Story by Steve Wunker
Moving into services has become a hot business strategy. Consider just some recent examples:
The list goes on and on. Across a wide range of traditionally product-oriented industries — medical devices, chemicals, high-tech, and more — companies have moved into services to augment their offerings. What can we learn from these experiences?
The attractions of the strategy are clear. Moving into services allows firms to target vast pots of money spent after products are bought, services are often sold at higher margins than products, tight integration of product and services can differentiate offerings, customers can be locked into a single supplier, and new markets can be accessed through creating a full solution to customers’ problems. Some companies have exploited the strategy to great effect — IBM’s move into services during the 1990s powered the company’s growth, entrenched its customer relationships, and helped its hardware business as well.
But this is not easy to do. The experience of companies that have transitioned from products to services shows 5 lessons:
The business strategy of integrating products and services can be compelling. Indeed, it may be vastly underexploited in some sectors. To take one example, Abbott’s recent acquisitions of Indian pharmaceutical companies makes it the leader in this major growth market, but without a complementary services offering that differentiates Abbott’s therapies it is not clear how the firm makes itself a better owner of these properties than local Indian managers. As companies embrace this strategy, they should take great care to learn from others’ experiences on this road — it reaches a compelling destination, but the journey is challenging.