external drivers of servitization

Part One: External Drivers of Servitization

The Service Design Group are experts at helping mid-market and enterprise B2Bs successfully achieve servitization and as-a-service transformations. Over the years, we’ve identified some repeat patterns that drive organizations towards servitization.

We view these drivers of servitization as a pressure gauge or litmus test. Meaning, reviewing these drivers and understanding – for each – if you are or aren’t experiencing the driver – is useful in determining the level of urgency you are facing relative to a servitization, digitalization or as-a-service mandate. The more drivers you identify with, the more urgent your call to action should be; the less you relate to, the desire to servitize diminishes.

Keep in mind, of course, that not all of these drivers are created equal. While all are important, the level of urgency is significantly greater for some compared to others!

This article is part of a two part series. Part 2 covers the internal drivers of servitization.

External Drivers, defined.

These drivers of servitization come from outside the walls of your business! These are things happening around you and to you but you do not have direct control or any ability to influence them. Responding to and addressing these drivers is highly dependent on your willingness to identify these drivers, your ability to acknowledge the impact they are (or will have) on your business, and your capacity to move with speed, agility and purpose in the face of potentially extreme risk, uncertainty and ambiguity.

Commoditization

If your business revolves around transactionally selling products, you will inevitably face commoditization. Substitute products will become available at a lower price or better quality and you’ll be in the race to the bottom, chasing customers with endless feature function comparison and price erosion. Break the cycle and servitize! A well designed as-a-service business model will insulate you from thankless product commoditization.

Competitive pressure

Competitive pressure comes in three flavors – new entrants (disruptors), incumbents moving slowly (opportunity), or incumbents moving fast (threat!).

These days, competitive pressure comes in three flavors. The most alarming as it relates to servitization is New Entrants. These are new-to-you, non-traditional competitors who are often considered digital disruptors, entering your market with service-based, digital and as-a-service business models. If this is happening to you, the pressure is on. You’d better servitize before it’s too late!

The next two flavors are from your incumbent competitors. Either none of them have begun to servitize, and the pressure is to strike and gain first mover advantage; or, someone has moved before you and the clock is ticking. You better catch up or get left behind!

Channel dynamics

A powerful, yet often overlooked and misunderstood, driver of servitization is shifting channel dynamics. Perhaps a long-time channel partner has entered an adjacent space and is now your frenemy; or, a long-time competitor enters into a “co-opetition” agreement with you to go after another market segment.

Alternatively, the channel change could be the ability — through technology or acquisition — to completely bypass or replace your position in the value chain. Or, perhaps, you identify an opportunity to bypass your channel(s)! It may even be a combination of all of these shifting channel dynamics at once!

Each of these shifts provides pressure, opportunity and need to servitize.

Customer preference

Show up with a service if you want to remain relevant and keep your customers’ wallet share!

A growing trend that transcends markets is a shifting customer preference towards lowering heavy, upfront CAPEX investment and a desire to partner with solution providers that understand their business, have a true ability to deliver outcomes that matter, and are willing to show up with complete solutions and flexible pricing models, including service level or performance agreements with real teeth and financial backing. If your customers are signaling this preference, they are without a doubt, telling you “show up with a service if you want to remain relevant and keep our wallet share!”

Macro headwinds

Hard to see, easy to feel. Macro forces are shaping our world and business dynamics all the time and if you’re managing to the next quarter it is difficult to see them coming your way! An easy example is regulatory changes. A harder one is decentralized financial and knowledge systems (think blockchain and crypto). Each of these examples present a different subset of challenges and “opportunity-scapes” but they ALL will require – to some degree – services, service ecosystems and servitization.  If you identify a macro headwind with potential to transform your market, it is worthwhile to consider how to adapt and respond via a servitization play.

Today’s Technology

The external pressure to servitize – or what many call “disrupt” – is usually a belief in new technology. We like to call this “technology of the day” as it’s a never ending cycle that repeats faster and faster over time. With new technology comes change and opportunity for new business models. Think about what has played out with eCommerce and is now starting to play out as big data, IoT, Edge Computing, Artificial Intelligence and Machine Learning mature and become more readily available. Instead of looking at today’s relevant and available technologies as opportunities to add features and functions to your product, look to harness them to transform your product into an as-a-service solution.

Black Swan Events

The term “black swan” – popularized by Nassim Taleb – refers to the extreme impact of rare and unpredictable outlier events — and the human tendency to find simplistic explanations for these events, retrospectively. We all have been and are continuing to be affected by a black swan event: COVID-19. The pandemic has devastated families, communities and businesses of all sizes. It has also highlighted the resiliency of as-a-service business models which have drastically outperformed more fragile, less agile product-centric models from incumbents unleashing a new wave of digital entrants that can take advantage of the changes in customer preference and need, regulatory action, and macro trends. As these “outlier events” become increasingly more common those that look to servitize their businesses or have already started the servitization journey will have a level of resilience that will be difficult for challengers to overcome.

Part Two of this two part article series covers the Internal Drivers of Servitization that are just as impactful in understanding your servitization journey.

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