Asset Management & Smart Maintenance

The challenges of solutions strategies

A successful solutions business is hard to implement. Whether or not it is the right competitive approach depends on a company’s strength in the market, how well it knows its customers (domain knowledge) and to what extent it is willing to invest in the necessary capabilities (possibly meaning a permanent increase in overhead costs) and see through the required operational and organizational realignments. Most of all however, it depends on whether the company can integrate products and/or services in such a way that the total provides more value than the sum of its parts.

The idea of competing through “solutions” has been around for many years. Numerous manufacturers and OEMs created solutions business units to better target vertical markets, specific customer segments or large/strategic accounts. For example, industrial automation companies created customer facing “systems” business units which integrated various products and an automation platform into a vertical market solution. However, it has not been all smooth sailing. Margin depends, among other things, on internal transfer pricing (so is a fairly artificial construct), however it is often the case that high product margins (arising from strong market positions and premium pricing) are negated by low systems (solutions) margins. In other words, the solution earned a lower margin than the individual products when sold on a stand alone basis. The evidence on the ground of positive impact of solutions strategies on profitability, customer retention, and competitive advantage is, in fact, fairly thin.

More recently, OEMs have incorporated services into solutions offerings, as a part of strategies to lock-in customers or lock-out competitors or as a way to repulse competitive attacks from manufacturers with lower cost bases, mainly from emerging markets. It is thought that as (service-based) solutions place greater demands on processes (logistics systems and supplier “ecosystems”, technology infrastructure and business processes, project and contract management, risk management and pricing), they are more difficult for competitors to emulate, providing competitive advantage and a means for defending market positions. Again, the evidence of success of such strategies is unclear. Undoubtedly some companies have been highly successful, others however much less so, which is indicated by the fact that numerous companies at some point exit solutions businesses they had deemed very promising to begin with.

To varying degrees, for market reasons, most companies now self-report some sort of solutions offering and though a precise definition of the concept is often elusive, in general, a solution is considered to be a bundle of products and/or services that in combination purports to solve a customer’s “problem”.

Some industries and markets have “naturally” exhibited stronger trends towards solutions than others, mainly driven by demands of large or very large customers with substantial buying power (often government entities, within the context of privatizing services for efficiency and budgetary control purposes) –requiring large investments by suppliers and therefore long time horizons for amortization -examples being the defense, aerospace, infrastructure or financial services industries.  This has usually been followed by industry consolidation as suppliers merged to form organizations capable of delivering significant scope (usually along a customer’s supply chain) of technology, products, services and financing over long time periods. And often large “scope” has been confused with “solution”.

For example, in the large power business, many managers understood solutions to mean an expansion of product scope, so as to offer turn-key power plant “solutions” out of one hand. So in the 1980s and ‘90s large turbine manufacturers acquired boiler makers and balance of plant companies to cover the whole gas, steam and combined power generation cycle. They often complemented this with a power transmission or distribution business covering the full electrical cycle (from fuel to socket) – largely because of the structure of the market and the nature of customers (mostly large monopolistic utilities, covering both generation and transmission/distribution) –in spite of the fact that all underlying technologies and necessary competences were quite different and could be procured independently of each other. Typical examples of such strategies included Siemens, ABB or Alstom. However, it is not at all clear that this strategy was more successful than, say, the one of GE which concentrated on dominating a relatively narrow product range (gas turbines) with the additional help of significant, high value and integrated service content. In fact, GE’s (comparable) profitability has been consistently higher throughout, whereas its major competitors were often plagued by technology, quality and project problems while their profitability suffered. Twenty years on, GE has effectively acquired two out of three of its aforementioned competitors (GE acquired Alstom, which had previously acquired ABB’s power generation business).

This example of the power industry shows that simple expansion in scope of supply –even to match customers’ vertical integration- is not necessarily a winning strategy. Moreover, it is not obviously a real solutions strategy at all –because a solution requires tight integration of the elements it consists of.

The required degree of integration of the elements of a “solution” may differ across different types of products and services. But it should be clear that if these elements are not tightly integrated so that the total creates more value than the sum of its parts there is hardly point to the solution at all and customers can rationally prefer to buy the elements individually. Once the commercial/technical logic of a “solution” is broken each element is subject to normal product competition or even commoditization with the associated margin pressure. “Value” can of course be interpreted and measured in many ways. One obvious way is cost, in the sense that a solution would have a lower (total life time) cost of ownership for the customer. Another may be risk reduction and yet another may be to create better revenue generating conditions for the customer, e.g. by improving productivity or quality.

Furthermore, as the purpose of the solution is to solve a specific problem and as customers have problems often unique to their particular circumstances, solutions need to be (highly) customized –though of course there are often cases where customized solutions have eventually become fairly standard (though usually complex) offerings, applicable to a wider range of customers.

Solutions therefore require both the ability to tightly integrate products and/or services so as to add value in excess of the sum of the individual products or services and the ability to customize and place the offering in a way that the customer’s problem is solved according to the customer’s outcome criteria. This requires deep knowledge of the specific domain the customer operates in.

Given that solutions usually need substantial investment in either technical, technological, commercial/sales or managerial capability and / or organizational re-alignment of processes and assumption of additional risks -all of which translate into upfront investment and higher overhead-, it seems safe to assume that failure to achieve the solution requirements results in insufficient gross margin increases (reflecting insufficiently additional value added) to cover the overhead increases and therefore in reduced profits or even losses.

If a solution can only create additional value (and be successful) if it is better aligned to the customer’s specific situation, performs better or costs less than the sum of its parts, it surely also must follow that the supplier of the solution must already be either a technical or commercial leader in one or more of the solution elements and must have greater domain expertise and know customers better than most competitors. The logical conclusion is therefore, that successful solutions strategies are aggressive competitive strategies, pursued from a position of strength by those who are already winning in the product markets to further augment their positions. Solution strategies as defensive strategies from positions of technical or commercial weakness in product businesses usually result in failure, mainly because the companies have neither the resources nor the domain expertise, nor the necessary margin buffers to develop and deliver them.  Companies with such weaknesses are better advised to remedy the specific weaknesses before pursuing solutions strategies.

Service based solutions have similar characteristics to product based solutions, while integration of services and products is often more difficult and/or requires more changes to the ways of doing business. Rolls Royce’s “power-by-the hour” concept, where a customer essentially buys jet-engine flying time (thrust), insights and support to optimize the flying process is a case in point. The customer pays for an outcome (optimized thrust hours) which requires tightly integrated products and services to avoid disruptions, downtime or sub-optimized performance and minimize supplier implementation risks.

So it should be quite clear that many companies touting “solutions” are not in effect offering real solutions but non-integrated product and/or product-service bundles. On the one hand this might be a good marketing tactic. On the other however, it might be a genuine strategic miscalculation accompanied by high “solutions-type” overhead which has no possibility of being recouped through higher margins. This dissonance is one of the major risks facing aspiring solutions providers. The other major risk is in implementation: either failing to correctly identify necessary changes in organization, processes or capabilities or executing them badly.

 

Titos Anastassacos is Managing Partner at Si2 Partners, a consultancy helping clients leverage services to win in industrial markets

Further articles on this and other topics can be found in the Si2 Partners Resources Page and the Si2 Knowledge Center

 

If you are a Service professional (manager, practitioner, consultant or academic) in an industrial setting join our group Service in Industry on Linkedin

We curate many Magazines on Flipboard on service markets and industries, service business and operations as well as service related technologies, the IIoT and innovation. You can follow us on Flipboard here . The content is crowdsourced. If you would like to be a co-curator, and share interesting articles with the community through Flipboard, please send us an email at info@si2partners.com with the heading “Flipboard”.

Si2 ON-Demand: Short remote sessions with Experts, backed up by analyst and research resources to solve problems and get things done faster, with less mistakes, at lower cost and less risk! – A fresh new approach for Service Leaders and their teams. To find out more see our post on this blog or visit Si2 Partners

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s