Many incumbent manufacturing firms have already started to combine products and services into new offerings with the intention to better address various customer needs. In more recent years, also different digital capabilities such as IoT, sensor fusion and artificial intelligence is increasingly introduced to further enhance these product-service systems. While the combination of products, services and digitalization offers many opportunities to generate new business models, my recent PhD thesis titled Towards Digital Product-Service Platforms in Manufacturing Firms, also sheds light on how companies pass through different stages in their digital transformation and how a platform approach for servitization may become a critical success factor.
Although many incumbent manufacturing firms have already started to offer combinations of products and services, most still have less experience from also using different digital capabilities to advance their product-service combinations – even if there are many tempting opportunities. If suppliers for example can gather vast amounts of data from products in use, Artificial Intelligence / Machine Learning may then be used to for example more accurately predict service need, to guide the operator to a better end-result or even facilitate autonomous operation of machines. Several aspects of the transition into digital product-service systems in incumbent manufacturing firms have been less explored and the research this article builds on explores the emergence of digital product-service systems in incumbent manufacturing firms, including the main opportunities as well as the barriers, and investigates how a platform approach may support incumbents in their transformation. The findings for example identifies a need to focus on the most value-generating combinations of products and services, that much of the initial transformation is driven by corporate entrepreneurs, that incumbents seem to transition through different phases, and also that a platform approach may assist companies to align several different shared capabilities, upon which a number of new business models may developed as complements to the existing transaction product-focused business model already in use.
The importance of value understanding
There are almost an endless range of possible product-service combinations, enabled by digitalization, that incumbents can potentially develop. Out of these opportunities, companies must carefully select a subset for which they can appropriate value, and the cost to develop is manageable. There is significant risk of ending up in a service paradox with underperforming business models, in which the investments into developing new services are larger than the value generated in return. The complexity increases with more advanced offerings, the number of product lines that the service should cover and similar.
One successful approach for understanding the value potential is to encourage corporate entrepreneurs to experiment with opportunities and business models. The empirical findings suggest that individuals with an entrepreneurial mindset are well suited to both identify and build proof of concepts for new and innovative digital product-service combinations. Such an effort was also seen to be well suited to build knowledge inside the organization, both within respective team, but also all the way to group management and board of directors. This means that the starting point for the digital transition should be embraced to start bottom-up, rather than top down which is otherwise commonly the case for strategic initiatives within large corporations. Companies should however be aware that an entrepreneurial approach with several independent initiatives, does not scale very well and that components are not easily reused across or between different initiatives.
A platform approach to digital servitization
Incumbents which desire several different digital product-service offerings should consider a digital product-service platform approach. The thesis outlines such a platform as “a set of physical and digital subsystems and interfaces developed to form a common structure from which a stream of derivative product-service combinations can be efficiently generated.” A digital product-service platform, once in place, also facilitates the rapid prototyping of new product-service offerings, effective scalability and a similar look-and-feel across offerings. A common platform, that is to be shared across several organization structures, at the same time creates new challenges. More specifically, the challenges relate to: (1) platform governance, (2) ownership of various activities, (3) deriving an overview of related product and service development, and (4) the budgeting of product-service bundles.
Three phases of digital PSS transformation
All four incumbents studied in the thesis appeared to transform through similar stages. The first stage was the entrepreneurial phase, which proved to be an effective starting point for the digital transformation. The complexity of the phenomenon, with products, services, and digitalization, makes detailed strategy documents a challenge and then an experimental approach proved successful to ignite the digital transformation, and to learn more about both technology and business models. All companies understood the power of a common digital product service platform, upon which several different business models could be efficiently generated using shared capabilities. Full use of the common platform was however not seen until a third phase, when the incumbents had aligned their organizational approach with their digital product-service initiatives.
Business model addition rather than transition
It is known that digital servitization has the power to transform the business models of com-panies, but the thesis also underline those incumbents will likely face a situation where existing product business model(s) remain rather intact, and new PSS enabled business models are added as complements. One reason is that product business models will remain strong revenue generators for a long time, until the new PSS business models are mature enough to replace them. This means that two partly competing business logics will have to co-exist, at lest for some time, within many incumbent firms.
Managerial Implications and Conclusions
Industrial manufacturers can generate more value for different stakeholder through digital product-service systems. These new offering may range from simple to being rather advanced. As a starting point, incumbents need to understand that more advanced business models also require more advanced capabilities, meaning that while more value may be generated as the product service offerings get more advanced, focus must be invested in understanding the related cost. Corporate entrepreneurship is an approach suited to understand the opportunities and to build knowledge. This investment is valuable, not the least, as input when defining a digital product-service platform that fits respective firm’s context. If companies then also align their organization structures to support their new platform enabled product-service initiatives, they may unlock a potential to efficiently generate a number of new complementing business models upon shared resources, which should become new revenue streams for incumbents – business models which eventually may challenge the existing product logic.
”A digital product-service platform is a set of physical and digital subsystems and interfaces developed to form a common structure from which a stream of derivative product-service combinations can be efficiently generated.”
Industrial manufacturers have an interest in digital product-service systems as additional value can be generated for different stakeholders when products and services are combined. These new offering may range from fairly simple to being rather advanced, and managers should be aware of the following:
- It is important to understand both the value generated from product-service systems, and at the same time, the cost associated with offering delivery
- Digital capabilities, such as cloud computing, artificial intelligence and 5G, may facilitate even more advanced offerings, but at the same time adds more cost
- Experimentation is a good way to verify the attractiveness of different ideas, but also to learn about, for example the complexities of digitalization and its related costs. Managers should encourage an entrepreneurial mindset, and truly learn from different proof-of-concepts.
- Using a platform approach to enable digital product-service systems can be a good approach for firms that intend to scale multiple digital product-service offerings. Through the platform, several new business models may be generated upon shares capabilities. However, managers must then also learn how to govern and manage the platform in an efficient way. The platform should become a company-wide resource and it must for example be clear for all parties how budgeting is made, and how decisions are made, and priorities set.
- Manufacturing firms with a tradition of developing products should expect that the new services-based business models rather complement than replace existing transaction based business models.