The Service ImperativeHow manufacturers are transforming service to drive profitable growthKey findings prepared for PTC Live Service Exchange

June 2013

Research objective

RESEARCH PROGRAM ON MANUFACTURING TRANSFORMATION

Analyze how external market forces are transforming manufacturing strategies and competitive positioning.

Measure the impact of strategy and planning, service, and manufacturing operations on business performance.

Provide insight into how manufacturing firms will drive growth, innovation, and customer satisfaction in future.

About Oxford Economics

Oxford Economics was founded as a joint venture with Oxford University, and it is now one of the world’s foremost independent global research firms.

Headquartered in Oxford, England, with offices throughout the world, we employ more than 80 professional economists.

Our global team is highly skilled in a full range of research techniques, from econometric modeling and impact analysis to executive surveys and interviews.

Oxford Economics is a key adviser to corporate, financial, and government decision-makers.

We have over 700 international clients, including major manufacturers such as GE, Coca-Cola, Boeing, Rolls Royce, Siemens, GM, and Samsung.

Survey profile

Survey profile: Country location and industry

We conducted an online survey of 300 executives across the manufacturing industry and key world markets in the first quarter of 2013.

What is your firm’s industry segment? In which country is your company headquartered?

0%

US

South Korea

Japan

France

Sweden

China

Taiwan

Norway

Germany

Denmark

Finland

20%10% 30%5% 25%15%

Medical devices

17%

Aerospace & defense

16%

Automotive

16%

Consumer & retail

17%

High-tech*

17%

Industrial equipment

17%

*includes electronics firms

Survey profile: Management level and function

Our survey covered the C-level and their direct reports across business functions and managerial perspectives. We also interviewed senior executives at a range of manufacturing firms.

What best describes your role? Which best describes your business function?

Sample interviews

I am a C-level

executive

41%

I report to a C-level executive

59%

0%

Supply chain manufacturing

R&D/engineering

Service

Operations

Finance

IT

Strategy & management

20%10%5% 25%15%

Survey profile: Company size and profitability

Our survey included a spectrum of companies measured by annual dollar revenue and profitability. We analyzed the survey data by revenue and profit growth, and compared the results with our own proprietary research.

Annual revenue Annual profit margin

0%

40%

30%

20%

10%

35%

25%

15%

5%

6% or lower Low

6.1%–10%Medium

10.1%–20% High

20.1% or more Very high

Very large: over $5bn.

21%

Small: $250–$750 mil.

25%

Medium: $751 mil.– $1.25 bn.

25%

Large: $1.26 bn.–$5 bn.

29%

The strategic role of service

Waves of change

66%Economic

realignment

61%

Technology

60%Talent shortages/

labor costs

60%Supplier and

partner complexity

59%Global

competition

46%Increased

regulations

45%Fragmenting

customer demand

Service executive

perspective

63%Increased

regulationsRegulatory compliance

and customer complaints.

67%Technology

Technology makes service and product

support more complex.

70%Supplier &

partner complexityNavigating supply chains

to service customers.

70%Talent shortages

Difficult to find service managers

with technical skills.

Service is a key market differentiator for the C-suite

C-level executives place a higher value on service as a market differentiator than their staff. Europe

Asia

Firms in Europe put a greater emphasis on differentiating through service.

C-level

Report to C-level

76.6%67.7%

67.0%62.5%

62.2%

75.3%

59.2%

82.4%

66.4%66.7%

United States

Now In 3 years

Now In 3 years

The service function is the top driver of competitive advantage for large firms

In the future, high-revenue firms (over $1.25 bn./year) believe that service will be the most important driver of competitive advantage.

Across firms of all sizes, service is only slightly behind R&D and manufacturing— and catching up fast.

25.3% 24.2% 12.6% 12.6% 11.6% 9.5% 8.4%

Service R&D/ engineering

Supply chain

Sales &marketing

Corporate managementManufacturing IT

0%

5%

10%

15%

20%

25%

16.7%

11.0%

Service Cross-functional/ corp. management

Supply chainSales & marketingR&D/Engineering

Manufacturing IT

22.0% 21.7%

18.3%

15.0%

9.7%

6.0%

3.3%

9.0%6.7%

23.3%22.0%

20.7%

6.1% growth 1.5% growth12.7% growth

11.1% growth

13.8% growth

100% growth50.0% growth

Now

In 3 years

Service innovation has become an industry imperative

Key insight

Deere’s service offerings go through a process of continuous innovation.

“What is leading edge today becomes standard tomorrow,” says Pat Pinkston, VP global platform services.

Telematics, formerly an option, is now standard on most premium machines; monitoring of certain data offered at an extra fee.

Each innovation cycle is “a differentiator in our products and potentially a separate revenue stream.”

High-margin companies will see service innovation as a greater priority. 10%

or lower10.1%

or more

72.4%61.9%

0%

20%

40%

60%

80%

100%

57.7%

68.0%

TOTAL

56.9% 56.0%

69.4%

56.0% 54.0% 54.0%

80.4%70.0% 69.4% 68.0% 64.0%

56.0%

Aerospace& defense

AutomotiveHigh-tech Industrialequipment

Medicaldevices

Consumer& retail

Over half of manufacturers now focus on innovation of service strategy and execution, and over two-thirds will do so in the future.

Now In 3 years

The service impact on performance

The service impact on revenue and costs*

Please provide the revenue impact of your focus on service, now and in three years.

Please provide the cost impact of your focus on service, now and in three years.

*All numbers represent the average impact on service across all firms, regardless of the priority on service

Key insightCharles Peters, SEVP of Emerson, says a focus on service drives sales revenue even before offerings are fully integrated.

Customers prefer working with innovative firms.

Emerson has seen meaningful gains in market share for core products based on the promise of future service delivery.

Increase in revenue

9.5%

7.1%

Decrease in company costs

8.9%

6.9%

0% 0%

11% 11%

8% 8%

5% 5%

10% 10%

7% 7%

4% 4%

2% 2%

9% 9%

6% 6%

3% 3%

1% 1%

Now In 3 years Now In 3 years

A turbo-boost from prioritizing service

Firms can achieve greater revenue and cost benefits today by placing higher priority on service.

Average revenue and costs impacts from prioritizing service

No or limited priority Moderate priority High or very high priority

10%

8%

6%

9%

7%

5%

4%

At lower priority levels, service has a greater impact on costs

Higher prioritization boosts revenue sharply

The average revenue impact for companies that place a high priority on service is 9.3%.

The average cost impact for firms that place a high priority on service is 8.5%.

4.3%

5.5%

6.1%

8.5%

Revenue Cost 9.3%

Rethinking service strategies

The growing allure of service as a profit center

0%

10%

20%

30%

40%

50%

60%

70%

80%

45.1%

55.1%52.0%

49.0%

36.7% 36.0%

42.0%

56.3%

66.0% 64.7%59.2% 58.0%

46.0% 44.0%

Aerospace& defense

AutomotiveTOTAL High-techIndustrialequipment

Medicaldevices

Consumer& retail

More than half of all firms will organize service as a profit center in the future.

Industrial equipment and high-tech firms will continue to be the furthest ahead.

Automotive firms will be the fastest adopters of service as a profit center.

Now In 3 years

Remote diagnostics are on the rise

Key insight

Boston Scientific offers a range of pacemakers that monitor a patient’s progress in and outside of hospitals. According to Sujal Bhalakia, VP of Operations, Strategy and Engineering, “Remote diagnostics is transforming medical manufacturing.”

The use of remote diagnostic is growing

0%

20%

10%

40%

30%

50%

60%

70%

Aerospace & defense

AutomotiveTOTAL High-tech Industrial equipment

Medical devices

Consumer & retail

Medical will be the highest user in 3 years

Automotive will see the fastest growth

39.7%

46.9%

22.4%

34.0%

50.0%46.9%

38.0%

56.3%59.2%

42.0%

50.0%

62.7%58.0%

66.0%

Now In 3 years

Use of performance-based service contracts will increase sharply...

Aerospace & defense

Automotive

Consumer & retail

TOTAL

High-tech

Industrial equipment

Medical devices

0% 80%70%60%50%40%30%20%10%

73.5%

70.0%

66.0%

62.0%

60.8%

60.0%

65.3%41.1%

49.0%

40.0%

44.9%

42.9%

36.0%

34.0%

Aerospace and medical devices

will become practice leaders.

Consumer firms will see the biggest

jump—almost doubling their use.

Now In 3 years

...with the fastest growth in Asia and Europe

Now most widely used in the US, Asia will leap ahead.

Now In 3 yearsEurope

Asia

51.7%

39.8%34.4%

64.7%68.8%

61.1%United States

Key insightTrane Inc., the climate-control subsidiary of Ingersoll Rand, offers performance contracting services that let building owners apply future energy and operational savings to financing today’s equipment upgrades.

Energy cost savings from improvements to HVAC systems and other equipment are guaranteed by Trane.

Energy is the largest single operating expense in most commercial buildings, with air conditioning alone amounting to 40% of a total energy bill.

The ultimate aim: design, build, and service anywhere

Design, build and service anywhere will grow a remarkable 125% in 3 years. Firms with highest profit growth (>10%) will move most decisively to design, build and service.

29%

69%0%

20%

10%

40%

30%

50%

60%

70%

34.7%

67.3%

Aerospace & defense

28.6%

60.0%

Automotive

25.9%

58.3%

TOTAL

26.0%

62.7%

High-tech

16.3%

50.0%

Ind. equipment

24.0%

54.0%

Medical devices

26.0%

56.0%

Consumer & retail

Aerospace will be the practice leader Industrial equipment will

see the fastest increase

Now

Now

In 3 years

In 3 years

Making it happen: service transformation

The importance of the service function is not understood across the organization

Service, manufacturing, and finance rank the service function as a top functional driver of competitive advantage in 3 years

Operations, R&D, and (especially) IT think differently

43% 21%27% 14%17% 29%

Service OperationsManufacturing R&DFinance IT

25% 16%29% 5%23% 21%29% 28%17% 29%17% 25%

Service Manufacturing R&D Service Manufacturing R&D

Better service coordination is critical for success

<10%

67.5%<10%

67.3%

>10%

74.7%>10%

82.8%

Increasing strategy coordination with supply chain/manufacturing

Increasing strategy coordination with R&D

Higher margin firms focus more on coordinating service with supply chain/manufacturing

Higher margin firms focus more on coordinating service with R&D

Now

In 3 years

Now

In 3 years59% 54%72% 73%

Feedback from service execution to other functions is becoming the norm

58% 52% 47%

71% 65% 59%

… service planning … product development … supply chain manufacturing

Service execution feedback to …

Now In 3 years

The service imperative: an action checklist

1. How is senior management across functions, including R&D, HR, and IT, addressing the critical role of service for gaining competitive advantage?

2. How can you enhance service strategy coordination across R&D and supply chain/manufacturing?

3. Does your organization have a closed feedback loop between service execution and service planning, R&D, and supply chain/manufacturing?

4. What organizational changes are you making to run service as a profit center and incorporate performance-based contracts into your business model?

5. How much are you able to service anywhere through partner and supplier networks, remote diagnostics, and other enabling technologies?