After several tumultuous years, there’s no doubt the manufacturing industry is going through a period of reinvention. From the shopfloor to the boardroom, companies must act now to transform their business models if they are to continue to create and deliver value in an ever more unpredictable operating environment.
In many cases, this means identifying new opportunities to support customers with non-traditional services in addition to the products that roll off their assembly lines. From distribution competence to data management, adding to their business model in this way can have a powerful impact on a manufacturing company’s bottom line.
Yet, as renowned entrepreneur Steve Blank points out, there’s a vital third part to the value conversation: how to capture it in the long term. And, for manufacturers, it’s here that an even more fundamental shift is required. Rather than the traditional ownership model in which customers buy from them in a series of one-off transactions, the successful firms of the future will be those that set themselves up to sell their assets, processes and capabilities as a service. What’s more, these new sales may see them act as providers to new customers too.
A rewarding combination
The concept of selling as a service is well-known, predominantly in the software industry where firms have long delivered applications and updates directly to customers via the cloud in the after sales market to reduce the complexity of software and hardware management, create ongoing relationships and generate more consistent revenue streams.
From film and video content to fashion, a similar subscription-based approach is now at the heart of many other industries, too. And while the subscription model may not yet be well-established among manufacturers, the potential rewards for firms that adopt it are both significant and exciting. Energy as a service. Quality control. Innovation. Maintenance. Logistics. Today’s manufacturing companies have a huge range of viable touchpoints with their customers; those touchpoints yield myriad options for capturing the additional value that a service model can provide.
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Much of their ability to do so comes down to strengthening their relationships with customers — and not simply by shifting from a product-centric mindset to a customer-centric one, something the vast majority of firms should have done already. Rather, it’s about making sure they are in constant dialogue with customers to truly understand their needs, expectations and frustrations. Only then can they evolve their business model to deliver the right combination of products and services to match.
They must also be willing to experiment, using a series of sprints to test different elements of their new service-oriented business model, then learn from and build on the results as they go. These elements might range from how to set pricing and recognize revenue, to determining what represents service excellence at all points of the value chain. Either way, adopting this agile approach will help get them to a fully functioning overall model far quicker than attempting to perfect everything at once.
And finally, they must engage their stakeholder ecosystem like never before. From suppliers and IT partners to shareholders and board members, manufacturers must be crystal clear about the role each of their partners plays in powering the necessary experimentation and, ultimately, delivering the right outcomes for customers. Being honest and transparent in answering the question of “what’s in it for me?” for all ecosystem partners is also vital to securing the level of collaboration and buy-in required.
In it for the long term
Disruptive as this may sound, the addition of a service-oriented business model is also no pipe dream. In fact, there are some impressive examples of it in action across the manufacturing industry already. GE Current is one. Set up by GE as essentially an energy subscription and management service, it has been an extremely successful (and lucrative) extension of the company’s core business model.
Likewise, Rolls-Royce’s TotalCare program has enabled the firm to go beyond just selling engines to airlines and provide a subscription service for the management and optimization of those engines after sale. Tellingly, it has also seen Rolls-Royce reshape the nature of its own supplier partnerships to maintain continued access to the products and components required to deliver the program’s maintenance and repairs service.
In both cases, the ongoing benefits in terms of additional revenue, deeper customer relationships and greater resilience have been considerable — and should provide powerful inspiration for other manufacturing companies to take similar steps. Of course, the creation of high-quality products will always be core to the industry’s financial and operational success. But by evolving their business model to also sell their assets, processes and capabilities as a service, manufacturers can go on capturing that value long into the future.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.