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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?