Anyone interested in the future of Australia's manufacturing industry should take heed of the latest research from the independent business think-tank, the Australian Business Foundation, that contrary to popular belief, manufacturing is not in decline.

In fact, there is an unrecognised dynamism evident in the way both manufacturing and service firms are responding to the competitive challenges of tough and crowded markets by linking and selling packages of products and services in innovative ways. This blurring and bundling of products and services is re-shaping not only manufacturing industry, but the pattern of competitive business activity in Australia.

This news comes from a study conducted by the Australian Expert Group in Industry Studies (AEGIS) at the University of Western Sydney under the leadership of Professor Jane Marceau. The study, funded over two years by the Australian Research Council and with the Australian Business Foundation as industry partner, is published in a report called Selling Solutions: Emerging Patterns of Product-Service Linkage in the Australian Economy.

The study sought to get a handle on a major international debate about whether manufacturing matters in modern economies.

On one hand, we see:

• the share of GDP contributed by manufacturing declining in all advanced OECD countries;
• the share of employment in manufacturing dropping; and
• the advent of new service industries taking manufacturing's place in the economy

This has led to the commonly accepted perception that all advanced nations are characterised by their post-industrial or service economies.

On the other hand, we also see that:

• innovation in manufacturing is higher than in any other sector;
• manufacturing is creating the most stable and highly skilled jobs; and
• the recent decline in manufacturing employment and contribution to GDP has levelled out.

Professor Marceau and her team delved into what was happening in Australian firms through a survey of 479 manufacturing companies in NSW and 63 detailed interviews with companies and industry associations across sectors.

The headline findings from their research were as follows:

• Australian firms are successfully competing by creating fresh customised business offerings by linking products and services together in diverse ways to meet customer needs.

Product-service packages were found to be widespread and diverse. Nearly ¾ of the manufacturing firms surveyed as part of the study reported that they incorporated and sold services in their product offerings to customers.

Typically these included engineering, prototyping, design and testing services during the production process, and services like maintenance, training and information/help desks at or close to point of sale. This was the case across the board – from metal manufacturers to electronics firms to pharmaceutical companies.

Service firms were also adding value to physical products acquired from manufacturers by bundling them with a vast array of services. Typical cases include computer and telecommunications companies selling total solutions of hardware, customised software, finance, technical support and upgrades. Another example is that of the hospital surgical supplies provider now sourcing a variety of products and linking them into packages which have just the right number of sutures, instruments and so on for a given surgical procedure.

Large scale, complex and unique construction or infrastructure projects (like building, owning and operating an airport or a sports stadium) provide yet another example of the mixing of products and services to deliver an entire, highly customised, once-off or small batch project.

The AEGIS team found several key factors shaping these product-service packages, including:

• the increasing power of the client and demands for customisation;
• the shift towards outsourcing;
• new products, especially radical or risky ones, generating customer demands for information, training, help desks and similar services;
• efforts to capture distant markets through collaborations with local servicing companies; and
• compliance with regulatory requirements stimulating new services in areas like design, technical and quality assurance, training and environmental impact assessments.

This emerging pattern of product-service linkage is a sign of Australian firms getting smarter and transforming themselves to provide solutions to customers, not just products or services.

Firms are blending and bundling products and services to:

• retain their customers;
• add value, while reducing costs and risks; and
• distinguish themselves by expanding and customising their offerings and looking for niches which give them long-term advantage.

Such behaviour is evidence of Australian firms transforming themselves from just a manufacturer or service provider to a total package problem-solver for their customers.

It is a smart move to add services to products because it is less risky to develop new services than new products. Services have ever-expanding boundaries and are not constrained by what the product can be first seen to do. Provision of services means that firms do not have to retool or invest in expensive and untried technologies.

The move made by Australian firms to "selling solutions" is a competitive response so that they can succeed in an increasingly volatile and globalised business environment of cheaper products, shorter product cycles, faster business imitations and saturated markets.

An excellent case example illustrating the findings of Professor Marceau's study was presented at a recent business briefing by Chris Bayliss, the Managing Director of Brevini Australia.

Brevini Australia is a modern high performing company that both sells and services planetary gearboxes to customers mostly in the mining, agriculture and construction industries in Australia and offshore. Brevini has succeeded in retaining customers and growing revenues by up to 60% in the last two years.

Chris Bayliss tells the story of Brevini taking a hard look at how it could ensure its survival and growth in a climate of intense competition, of customers with little loyalty buying on price and the company's profitability becoming increasingly marginal.

Brevini changed their approach, transforming themselves from a manufacturer of a single product to a unique and customised total package service provider. They first added value to their gear boxes with new features and capabilities. They then engaged further with their customers in understanding the end uses of the gearbox and became involved in problem-solving and design. They then added services to the package, including maintenance and upgrades.

Brevini's journey proved successful, though not easy. It required a cultural shift in management, sales team changes, major efforts to win customer confidence, a commitment to forming alliances and reorganisation of the capabilities of the business so they could consistently offer a high quality total package of solutions to customers.

Competing by linking products and services drives Australian firms to be more innovative and knowledge-intensive.

Devising new product-service packages stretches the technical, managerial and marketing capabilities of firms, resulting in distinctive know-how and intelligence which in turn, drives their innovation and competitiveness.

Innovation through product-service packaging has far reaching effects on business competitiveness as the firms involved tend to:

• collaborate with others, including customers, at home and abroad and so, increase their level of knowledge or technical proficiency;
• retain customers and thus spend less energy on recruiting new ones;
• generate new skills inside their enterprise, notably through different mixes of technical and market-related skills; and
• be flexible in reorganising their operations to suit and satisfy customer needs.

Such innovation, because it does not always require R&D investment, often goes unrecognised in Australia.

Manufacturing remains central to much productive activity and is not in decline, just changing configuration to increase the levels and variety of services.

This study holds a warning against making public policy (and business strategy) decisions based on a simplistic view of manufacturing in decline and services on the rise. It allows us to better understand the rich dynamic between manufacturing and services in Australia and the new capabilities emerging.

To foster such capabilities, the messages for all Australian businesses, irrespective of their sector of the economy, are:

• Collaborate with other firms and organisations, like research and education bodies.
• Increase the number and broaden the range of services you offer.
• Stay close to customers.
• Re-think the internal organisation of your firm's activities.
• Invest in new skills.

The pattern of providing new business offerings and customer solutions through product/service linkages is an indicator of innovation and new competitive capabilities at work in Australian industries and enterprises.

Therefore, the characteristics associated with product-service linkages can serve as a checklist for public policy making decisions as to the health, untapped opportunities or appropriate focus for future industry support measures for any specific industries or firms requiring the attention of State or Federal Governments.

The Selling Solutions study provides a timely and potent new tool for discerning and deft industry policy making in Australia.

The story told in the Selling Solutions study should be music to the ears of those committed to advancing Australian manufacturing industry. It makes a refreshing change from fruitless debates about whether Australia is an old or new economy.