5 Lessons from Companies Moving into Services

By: New Markets Advisors

Moving into services has become a hot business strategy. Consider just some recent examples:

• Intel is purchasing security firm McAfee for over $7.6 billion, aiming to integrate its chips with McAfee’s software and services to constantly monitor new threats
• Ford is enabling customized configurations of its cars’ software, which could range from transmission preferences to music, GPS software and much more
• Nokia spent over $8 billion to purchase a single company specializing in mapping software, and has supplemented that move with big spending on buying and developing other software and services to differentiate its handsets
• Procter & Gamble has created a string of car washes branded “Mr. Clean” in an attempt to move into this highly fragmented, $35 billion industry
• Scotts has moved its lawn care brand into the lawn services franchise industry

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:

• Create a new experience, not just a new business model — While Nokia phones now offer excellent mapping and a range of other services through the company’s Ovi app store, the experience is not that distinct from what is available on competitive handsets. Nokia gets modestly more revenue from providing both the hardware and the software/services, but at a real cost in terms of reduced flexibility and sales channel alienation. Contrast this to Ford, which needs to control the hardware to enable services like tuning transmissions to individual preferences, and can therefore offer customers an experience unmatched by other carmakers
• Be certain about an industry’s direction before abandoning flexibility — One clear lesson of new markets is that a number of variables can impact a nascent industry’s evolution. Eventually the shape of the industry becomes clear. An integrated product-service solution may be hard to iterate, or it may make things more malleable versus having to rely on outside partners. The flexibility of integrated vs. modular solutions depends on both system architecture as well as industry dynamics. It is important to retain the ability to evolve quickly during an industry’s early days. Once a business is more mature — e.g. computer security — it can make more sense to invest fixed costs into product-service integration, as Intel will do with McAfee
• Have a crystal-clear channel strategy — When IBM moved heavily into system integration, it alienated prior sales channel partners that made hardware recommendations to their IT services clients. IBM understood the ramifications, and it had a substantial direct sales capability. In many industries, sales channels not only move boxes but also install and service products. Companies must have a very well-defined view about whom they will alienate through moving into services, how they will fill this gap in their ecosystem, and how they will keep other key partners on-side during the transition
• Set up the organization to handle distinct control systems — Running a services company is extremely different from managing a product firm. The ways that companies discover service shortcomings, the autonomy given to front-line staff, planning processes, and much else is distinct. This seems to be obvious, but countless companies have put executives with product backgrounds into service management roles without a roadmap on how to act differently. This can create all kinds of problems from service development through to execution and performance measurement
• Prepare to balance — There is no cookbook approach to manage the transition to services. Rather, executives need to constantly balance competing imperatives — service customization vs. the need for scale economies, leveraging the product salesforce vs. creating skewed sales incentives, locking in customers over the long-term vs. winning wary customers in the short-term, and so on. It can be extremely useful to execute this transition with people on board who have seen this movie before, so long as they recognize the need to adjust their approach according to circumstances that include product lifecycle, channel economics, value created for the customer, competitive intensity, trackable frontline performance data, and others

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.

Story by Steve Wunker.