THE STRATEGIC SERVICE VISION APPLIED TO MANUFACTURING

We have said that customers buy results and solutions rather than products and services. This has led a number of manufacturers to redefine their businesses from the manufacture of products to the delivery of solutions. CEMEX, one of the world's leading manufacturers of cement and concrete, now delivers solutions—airport runways, highways, and cement that absorbs pollutants in the air. GE Medical Systems, manufacturers of CAT scanners, delivers functional machine time to hospitals by remotely monitoring its machines and sending repair specialists to make repairs to ensure continued functionality. Otis Elevator Company sells the same kind of solution for the elevators that it manufactures and monitors remotely. Rolls-Royce's aircraft engines are sold on the basis of uptime, which requires the manufacturer to build dependable products and make sure that they are maintained in a timely and proper manner. These strategies, as Rogelio Oliva and Robert Kallenberg have pointed out, change "the focus of the value proposition to the end-user from product efficacy—whether the product works—to the product's efficiency and effectiveness within the end-user's process."

Organizations that adopt a solutions-driven manufacturing strategy inevitably place as much emphasis on service as on manufacturing. Manufacturers establish a service organization that may become a separate business, either operated as a cost or profit center. This strategy also encourages manufacturing and service management to coordinate efforts to deliver solutions to customers.

Such a strategy essentially evolves through several stages. The first, primarily transaction oriented, is limited to the installation and occasional repair of a manufactured product. Responsibility for maintenance is the customer's, even though the manufacturer may perform it upon request. This becomes relationship-oriented when responsibility shifts from the customer to the manufacturer for maintenance, repair, and ultimately uptime. Manufacturers that lease their products and sell maintenance contracts essentially assume this kind of responsibility. It creates an alignment in incentives. What's good for the customer is good for the manufacturer and vice versa. In some cases, this kind of relationship may lead to a manufacturer taking over full responsibility for the operation of a facility, utilizing one or more of the products that it makes. Pitney Bowes, a manufacturer of postal processing equipment, offers to take over internal mail processing for large organizations. IBM offers turnkey information technology operating solutions instead of just hardware, software, or services.

According to Oliva and Kallenberg, this kind of transition involves several major challenges to manufacturers. First, it requires a cultural shift from a manufacturing mentality and an engineering orientation to one in which services and the activities they spawn become equally highly valued. As one of their respondents pointed out, "It is difficult for an engineer who has designed a multimillion-dollar piece of equipment to get excited about a contract worth $10,000 for cleaning it." Second, in contrast to pure manufacturing, the strategy often involves the development of a global infrastructure populated with large numbers of service people, often scattered over great distances, requiring a different kind of supervision than in the factory. Third, it may require a large investment with an uncertain payoff some years later.

A manufacturer's migration toward the business of providing solutions inevitably leads to it realizing a greater proportion of its total revenues from services. Nowhere has this change been more dramatic than at IBM, where its Global Solutions Division, centered around providing solutions, often involves the turnkey operation of data centers or the provision of cloud computing capability. By 2011 IBM's systems and technology division (primarily manufactured products) made up only 18.5 percent of the company's total revenue. And, not by accident, the head of Global Solutions, Virginia Rometty, became IBM's first female CEO.

The ascent of services in a manufacturing organization inevitably raises the question of whether the provision of services should be recognized as a separate business with its own leadership and profit targets. Perhaps the biggest influence on the decision is the extent to which services are performed in support of manufactured goods. In that case an organization may have a strong argument for retaining common leadership for the manufacturing and service operations. However, where services become an integral part of a solutions-oriented menu of services and products, as at IBM, a strong case can be made for creating a separate profit center for the solutions business.