By Eszter Gulacsy
What is servitisation?
The concept originated in manufacturing and much of the research about servitisation focuses on manufacturing companies. Servitisation is the transformation of a firm from product-centric approach to a service-centric approach. In doing so, the firm shifts its business model to improving customer value in use, thereby assuming greater responsibility for the overall value-creating process as compared to product-centric, transaction-based business models.1
Probably the most significant example of servitisation is the successful transformation of IBM in the 1990s from a product-centric to a service-centric organisation.
Although IBM first released its personal computer to the market in 1975, sales were disappointing as there was low demand for computers. It was not until 1980 that IBM tried again to crack the personal computer market.2 By then many other companies were already making the machines, and IBM was not able to gain immediate control of the market.
In 1994 the new management led IBM to exit the network products business, focused on application software, storage, and personal computers to become a freestanding service- business focused on software.
As of 2018, IBM is an $80-billion company and #1 in many areas of the industry including enterprise services, enterprise security and artificial intelligence.
Advantages of servitisation
Research suggests that servitisation can nurture growth and profitability in different ways.
Firstly, higher revenue potential often exists in industries with an extensively installed product base such as the aerospace, locomotives and automotive industries). Service revenues can be one or two orders of magnitude greater than new product sales.
Secondly, as services provide a steadier source of revenue, increasing service revenues can compensate for declining revenues in equipment sales. And adding a service offering to your products makes them less sensitive to price competition.
Thirdly, services are globally more profitable. Due to their lower price sensitivity and lower comparability, service offerings tend to offer higher margins and rates of return than basic products.3