Bowen, 2008). That is a huge number! With this fundamental change from agricultural, products, and commodities to service oriented offerings it is necessary to train managers on the new S-D vantage point of seeing and perceiving their operations in a new light. Such an approach will help decision makers view organizations and problems from a perspective that actually reflects current economic activities.

The differences in technique are significant. According to Vargo and Lusch (2004), a shift from products to intangibles, specialized skills, knowledge and processes requires companies to focus more on marketing and integrate of operational processes. If an organization is selling experiences (i.e. service) then their approach to management would be completely different and decisions would focus closely on enhancing that perceived value.

The selling of experiences occurs whenever a company uses services as the stage and products as the prop (Pine & Gilmore, 1999). Where companies once showcased their products and earned revenue they are now making the majority of their revenue from the services attached to those products. There is a fundamental shift in thinking that focuses on the intangible but extremely important psychological experiences of services while less on the give market value of products.

Let us put this to an example. An organization sells an electric toothbrush and earns a few dollars of revenue. Under traditional economic models the sale is made when the transaction is completed. Yet in a service economy it is possible to sell the experience of being beautiful with white teeth. The selling of the toothbrush may be part of a beauty makeover service that transforms a person’s image and comes with teeth whitening, cosmetics, hair products and other related offerings. The products are secondary to the service.

Changing the perspective creates greater opportunities to maximize revenue generation streams. The economic approach adjusts to better reflect modern economic conditions. Operations become more of a support and enhancer to experiences than a logistical path of selling products. The very way people are trained, the type of systems used, and the marketing mix adjust to enhance the experiences and positive feelings of customers.

Tips:

-View experiences as service.

-Sell products that enhance that experience.

-Adjust management styles, organizational structure, and operations to enhance experiences of customers.

-Focus on the total customer experience.

-Raise the perceived value of products with service.

-Integrate operations into the marketing strategy.

Ford, R. & Bowen, D. (2008). A service-dominant logic for management education: its time. Academy of Management Learning and Education, 7 (2).

Pine, B. & Gilmore, J. (1999). The experience economy. Boston, MA: HBS Press.

Vargo, S.  & Lusch, R.(2004). Evolving to a new dominant logic for marketing. Journal of Marketing, 68 (1)

 

Services versus Goods – Which brings your company more money?

A fundamental shift from good-demand logic to service-demand logic is occurring within the service management field. Service-demand logic looks at the economic value of the services associated with the product versus the actual cost of the product itself. Changing this scope of understanding helps decision-makers to view the value of the product as one of many types of possible revenue generating sources. These others sources may include servicing, insurance, technical support, upgrades, etc…

One of the reasons why a company would desire to move from a good-demand mentality to a service-demand mentality is because the latter affords many more opportunities to gain wealth. A secondary reason is because in today’s world of low price Asian manufacturers it is hard for American companies to compete on product price alone. Selling a total package raises the overall value of the product to the consumer.

It is important to understand the differences between products and services to understand how the mental shift impacts business operations. According to Vargo and Lusch (2004) there are four fundamental differences:

1.)    Intangibility: Services are intangible and products are tangible.

2.)    Heterogeneity: Goods are standardized while services are not.

3.)    Inseparability: The services are inseparable from the customer while goods are produced separate from the customer.

4.)    Perishability: Services are perishable while most good are not.

Through these four concepts it is possible to understand that services are connected deeply to the needs of the customer. They create a relationship and expectation on the customer through which long-term relationships and additional purchases can be sought. Thinking of a product with services raises the overall market value of the entire package allowing for higher levels of customer satisfaction and sales.

Service-demand logic is based on the culmination of many different marketing , organizational, and service theories. Lusch and Vargo (2006) reviewed 50 top marketing scholars from around the world and found much support and some criticism of service-demand logic. Eventually the field was integrated by Gummesson (2008) with marketing and customer relationship management to create multi-party networks through mass marketing.

Even though this is an emerging concept it stands to logic and reason that the service economy requires a new way of thinking about products. The product is sold into a relationship with the customer. It is this relationship that can either foster over many years or be a simple one-time sale. Through the proper management and development of appropriate service offerings organizations can create higher revenue streams that further their sustainability interests.

Gummesson, E. (2008), Total Relationship Marketing, revised 3rd ed., Butterworth-Heinemann, Oxford.

Vargo, S. and Lusch, R. (2004b), The four service marketing myths: remnants of a goods-based, manufacturing model. Journal of Service Research, 6 (4).

Vargo, S.. and Lusch, R. (2006), Service-dominant logic: what it is, what it is not, what it might be, in Lusch, R.F. and Vargo, S.L. (Eds), The Service-dominant Logic of Marketing: Dialog, Debate, and Directions, M.E. Sharpe, Armonk, NY, pp. 43-56.