Product as a Service - A solution to the Red Queen Effect?

[Former Member]

How the Red Queen Kills Manufacturing Companies!

A few weeks ago, I found myself in the illustrious company of C-level executives from global heavy industry equipment manufacturers. Most companies were household names to us seasoned SAP-lings, but there were a few new kids on the block from the eastern shores of China and India.

Listening to the presentations and discussing the challenges, I wasn’t surprised to see or hear that both the relatively new players and the more mature manufacturers from the West are not only faced with similar business challenges, they are tackling them in the same way.

Pressure on cost is countered by increasing productivity. Demands for reduced time to market are resolved by improving processes. Pressure to reduce time to deliver equals automating activities. And so the list goes on, including all KPIs we from SAP usually recommend to
measure.

It sounded to me that everyone was pulling on the same oars to gain productivity, gain speed, gain flexibility. But really, how big is the competitive advantage generated by these massive efforts, when everybody is doing the same thing? Or to put it into the words of the sly Red
Queen from Lewis Caroll’s  wonderful novel ‘Through the looking glass’: "It takes all the running you can do, to keep in the same place."

And if you think about it, this is what most companies do. All year long, every day and every hour they increase productivity, they improve processes, they automate activities. Looking back at the end of each year however, they are still in more or less the same place relative to their main competition as at the beginning. And every year, one or two companies of the industry go out of business or are being bought up by the competition, because they were not able to run fast enough anymore. Evolutionary biologists have observed the same phenomena in the development of a species and called it “The Red Queen Effect”. The whole species will survive by increasing their fitness to compete for restricted resources. One or the other individual of the species however, will not. How can you make sure, your company is not one of the latter?

In other words, can you elude the Red Queen?

One possibility is to diversify your product range. But probably not in the way a German car manufacturer once tried to do it and failed. If you know how to build a very good car, you shouldn’t automatically assume you know how to build a decent space craft, too. I suggest thinking a little closer to home, i.e. your existing product. If you build a car, you could, for example, include all the servicing and spare parts for a few years in the price. Already done, you say?

Ok, let’s think a little bit broader.

What do you sell when you manufacture a drill? Holes in the wall, right?

This is what Hilti, a construction tool manufacturer from Liechtenstein, thought and went on to develop a fleet management offer for their customers. By signing a contract, a customer will always have a defined range of tools available to him without having to care or think about repairs, spare parts or consumables. Hilti cares about them for him. Hilti’s customer can now do what he or she does best, which is drilling holes in walls.

What do you sell when you build mining machinery? Holes in the ground, right?

Mining machinery is a lot more complexthan a drill and much harder to maintain. So, why not offer your customer a full service package around the heavy machinery? You sell him uptime of tires, oil pumps, pneumatic pumps, engines and all the rest of it and the customer can concentrate on mining coal, oil, silver or gold. The customer might not be good at or even be interested in running difficult maintenance schedules or bind precious capital in expensive spare part stocks.  You could then also lease the machinery to the customer, including the maintenance services and spare parts. The machine does not even sit on the customer’s balance sheet this way.
And every CFO loves a lean balance sheet.

Doesn’t sound too complicated? In principle, it is not. But it can mean fundamentally “evolving” your business model, and this has to be done with greatest care otherwise the entire venture can become very expensive very fast.

In more concrete terms, here is what I think you can do to beat the Red Queen. I am citing word for word from our SAP’s colleagues’ Christoph Pichler and Christopher Megies insightful white paper on Paas:  New Business Opportunities through Products Delivered as Services.

• Develop an Integrated Offering

Product and service components of the offering are integrated to an extent that they are not perceived and cannot be valued as single components of a bundle, but only as an indivisible unit. No one questions the indivisibility of the cab and driver for the purpose of rendering
transportation services. Thus customers will be willing to pay for the actual value they get from the solution, rather than summing up individual price points and asking for discounts.

• Ensure Value Chain Integration

By running services on their own products, product as a service providers extend their footprint within the value chain and reach out into the domains of their customers. By not just dropping their products at the doorstep of the customer, but walking in, these companies need to gather an even deeper understanding of their customer’s business processes and fully integrate their products and services into their  customer’s operation lifecycle.

• Customize

Many business to business markets customers face similar problems, yet requiring more or less customization of offerings. In these markets, integrated solutions need to be designed to be modular and configurable in order to fit to an individual customer’s requirements and to tightly integrate with the customer’s operations.

De facto, they go on to summarize, “a company that delivers its products as services enhances its customer value proposition significantly. “Customers do not look for goods or services per se; they look for benefits that serve their own value-generating process.” Usually, this requires innovating the business model, and implies a major business transformation, bringing both significant chances for sustainable business success, and the risks of failure of associated initiatives. However, identifying transformation needs and closely managing organizational change can greatly contribute to reducing the risk of failure and increasing the speed to market of new business models.”

Of course, there is a lot more detailed work required to make PaaS a profitable model. There are many aspects to consider, mainly along the lines mentioned at the beginning of this blog: productivity, speed, flexibility. And again, you may re-encounter the Red Queen at some point on your journey to become a PaaS provider. When everyone delivers the product as a service, then it takes all the running you can do, just to keep in the same place.

You may be upset now, and I hope you are, because my suggestions just provide a temporary escape from the Red Queen Effect. But, anyone who takes this as an excuse not to even start trying to at least temporarily escape the Red Queen, in my humble opinion, is bound to vanish into obscurity, will be bought up by the competition or will simply be going out of business.

Even more upset now and puffing with indignation?

Good - Drop me a line, and let’s start this important discussion.