Digitally Enabled Service Strategies¹

Executives in a wide range of industries are betting on services as the single largest revenue and profit growth opportunity in the coming years. Yet in many product organizations, the focus of activities such as product configuration and support services, supply chain services, and after-sales services has been simply cost avoidance. Transforming traditional product-focused organizations into service-oriented growth engines, requires changes in both strategy and culture. There is little doubt that supply chains offer a wealth of opportunities for building new revenue generation engines. Exploiting those opportunities requires understanding the right level of service to offer (more is not always better!), nurturing the right service organization (harder than it looks!), and harnessing the right technologies to deliver the service (careful investments!).

In this article, we explore how digital technologies can be used to enable service offerings. We examine four different strategies for digitally enabled services and see how those strategies can be used in different competitive situations to protect revenue and reduce cost or create entirely new business models.

The Service Challenge

The rapid economic deceleration of the world economy over the past two years has forced nearly every company to find ways to protect existing revenues and seek new growth opportunities. In some industries like apparel and electronics, globalization and relentless deflation¹ has driven firms into outsourcing relationships to achieve ever-lower costs in less-developed countries. With profits squeezed and growth nonexistent, services beckon as a high-margin, growth opportunity. Many product firms have successfully implemented new service strategies and captured important service revenues. For example, IBM pulled itself up from a multi-year slump with a daring services strategy. Likewise, equipment firms like Caterpillar and Boeing have built legendary business models in after-sales service and support. It is little wonder that firms from Hewlett-Packard to United Technologies are making technology investments to boost service offerings. In some cases those investments are focused on efficiency and cost reductions. For example, Sears invested $77M in GPS and wireless connectivity to increase the efficiency and reliability of their field service operation. Yet, some product companies have struggled to bring services to market. Hoping to combine new services with existing products, they failed to understand the unique challenges of service offerings. Recently a group of CIOs and senior customer-facing executives gathered for a roundtable hosted by the Center for Digital Strategies at the Tuck School and Cisco Systems, part of the Thought Leadership Summit on Digital Strategies series. After a day of active debate, the group concluded that^3,4 :

• Companies that expand from products into services can create genuine synergies and achieve new levels of growth. The secret is to find ways of leveraging their customer contact, their brand, their customer database, their product database, and their ability to guarantee product and service compatibility. Opportunities for doing these things can usually be found in the service spaces adjacent to their product spaces.
• Adding services extends the customer-supplier encounter and makes it more intense. This means that companies need to consider the encounter as a kind of drama played out over time, framing the key moments and building the emotional connection, so that customer satisfaction is converted into customer loyalty.⁵
• Services are more challenging to offer because, unlike with products, customers can directly affect quality and cost through their actions. Therefore companies should seek to mold their customers’ behavior in ways that will reduce the costs of supplying them, while simultaneously offering the customers more choices in the areas of least operational impact.
• The most important change when a company moves into services is cultural. To transform the company’s culture, executives should provide: a) a clear vision of what the service activities are supposed to achieve, b) a common service terminology, c) a mechanism for sharing service stories, d) appropriate measurements and incentives, and e) regular contact between senior management and service customers.
• Value chain thinking will become as pervasive in services as it is in products. Companies must think carefully about who their partners are, their relative competencies, what the consequences for their value chain partners might be as they expand further into services, who controls customer contact and can guarantee quality, and for whom loyalty and brand value is ultimately generated.
• The use of digital technologies to empower customers needs to move beyond cost reduction to service enhancement. Merely coaxing customers on-line can have the unintended effect of eroding customer loyalty and profitability.

Keeping these observations about building services in mind, many CIOs face the endless question about how digital strategies can be used to reach customers and deliver services. Certainly the internet has enabled some of the most exciting and competition disrupting service strategies seen in the past decade. Many firms saw the internet as an opportunity to radically reduce costs. Others saw the possibility of opening markets and increasing revenue. Still others have found completely new business models that lowered costs and created new revenues. Depending on the competitive environment, all of these strategies can be very effective. Of course, there are many pitfalls to avoid. In the next section, we present a framework for understanding when and how to use digital strategies to bring services to life.

Digitally Enabled Service Strategies

Digitally enabled service strategies can achieve many different objectives. They may be employed to preemptively protect current revenue streams or as a competitive reaction to other offerings in the marketplace. They may be developed to expand existing markets for improved profitability by reducing costs or they may result in entirely new business models that both reduce costs and enhance revenue. The exhibit below illustrates these four different strategies.

For example, in the late 1990’s many firms cautiously went on-line simply to protect their turf. They implemented “brochure” web sites that did little to increase revenue or reduce cost. But, by moving on-line, firms made themselves available to customers who were searching for product information on the web. Often these moves were defensive in nature – stemming a shift of demand to on-line rivals. Moreover, managers often hoped the move would expand the exiting market, but found later they did little beyond achieving parity and preventing erosion. Certainly, in some cases, the digital offerings truly expanded their market. For example, small regional firms that went on-line sometimes found national markets. More exciting product related services often supported sales and successfully expanded revenue.

Some firms found that developing services for their resellers can significantly improve revenues of their products and build channel loyalty. For example, Eaton developed a web-enabled configuration tool that allowed its distributors to configure highly complex electrical products. Now Eaton distributors take the tool with them to their end contractors to help them develop a product solution. The service enables the distributor to cement its relationship with that contractor and ultimately cement the relationship with Eaton. Eaton also observed that the tool created back office efficiency for Eaton because they were able to integrate the product information all the way down to the shop floor, where a fully configured panel board is constructed and shipped with little engineering interaction. Many other firms from Dell to Cisco to John Deere have experienced similar benefits from digitally enabled product configuration tools.

Many other firms have focused their digital service strategies on cost reduction. In some cases, they also found that the service not only reduced cost, but also expanded their market. For example, when FedEx began offering their tracking service on-line, the cost savings were substantial. Customers who used to call service centers could now access the tracking information themselves – drastically reducing the cost for FedEx. However, their early service offering quickly became a feature for many customers, increasing revenue. By the time UPS reacted to offer their own tracking service, they enjoyed the cost reductions (over a manual system), but saw little competitive advantage – UPS simply protected their turf. Many airlines found the same result when they began offering flight status, schedule, and departure information on the web.

Worse yet, some firms experienced revenue and profit erosions when trying to move customers into on-line services. For example, a recent set of studies⁷ in the retail banking industry found that the self-service⁸ focus of on-line banking could backfire. On-line banking was largely seen as a way to reduce costs by moving customers who were expensive to serve into the lower marginal cost, on-line channel. Surprisingly, the studies conducted at Harvard and Wharton found that customers who moved to the on-line channel actually became more expensive to service and the revenue generated from those customers decreased. So the profitability of those customers decreased after they adopted the lower marginal cost channel.

The most exciting strategies are those that used a combination of services and a new organizational structure to create entirely new business models. Often the key to such new offerings is finding the right bundle of products and services. Interestingly, there are successes with radically different levels of service. For example, consider the strategies implemented by two chemical companies – Univar, which is the largest independent chemical distributor in the world (an offspring of the Dutch conglomerate Royal Vopak) and Dow Corning, which is the joint venture between Dow and Corning best known for its wide range of innovative silicone products. In the mid to late 1990s, during the B2B craze, many firms tried to build eBusinesses in chemical distribution. Univar and Dow Corning both held back, plotting their strategy for a completely new business. Many of the others are gone now, but these two have turned out to be very successful. Today their eBusinesses stand in stark contrast to each other, but they share some similarities in their history, organizational culture, and governance. In both cases, the parent company created a new organization, maintaining financial control of the business, but offering the management of the new venture tremendous autonomy in creating of the business model and delivery organization. Significantly, in both cases the focus of the new business was a digitally enabled strategy that fundamentally redialed the service bundle mix. However, on the service dimension the two firms went in separate directions.

Univar created its offering called Chempoint, and Chempoint’s business was about adding service to their product offerings⁹. They identified a market opportunity in the specialty and fine chemical distribution – smaller customers who historically received very little service. Neither the larger chemical manufacturers nor distributors wanted to deal with them because of their low volumes and high cost of service in the traditional sales model. But rather than simply reduce service by trying to move those customers to an online channel, as many eBusinesses did, Chempoint added an important element of service to the bundle. Chempoint hired chemists, chemical engineers, and problem-solving technicians to go out and find these small businesses and help them understand what they should be buying. Working with the chemical suppliers, they offered to help them cultivate and grow this underrepresented segment. So, for example, Chempoint might go to the little dairy in Vermont and help that dairy find the right food dye for their ice cream. If they found the dairy was using an artificial dye, they might suggest a natural one so the dairy could promote “all natural” on the product. Then after helping them learn about using the new product, they would transition them to a lower cost channel on the web or even through phone/fax if that was what the customer desired. Chempoint integrated their fulfillment system of suppliers and third party warehouses over the web to further cut fulfillment costs and to facilitate another service – order tracking. So they added service in what was a low service environment and they bundled the service together with the product creating a very successful business.

Dow Corning, on the other hand, was historically a very high service provider of silicon products. They traditionally provided their customers with many services from ordering and shipment flexibility to chemical engineering and product support. Reevaluating their business, they realized that a fraction of their business was being eroded away to commodities. Other customers segment had never been penetrated because Dow Corning was a high service business. So they launched a new eBusiness and a new brand called Xiameter¹⁰. The goal of Xiameter was to capture the high volume customers that required very competitive prices and who didn’t require extensive service offerings. Thus, they redialed the service bundle to reduce services. Realizing that the Dow Corning culture couldn’t accommodate this low-service model, they created a new organization to bring Xiameter to life. To signal the differences between Xiameter and Dow Corning, both to customers and to both organizations, they even rebranded the silicone products themselves under the Xiameter name.¹¹

Chemically equivalent to Dow Corning products and produced in Dow Corning facilities these products carried the Xiameter name with no reference to Dow Corning. Their focus is large quantity distribution, cutting prices 15 to 20 percent over traditional competitive pricing. And they nearly eliminated all of the Dow Corning services. If you want service, you buy it separately (from Dow Corning). Xiameter products are for firms who know exactly what they want and are willing to follow very specific business rules to receive a lower price. For example there are strict rules about order quantities, about timing, and shipment leadtime. One of the most fascinating aspects of their model is their use of technology to focus the customer. They realized they couldn’t do this internally at Dow Corning because as soon as a customer is on the phone, the scope of the service offering begins to creep. In the Xiameter web interface, very tight business rules on order sizes and shipping leadtimes focus the customer. These rules helped Xiameter cut manufacturing costs by transitioning the supply chain from what was historically a make-to-stock business to a make-to-order. Thus their innovations in the supply chain and focus of their digitally enabled service reinvented their business model, reducing costs and expanding demand. The new offering is not for every customer, but in the high-volume commodity segment, the new business model was very well received.

Not every firm that ended up developing new businesses, started out with that goal in mind. In some cases, the firms started out implementing digital services with a focus on cost reduction. Along the way in a cost reduction strategy, they discovered that there was a bigger opportunity to reinvent their businesses. Implementing a new supply chain, together with the new “go to market” strategy, they created better value for the customer. In some cases, they found that as they improved supply chain information sharing and coordination, they discovered that they have new access to information that either had value in the marketplace or could be used to change their business model.

GMAC followed such a progression in creating a breakthrough in its business model and supply chain for off-lease vehicles. GMAC returns nearly one million vehicles per year to the market as their leases run out. For years, GMAC shipped those cars to non-GMAC auction houses for sale. GMAC realized that, in addition to being costly to physically move the cars, the company was missing an opportunity to learn about the marketplace and interact directly with customers through the auction process. GMAC now sells the cars through five digital auctions, run by GMAC, for five geographic markets. As the world’s largest vehicle auction house, GMAC has established a new business that includes revenues from vehicle sales, from services such as vehicle inspection and certification, and from detailed information about the weekly value of vehicles in each region of the country. GMAC now has its own direct source for vehicle value information that is more detailed and timely than Kelly Blue Book¹². The result was a new business model with both cost reductions and revenue growth.

Digitally enabled services offer tremendous possibilities for firms to grow their businesses. One key to unlocking the opportunities is finding the right strategy focused on cost reduction, revenue growth, or a new business model that achieves both.

End Notes

¹ A version of the paper appeared earlier this year in the German publication Information Management and Consulting and in ASCET.

² Professor Johnson is the director of the Center for Digital Strategies, Tuck School of Business at Dartmouth College.

References

¹ Johnson, M. E. (2002), “Product Design Collaboration: Capturing Lost Supply Chain Value in the Apparel Industry,” Tuck Working Paper, Dartmouth College, Achieving Supply Chain Excellence Through Technology, Vol. 4, Montgomery Research, Inc., https://www.ascet.com.

² Radjou, N. (2003), “Firms Seize Aftermarket Opportunities,” Forrester TechStrategy Research Report, February 27.

³ These summary points along with more details on the summit conclusions can be found in Borg, S. (2003), “Service and Support: From Cost Reduction to Revenue Generation,” Thought Leadership Summit on Digital Strategies Report, Tuck School of Business at Dartmouth, www.tuck.dartmouth.edu/tlsummit.

⁴ Brechbuhl, H. (2004), “Best Practices for Service Organisations,” Business Strategy Review, Spring, Vol. 15, No. 1, 68-70.

⁵ For more on the behavioral dimensions of service encounters see Chase, R.B. and S. Dasu (2001), “Want to Perfect Your Company’s Service? Use Behavioral Science,” Harvard Business Review, June, 79-84.

⁶ Johnson, M. E. and S. Whang (2002), “e-Business and Supply Chain Management: An Overview and Framework,” Production and Operations Management, Vol. 11, No. 4, 413-423.

⁷ Hitt, Lorin and F. X. Frei (2002), “Do Better Customers Utilize Electronic Distribution Channels? The Case of PC Banking,” Management Science, June, 732-748.

⁸ Moon, Y and F. X. Frei (2000), “Exploding the Self-Service Myth,” Harvard Business Review, May-June, 2-3.

⁹ Johnson, M.E. and J. Johnson (2001), “ChemPoint and Yantra: Extraprise management in the specialty chemical industry,” Center for Digital Strategies Report, Tuck School of Business at Dartmouth College, www.tuck.dartmouth.edu/digitalstrategies.

¹⁰ Lin, S. and E. Senger, (2003) “Xiameter – e-Commerce Solution Covering Business Customer Ordering and Information Processes,” Tuck School of Business & IWI-HSG/S, www.tuck.dartmouth.edu/digitalstrategies.

¹¹ Rozin, R.S. and L. Magnusson (2003), “Processes and Methodologies for Creating a Global Business-to-Business Brand,” The Journal of Brand Management, February, vol. 10, no.3, pp.185-207

¹² Kopczak, L. R. and M. E. Johnson (2003), “The Supply-Chain Management Effect: How Supply Chain Management Is Changing Managers’ Thinking,” Sloan Management Review, Spring, 27-34.

M. Eric Johnson is a professor at the Tuck School of Business at Dartmouth and director of the Center for Digital Strategies at Tuck. His research focus is on supply chain and IT. The center’s mission is to examine the impact of information technology on the firm’s ability to integrate with customers and value-chain partners. For more information please see www.tuck.dartmouth.edu/digitalstrategies.