By Jim Salas, PhD
A recent Wall Street Journal article argued that the key to growing middle-class jobs in our economic recovery was our manufacturing industries.
If that’s the case, what innovative model can our legion of product-oriented small business owners follow as they advance our economy — and what challenges await them?
One illustrative example is offered by IBM, which diversified to support growth. Thirty years ago, the company’s products were so successful that it sparked a business adage: “No one ever got fired for buying IBM.” But by 1993, IBM posted an $8 billion loss — at the time, the biggest loss in the history of corporate America. Since then, IBM established over $100 billion in multiyear service agreements with its customers—a stable source of revenue that has helped to buoy IBM through tough economic times when customers could not buy new products.
IBM successfully transformed from being solely an internationally renowned business machine maker – a producer — to a globally respected corporate services and solutions company as well. Today, the company is well on the way to transitioning from legacy areas of the business to service enterprises. In fact, in 2014 the company’s annual revenue for cloud computing products was up 69 percent.
That doesn’t mean that manufacturers must become service companies. But smart small business owners who choose to diversify can learn from the IBM example about the right way to introduce services — because unlike IBM, three-quarters of the companies that turn to services fail to realize their expected return.
They fail because they don’t fully visualize the transition from products sold to services rendered and identify the challenges that they will face during the transformation. Through our research with dozens of CEOs from companies that have successfully (and unsuccessfully) launched service offerings, my colleagues and I identified five key factors – the “five c’s” — necessary to guide management, marketing, sales and other related organizational changes needed for goods-dominant small companies to successfully grow services and solutions:
Configure your company with a service culture. Very few executives grasp the extent to which they must change their organizations in order to grow services and solutions – and it starts with executive mindset. Small business owners should discard their thinking that their services or solutions are supporting products. Rather than push out products, they should incorporate a service culture — thoughtfully listening to customers and helping them to solve their problems.
Re-examine your capabilities. Sylvania has transformed itself from a small New England light bulb recycler into the global lighting applications and services division of OSRAM AG. But none of their services would be possible without the capabilities of key employees, particularly salespeople, service technicians, and delivery personnel.
That might mean reviewing your current personnel roster and adjusting accordingly. Because explaining complex services and solutions is very different from explaining physical attributes of products, for example, traditional product salespeople may not be the right fit to sell services. Small business owners need to take a hard look at their internal capabilities to determine if and how those match with the new services being provided.
Customize services when it’s necessary; standardize when it’s not. More sophisticated services (such as consulting) that are tailored to individual customers’ needs are traditionally more profitable than simpler services such as service warranties. Unfortunately, with customization comes another “c” – cost. Not everything has to be created from scratch. To keep investment under control, business owners should understand what services can be “standardized” to maximize efficiencies, and what requires customization to provide real value.
Collaborate with customers. Collaborating means involving customers in the process of generating ideas, designing, developing, producing, and delivering service and solution offerings. This increases the likelihood that your new services and solutions better suit customer needs, generate greater satisfaction, and strengthen customer loyalty and firm profitability. Collaboration may be as simple as customer satisfaction surveys or as invested as prototype testing, but we found that the degree of collaboration should increase as firms offer more specialized services and solutions.
Accept that there will be challenges. As a small business owner, one of the greatest challenges to successfully providing services is accepting that it takes time — and it takes resources. It helps to have a pre-determined timeline and budget. Transitioning companies should begin develop a timeline metrics for revenue, profits and growth that define “success,” and invest strategically to meet them.
Even if incorporating all five C’s to generate service revenues, the most critical aspect of the transition is culture change – which must be driven by leadership willing to put the customer before the product. Without significant cultural shifts, efforts to ride the wave of service innovation into a full recovery will stall.
Jim Salas, PhD, is an Assistant Professor at Pepperdine University Graziadio School of Business and Management. His book, Profiting From Services and Solutions: What Product-Centric Firms Need to Know, co-authored by Valarie A. Zeithaml, Stephen W. Brown, and Mary Jo Bitner, is available through Business Expert Press.