KEY CONCEPT
Different types of services — from ‘complementary smoothing’ services such as maintenance support to ‘substituting’ services such as leasing arrangements — can be more or less effective depending on the current phase (early ferment, middle transition, or late mature) in the life cycle of the product’s industry.
IDEA SUMMARY
There are a variety of product-related services that manufacturers offer their customers. New research pinpoints the following different categories of services:
- Complementary services help customers feel more comfortable buying the product because they either smooth the sale and use of the product or they adapt the product’s functionality. Complementary smoothing services — such as financing, training or support services — don’t change the product in any way. Complementary adapting services, on the other hand, involve changing the product to fit the needs and priorities of the customers. A manufacturer such as General Electric, for example, can tailor its generators or nuclear reactor equipment to be used in extreme weather conditions as required by the customer.
- Substitute services, unlike complementary services, replace the purchase of the product. Leasing and rental arrangements are the most common type of substitute services. From computers to office equipment to industrial and agricultural equipment to cars, the customer pays for the usage of the product (e.g. computing time used, miles driven or number of copies made), while the manufacturer continues to own the product and to be responsible for repair or maintenance. One creative use of substitute services involved Rolls Royce, the largest manufacturer of aircraft engines. Roll Royce offers a ‘power by the hour’ service through which airlines purchase the use of aircraft engines rather than buying the product itself.
When is the best time for manufacturers to offer the different types of services? According to the new research, the answer is found in the three major phases in the life-cycle of an industry, specifically:
- The ferment phase. This first phase of an industry is characterized by a very high degree of uncertainty. The technology is new and untested in the marketplace. Customers are not even sure which features or capabilities of the product are most important for them. Because of this wide-scale uncertainty, the ferment phase is best suited to adapting services: manufacturers can alter their still-evolving product design to fit the particular needs of early adopters (needs that early adopters recognize over time as they use the product). Scientific instruments, industrial machinery and machine tools are just several examples of industries where early products needed to be adapted to the needs of customers. If the product is radically different, manufacturers can turn to substituting types of services, notably leasing options. This gives customers a chance to become familiar with the product without having to make a purchase commitment. Early mainframe computers — huge and hugely expensive — were at first leased with companies paying for computing time.
- The transition phase. In this phase, a dominant product design emerges, and the uncertainty of the ferment phase diminishes: customers know what they are buying and what they want and need. Manufacturers should now shift from adapting and substituting services to complementary smoothing services: helping customers use the products. For example, from the 1980s to the 2000s, companies such as IBM, SAP and Oracle shifted from consulting, customization, integration and other complex adapting services to more simple and cheaper smoothing services, such as basic technical support or product upgrades.
- The mature phase. This final industry lifecycle phase is characterized by a saturated market, which requires manufacturers to differentiate themselves. Effective smoothing services can help. GE’s locomotive products division is one example. GE not only helps finance the locomotives, but also helps finance other rail-related products such as intermodal containers and maintenance vehicles. GE also offers complementary smoothing services such as boxcar scheduling and routing services and track utilization services. The mature phase of an industry lifecycle is also appropriate for substitution services that can help a company expand into new customer segments. For example, power tools producer Hilti, which specializes in large-scale, commercial-grade power tools, has started to offer tool-rental options for homeowners and small contractors.
BUSINESS APPLICATION
The research framework presented here offers a general template for when to offer different types of services. Companies should not be afraid to: customize or adapt products, or offer substitution services (e.g. leasing), in the earliest phase of the industry life-cycle; shift to smoothing services (e.g. maintenance agreements) in the transition phase; and use a mix of smoothing and substitution services to retain their customers and expand to new customer segments in the mature phase.
An aggressive pursuit of the right type of services can sometimes make the difference between survival or exit from an industry. The additional revenues and profits from smoothing services is one intuitive reason. Developing tighter customer relationships through adapting services can also lay the foundation for sustained success.
Another (and more creative) path to competitive advantage is through the subsidization of services. Google, for example, gives away the Android operating system and different Internet-based services (search, email, etc.) and then charges for advertising.
The bottom line is that thinking of services as simple complements to the product that are only important when the industry is mature vastly underestimates the potential of services to contribute to the success of a product manufacturer. Knowing when and what type of services to offer can allow firms to maximize this contribution.
REFERENCES
Services, Industry Evolution, and the Competitive Strategies of Product Firms. Michael A. Cusumano, Steven J. Kahl & Fernando F. Suarez. Strategic Management Journal (forthcoming).
