Leadership & General Management

Can Service Managers Think Strategically?

Can service managers in manufacturing companies think strategically?  – This depends on whether service is intended as a strategic business or not.

This is not just about theoretical ability. Thinking strategically – in the sense of setting goals and planning how to deploy resources to reach these goals within a market and competitive framework- requires practice. It is also an important question for companies if, as many say, they see service as an increasingly important competitive tool. Because strategic action requires strategic thinking.

Usually however service managers don’t have the ability or the mandate to make strategy and therefore lack practice –in contrast to managers of product units. As most manufacturing companies see their primary mission as to make and supply product, the freedom of the service division to strategize is severely constrained. Strategy involves selecting markets and customers, defining and differentiating a value proposition and putting together the means to deliver. For most service units many of these things are quasi-automatically pre-determined by the product, so “strategizing” almost becomes an oxymoron. The bulk of revenue is generated from satisfying pre-existing installed base demand: selling productderived services (spares and repairs) to a captive customer base.

Service managers go through the motions of developing “strategic plans” as required in the periodic company exercises, but this is often a strategically meaningless exercise as choice is absent, while most service budgets simply extrapolate from the past, or, in some cases, from the expected growth in installed base (if it is fast enough to make a difference). In this sense the service business is a derivative of the product business –its potential success or failure dependent more on actions of product units and the propensity of the installed base to fail -than its own strategic ideas and actions. While service may be an important core competence (like supply chain management or finance) it is not a strategic business (a Strategic Business Unit –SBU- in Porter’s sense: A key characteristic of an SBU is that it exercises control over most factors that affect its long term performance).

This is the case regardless of how service is organized within a company. For example many companies organize service as a profit center for a variety of reasons: to elevate it hierarchically and attract better talent; to improve focus; to better measure performance; to allow it a bigger budget for resources; or because they think service operates in a different market –the after-market of the installed base rather than the new (product) market of the OEM: Services are usually paid for through OPEX, capital products through CAPEX; buyer procedures, even buyers themselves are different. Companies tend to think that service is different from other functions such as supply chain management or finance because it is somehow like a company within a company: market / customer fronting with its own delivery chain and resources –separate from those of making product.

While all these may be valid points –in some (few) cases good enough to warrant a separate service organization –they don’t define service as a strategic business or allow service managers to strategize -as long as choice regarding the value proposition, markets and goal setting is constrained. In many cases companies’ characterization of service as a SBU results from confusion: they try to manage it as an SBU, e.g. by mandating the drawing up of strategic plans, but treat it in reality as a function. Calling something an SBU or designating it a profit center does not make it one, unless the key characteristics are really there. The key to defining service as a strategic business is clarity as to strategic intent. If a company’s strategic intent is to use service to make its product more competitive, then service must be sub-ordinated to the product and while it can be a key core competence it cannot be a strategic business driving revenue. Therefore it cannot / should not strategize, but develop excellent processes, capabilities and tactics to achieve its objectives –regardless how it is designated or appears in company organization charts.

On the other hand if a company’s intent is to develop and grow the service business independently from the product business, then service can and should be defined as a strategic business. This does not mean that the service unit should not provide the support services required by the product installed base. However it does imply the recognition that the differentiating value proposition in this case is in the (transferable) service competencies rather than anything associated with the product per se. Examples might be the capability for fast response to problems (e.g. through efficient service asset deployment, logistics systems or technological infrastructure) or the capability to quickly solve problems (e.g. through deployment of a deep smarts knowledge base). And it is precisely these service competences that need to be packaged into a value proposition and sold to customers, the customers being either end users or, in fact, OEMs, including the in-house product units –which could view the service business as a kind of provider of outsourced services –with some important implications (this requires at least implicit, preferably explicit, agreements between services and products on required service levels and how to share costs and profits among other things, to create the right incentives and facilitate win/win conditions).

Crucially if a company’s intent is to grow services independently of products a service unit will need to develop other offerings not directly related to the OEM’s captive installed base –often times unrelated to product support. This could involve integrating with end users to offer asset or process productivity services or building on a particular specialization such as logistics or maintenance technology to develop a new service business (e.g. Caterpillar developed Cat Logistics as a large stand-alone third party service based on its advanced capability in spare parts delivery to its customers around the world; SKF developed an analogous third party maintenance business on the strength of condition monitoring competence). In other cases it could involve offering complete solutions and outcome based contracts incorporating OEM and third party products, effectively changing the way the company brings its ownmade products to market (many aircraft engines, locomotives, power plants or defense systems are sold under such contracts today).

Strategic thinking requires strategic context. Service managers can think strategically provided strategy is to be made. Service requires a strategy if it is intended as a strategic business with a mandate to grow independently of product. It should then be organized as an SBU.

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