Servitisation of Manufacturing- Service Design and Delivery - Essay Example

• 1. Question One - Transition of Business Model

1.1 Introduction

If asked, most people would describe a good or product as what can be made. A product is tangible and visible and is used to satisfy certain needs or wants. Products may include objects like electronic devices, motor vehicles, agricultural equipment, and mobile phones (Elango, 2015). Goods are discernible. Services on the other hand refer to intangible satisfaction of wants and needs. Services are invisible and indiscernible (Andrew, 2009). Services are provided through action and include after-sales services, banking, insurance, and education.

In today’s changing world, many firms are opting to make good-to-service based business model transition (Banerjee, 2010). This is because of the evolving nature of the products; so for one to survive, they must adapt to the market. Previously, businesses offered products and nothing more. The customer would purchase the good and no other services were rendered by the provider. Now, companies want to be a one-stop shop where the customer’s current and future needs are taken care of and profit is maximized within the company (Haslam, 2015). In as much as this trend is seen to be growing, there are still a few hurdles companies are required to get over before being able to transition from product to service provision. The first major hurdle is mentality (Koller, et al., 2011). Most products are manufactured by engineers and other scientists. These people are specialized in the construction of the good and that is where they see the financial gain of the product. Convincing a person, who is used to only the construction of the good that a profit can be made in the repair of the said good after a short while not an easy undertaking (Sikdar & Payyazhi, 2014). Other firms may find it difficult to transition as they may feel that the provision of services is beyond the scope of what they do and abandon the thought. For example, a computer manufacturing firm may decline to provide computer insurance services because they see themselves as lacking the skills to provide this service.

The second hurdle companies have to overcome is the changes in the company’s structure (Clark, 2007). The introduction of service delivery in a firm whose main function was product provision is difficult. Services require structures and processes that are foreign to the company. The core of the entire business model shifts from simple transaction to customer-relationship based business models (Dias, 2009). Developing the new service system requires funding as well as other company resources that would have otherwise been used in the construction of the company’s core focus. This disruption caused by the transition may deter some firms from expanding the company into the service sector (Martin, 2009).

1.2 A Case of Servitisation of Manufacturing

Although the product-to-service transition may seem like a colossal undertaking, there are companies that have managed to do so smoothly. One such company is Caterpillar Inc. Caterpillar Inc., or CAT, is a company that was founded in 1925 in the American state of California (Harlow, 2014). CAT is a well-known brand all around the world for its construction of heavy construction machinery. CAT’s largest market is in the construction and mining equipment. In previous years, the company was only known for its provision of goods to its customers. Caterpillar offered the goods and nothing more. Other services related to the product such as insurance and repair were not done under the company or by the company’s dealers located worldwide.

Over the years, the manufacturing divisions at caterpillar had expanded to almost every continent in the world. The use of its products in the construction of major civil engineering structures around the globe was well known and respected. However, the company directors came to the realization that other firms were making money on their products by offering services they could not. When farming equipment broke down, the farmers would need the services of a firm that repairs heavy machinery. The buyer of the equipment also outsourced insurance for the product from insurance companies. After this realization, the groundwork was laid for the transition of Caterpillar from product provision to service provision. Previously, CAT had three functional units: transportation, construction industries, and energy divisions. In the construction industries division, Caterpillar manufactured machinery in the mining, aggregate markets, heavy construction, and heavy and general construction. Caterpillar manufactured over 18 models of industrial machines and over 17 models of tractor and tools. This division was the major unit in the world established company as it accounted for the highest number of customers (Catepillar Inc,2007).

The Energy & Transportation division of Caterpillar supported customers using turbines, industrial and marine applications, reciprocating engines as well as parts in the industries involved in serving power generation, rail, and oil and gas. The resource industries department in Caterpillar was involved in the manufacture of machinery mainly in the applications of quarry and mining. This department was strengthened in 2011 when Caterpillar acquired Bucyrus International Inc.

Caterpillar’s transition into a service-based company came with the introduction of the company’s fourth unit, the financial products division (Caterpillar Inc.,2007). This division is in charge of Caterpillar’s provisions that are intangible. Through the financial products division CAT provides financing alternatives to its customers, both retail and wholesale, all around the world. Here, the customer is able to acquire financing alternatives for Caterpillar products, for example, mining equipment. Previously, if the customer needed to purchase machinery from the company, they would source for funds from other institutions like banks separately and only make the purchase once all the money was available. Today, one can purchase the equipment and make payments in installments through this division of the company. CAT Financial provides financing for heavy machinery that, in most cases, incorporate Caterpillar products.

Another major service provided by Caterpillar is insurance. In previous years’ customers required insurance services on the products purchased. This was done so as to shield them against incurring losses in case of damage or loss to the property. Insurance services were outsourced from established insurance companies separate from the company. This, however, changed and today Caterpillar protect customers from reducing risk of Caterpillar products, damage to the machinery purchased, injuries caused due to the negligence of the employer, liability on automobiles and other property under the customer’s name, and provide life insurance services (Harlow, 2014). It is important to note that although CAT Financial is a major division of Caterpillar Inc., its financial reports are done differently. This was the approach taken by the company so as to ease the transition between the being an exclusively product-based company to a service-based company.

1.3 Value Constellation

A value constellation involves different economic actors working together to make the company successful (Houghton, 2009). The actors affect the outcome of the service provision. The actors in the case of Caterpillar Inc. are the customer, the resources, and the outcome.

1.3.1 Customer

It is clear that the increased customer base enjoyed by Caterpillar is largely due to its diversification. With the introduction of financing alternatives and insurance services, the customer is more likely to shop at the company because everything that is required during and after the purchase is available in one place. The experience of having everything done at one company, compared to previous years when finances and insurances were handled separately, increases the likelihood of the customer being more satisfied and getting their value for money (Koller, et al., 2011).

1.3.2 Outcome

The general outcome of the transition has been positive as CAT Financial is in competition with other well established service providers such as General Electric Capital Corporation. This is a clear indication that the venture was a successful one.

1.3.3 Actors

The actors affect the outcome of the service provision. The actions of the actor affect the business model positively or negatively. The actors in the case of Caterpillar Inc. are the CAT customer, both old and potential target customers, the resources allocated to the transition and the correct utilisation of the same, and the outcome which affect the decisions of the company.

1.3.4 Resources

CAT put together a large amount of resources for the expansion of the company into service provision. During the transition, a new company division was created; one which was somewhat independent of the whole company. By the time this was happening, the company had expanded into most parts of the world and thus was already a large conglomerate (Caterpillar Inc., 2007). New managers were appointed, new policies put in place, the number of employees increased, and the company structure was shifted. This endeavor required a lot of resources. The expansion, however, led to increased profits as demand for the goods and services increased and in the long term the transition served the company well. The general outcome of the transition has been positive as CAT Financial is in competition with other well established service providers such as General Electric Capital Corporation. This is a clear indication that the venture was a successful one.

• 1.4 Mass Customisation and Mass Personalisation

Mass customization refers to the process that uses both ‘mass’ and ‘customization’ through the modification of the company’s goods and services with the low costs associated with mass production, and the personalization of the goods and services (Kumar, 2007). The needs of a specific customer are thus met without the company incurring excessive costs. Mass personalization on the other hand refers to custom-tailoring of the goods and services by the company so as to cater to individual preferences. The major distinction between mass personalization and mass customization is how much the customer controls the end product, with the former having more control (Blecker & Friedrich, 2006).

• 1.5 Conclusion

Through the Caterpillar Financial department, the company utilizes mass customization. This is achieved by the company modifying its products and services so as to appeal to a large mass. CAT is able to better understand the needs of the customer through interactive forums such as conferences and field research (Whates, 2005). In so doing, the company offers what can be utilized by majority of the customers. Mass customization is how the policies of CAT Financial were realized. Market research was conducted and the most widely required services were settled on and thus provided by the company.

• 2. Question Two-Rapid Assessment Questionnaire

A rapid assessment of an institution is the quick and cost-effective tool that is used by companies to assess the company progress and the overall business performance. The rapid assessment questionnaire is the vital questions that are asked in order to achieve rapid assessment. These questions are answered by the company stakeholders so as to pinpoint critical areas and respond to them quicker (Gummesson, 2006). The questions in the questionnaire include questions that lead to evaluation of the current situation in the firm in terms of infrastructure, resources, and employees and the answers lead to changes in the company that should be enforced to improve efficiency. This method also allows for comparisons with competing companies to be performed and short and long term goals and decisions are also made.

The Lean Business Plan is a scientific approach to creating and managing of companies so as satisfy customer needs quicker. The Lean Business Plan allows a company to navigate itself in terms of where changes are required to make the business more efficient (Brophy, 2013). The Lean Business Plan and the Rapid Assessment Questionnaire are used together in the manufacturing industry to form the Rapid Plant Assessment (RPA) technique. The RPA process is used in this industry to validate if a factory is lean in less than an hour (Chongwatpol & Sharda, 2013). The information thus gathered influences major decisions such as continuous improvement, benchmarking, acquisitions, and competitor analysis. There are 11 categories in the sheet that allows for the assessment of how lean the factory is. The questionnaire has 20 straightforward questions. These questions determine if the plant is working efficiently in the 11 categories (Brophy, 2013).

The use of the Rapid Assessment Questionnaire together with the Lean Assessment has been applied in the service industry too. Here, questionnaires on the critical areas of the business are prepared and answered by the stakeholders in the company. The questions are simple yes/no questions (Schiuma, 2011). Once the questionnaires are filled, they are used together with the Lean Assessment to acquire knowledge on customer needs and how to quickly assess make changes. This process, like in the factories, is done at a much faster rate than market research and analysis.

The Service-Dominant (S-D) Logic is an argument for the understanding of the inherent characteristics of an organization. The S-D logic is based on the assumption that the main focus of organizations and other groups, and society at large, is the exchange of services. Here, service is exchanged with service and nothing else and that every aspect of the economy is based in service; every company in every society is a service company (Gummesson, 2006). Therefore, the base of marketing should be exclusively marketing. This logic further states that the marketing needs of the industry should break free of from the industry dominated by goods. The logic emphasizes the value found in the use of the service rather than the value gathered from value garnered from the exchange of the service. Firms are expected to market in conjunction with the customers rather than to the customers.

The Rapid assessment questionnaire if used together with the S-D Logic may not be as efficient. This is because the questionnaire, in its fundamentals, targets all factors that may affect the output of the organization. Some questions that require to be answered for the use of the questionnaire and the S-D logic may largely remain unanswered. The S-D Logic focuses on the service industry independently. This is not what is experienced in the real world. In reality, services are exchanged with goods more often that they are exchanged with other services. Further, the S-D Logic of business assumes that every aspect of the economy is service-based. The questionnaire encompasses both the good and service aspects. This contradiction may lead to wrong conclusions and assessment of the entire organization. Thus, the S-D Logic and the Rapid Assessment Questionnaire, as is, is not efficient in a Service-Dominant Logic unless the questionnaire is modified to work for this sort of environment.

The Service-Dominant Strategy Canvas is a tool used in organizations for the design of Service-Dominant Logic. The Service-Dominant Strategy focuses on the customer and customer relations. The critical questions asked are who the customer is, what service the organization can provide the customer and the customer interaction (Vargo & Lusch, 2012). The strategy formulates ways in which the customer is put at the center of every business transaction. Seeking out the customer, understanding the needs of the customer, and interacting with the customer so as to offer the best possible service is paramount. This are the considerations made under the value-in-use part of the strategy. In the service environment, the focus is on the core services and the core partners, the role of the organization in the service-based society, and what the enriching services and who the enriching partners are (Normann & Ramírez, 1998). In terms of how the different service providers interact, the core issues are how the important relationships are managed and how the enriching relationships are managed. These are the strategies that are used to come up with the S-D Logic.

In comparison with the Rapid Assessment Questionnaire, the S-D Logic strategies and the questionnaire have some things in common. The Rapid Assessment Questionnaire sets out to review the overall company progress as well as to make short term and long term goals that make changes that benefit the organization. The Service-Dominant Logic strategy also sets out to do the same. It maps the actions and reactions the company will make in a service-based society (Gummesson. & Vargo, 2010). The main difference between the two is the Rapid Assessment Questionnaire is a quick tool while the Service-Dominant Strategy is a guideline on how the entire organization will operate within the company, with its customers, and other service providers mainly in the long run (Urban, 2015). Also, the Rapid Assessment Questionnaire relates to the real-world environment where goods and services are exchanged. Again, the questionnaire may be modified to fit the service-based environment.

Much research has not been done on the Service-Dominant Business Model (Debelak, 2006). Most service industries use goods-based service models to model their business which may not work well. However, one service-based framework was created with four main building blocks of the business framework as follows: Service Dominant Business Models, Service Dominant Strategy, Business Services, and Service Compositions (Doolen, & Hacker, 2005). The outcome of the first layer of this framework is the Service-Dominant Strategy. The second layer is the actual business model. The service composition and business services are third and fourth respectively (Lusch & Vargo, 2006). The importance of the development of the service-based business model is it will help in the transition of organizations from being goods-based to service-based. The creation of the model allowed for the complete framework thus the realization of a society that is completely service-based being close. The Service-Dominant Business Model is also important because in as much as the business environment is still largely goods-based, the service industry is growing rapidly and thus there is a need for this kind of business model (Banarjee,2010).

The Rapid Assessment Questionnaire may be used in the Service-Dominant Business Model as it was used in the goods-based business model with success. This is because, unlike the previous theories that had the goods-based and service-based industries crossing paths, the Service-Dominant Business Model is tailor-made to suit the service-based industry (Neu, 2005). Thus, the outcome of the Rapid Assessment Questionnaire in the Service-Dominant Business Model would be efficient.

Decades ago, customers were satisfied after receiving goods alone from organizations. This is no longer the case as organizations that refuse to offer services to their customers are unable to remain afloat (Steve & Lusch, 2012). The great leaps made in technology have also made the provision of services much simpler that it was before. Developed countries are gearing towards a service-based with the rest of the world largely involved in goods-based business models. This rapid change is aided with the embracing of technology in all sectors of the economy. This is more reason why all organizations interested in keeping up with competition should embrace the transition from good-based to service- based business model.