Consequences of Changing to a Product-Service Business Model

In challenging economic times of high and fluctuating raw material and energy costs coupled with relatively static or declining markets, most companies realise a “do nothing” strategic objective will inevitably deliver shrinking returns. Manufacturing businesses may choose to cut costs to improve margins, enhance their offer to extract greater value and expand their market or even attempt to do both simultaneously. Manufacturing companies that have traditionally operated a lean, transactional business model may consider supplementing the supply of products with product use support services. Some might go one stage further and introduce a combined Product-Service business model to the market in order to differentiate their offer from those of competitors and increase the perceived value of their offer in the minds of customers, thereby halting or reversing price erosion.

The consequences of introducing services or changing to a Product-Service business model, both to the company and to its relationship with its existing customers, are not always fully appreciated. To access value through a Product-Service business model necessitates a transfer of activities previously carried out by the customer to the supplier. Also, customers who once paid for ownership of an asset i.e. the product as supplied, are now purchasing the “use” of an asset in a combined Product-Service “system”. The customers pay for the benefit of transferring to the supplier some of the risks, responsibilities, costs and complexities associated with full asset ownership. In addition, when the supplier retains and assumes some of the cost of ownership of the Product-Service asset they must also recognise that they become reliant on the customer to co-create some of the value they seek to capture. So although activities may be transferred from the customer to the supplier, the customer retains some responsibility for the quality of the outcome of these activities. The customer becomes simultaneously client and collaborator. This transformation is awkward from a customer relationship perspective and more “messy” from a contractual and organisational sense.

These consequences are explored by Morcos and Henshaw in their 2009 publication “A Soft Systems Methodology for Transforming Organisations to Product-Service Systems” who stated that:

The transformation ….. requires changes in the company’s structure, organisation, marketing strategies, ….. [and] requires a different way of thinking ..…. [such a transformation would be] supported by methods and techniques that support co-value thinking [a trade-off between goals and organisational boundaries that exist and] …. recognition of the co-creation of value by supplier and client; this represents a major change in mind set …. different management and decision-making approaches in the leadership style …. and throughout the organisation.

Morcos and Henshaw (2009) used Soft Systems Methodology (SSM) as a methodology to support organisational change to a Product-Service business model by identifying the consequences of change and proposing solutions. SSM was developed, together colleagues at Lancaster University, by Peter Checkland who the realised during his days as a technical manager in ICI that “how to do it” goal-seeking models that dominated managment science at the time were inadequate for resolving human-behavioural “soft” problems in real world work systems. SSM is a methodology that works well for systems where the goals of the system are debatable and conflicts exist between stakeholders. SSM has been successfully used for over 40 years because it is an action-orientated approach that helps to identify potential solutions, which can then be evaluated within the organisation for desirability and feasibility. From my own previous practical experience of using SSM in an industrial commercial setting, I can confirm that Mode 2 SSM is excellent for establishing a global view of a complex problem situation by creating a framework that facilitates structured thinking about issues surrounding a major organisational change among the stakeholders.

Whilst Morcos and Henshaw (2009) considered the “servicisation” of a product sell, in a recessionary environment the strong need to control costs sometimes leads to a strategy of selective withdrawal of support services from certain customer segments.  In these cases the use of SSM might also elucidate the consequences to the client relationship and within the internal organisational of withdrawing services from a Product-Service sell.

Pennog has knowledge and experience in the application of Soft Systems Methodology (SSM), customer segmentation and creation of Product-Service business models. Call Pennog on +44(0)1484 443001 or contact us using our easy contact form and we can tell you more about how our business process re-engineering services can help your company successfully implement a differentiated approach to the market.

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