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Selling Solutions: Emerging Patterns of Product-Service Linkage in the Australian Economy

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Selling Solutions: Emerging Patterns of Product-Service Linkage in the Australian Economy
February 2002
Australian Expert Group of Industry Studies, University of Western Sydney

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This study was undertaken by the Australian Expert Group in Industry Studies (AEGIS) under the leadership of Professor Jane Marceau. It was funded by the Australian Research Council through a SPIRT grant and the Australian Business Foundation was the industry partner sponsoring the project.  The study confirmed that successful manufacturers were responding to increased competition in global markets by bundling together products and services into new innovative business offerings focused on solving customers' needs.  In the process, manufacturers and service providers were also generating new mixes of technical, managerial and collaboration skills and capabilities to sustain this competitive edge. 

Overview & Comments

Background

  • This study was undertaken by the Australian Expert Group in Industry Studies (AEGIS) under the leadership of Professor Jane Marceau. It was funded by the Australian Research Council through a SPIRT grant. The industry partner sponsoring the project was the Australian Business Foundation.
  • The study explores the nature and extent of the blurring between manufacturing and services activities in Australia, as a means for firms to secure their competitive advantage in an increasingly fast-paced, more interconnected and customer-focused business environment.
  • This investigation involved a mailout survey of 479 NSW manufacturers in July and August 2000 and detailed case studies based on unstructured and semi-structured interviews with 60 companies across several sectors of the Australian economy.


What We Learnt

  • Contrary to popular belief, manufacturing is not in decline, but is moving increasingly to compete by linking products and services into new business "product-service packages" or solutions.
  • While Australia, like most developed countries, has seen recent growth in service industries, this does not herald the post-industrial or service economy.
  • Both manufacturing and service firms are blending and bundling together products and services as part of a transformation to a more dynamic modern economy to meet the demands of new markets where the customer is king.
  • Such product-service linkages were found to be widespread and diverse in the Australian economy, necessitating a shift in how we characterise both productive activity in Australia and competitive business structures and skills.
  • Three key patterns of product-service linkage were identified by this study and are summarised below.
  • New manufacturing – where manufacturers are increasingly incorporating services into their offerings to customers, both within the production process and at, or close to, point of sale.
Examples of new manufacturing, where services are integrated into production typically include engineering, design and testing services to customise products to match client needs. The customers are usually industrial users, rather than end consumers. Installation, training, finance and maintenance services are the most cited after sales services provided by manufacturers to their customers.

One case is the pharmaceutical manufacturer of new over-the counter or prescription drugs with which the medical market is unfamiliar, providing help-desk services for medical professionals and consumers with details on the effect of the drugs on different patients and disease states. In short, the manufacturer not only sells the product, but also sells advice on the use of the product.

Another example is a local contract manufacturer of information and telecommunications technology products like circuit boards, which supplies to a multinational firm that outsources all its manufacturing to the contractor in favour of concentrating on its core R&D, design and marketing competencies.

The contract manufacturer, in an effort to better serve and retain its multinational customer, increasingly provides additional value-added technical services such as prototyping, testing, engineering, calibration, as well as point of sale documentation and configuration services as required by their customer.
  • Service/product bundles – strategies by service firms taking products produced by others and adding value by bundling them with a vast array of services, and in turn, often stimulating the creation of new physical products.
The information technology and telecommunications sector is the classic case of service-product bundling to provide a total "solution" to the customer. For example, the telecommunications company sells mobile telephones produced by a manufacturer in conjunction with its own primary service, access to a telephone line.

Typical services offered by ICT firms are customisation, installation, training, maintenance, technical support and upgrades, bundled together pre-packaged and customised software and hardware. These service/product bundles are offered by these firms to differentiate themselves in the market and to respond to consumer demand for tailored solutions.

The intelligence and technical capability developed in such bundling has led in some instances, to the creation of new products or expanded suites of services.

Another case of service/product bundling occurs with service firms supplying hospitals with surgical supplies; these firms now buy products from others and link them into packages which have just the right number of sutures, instruments and so on for a given surgical procedure.
  • Project-based firms – complex, unique and highly customised activities where both services are linked to services and products to services to deliver an entire project, like construction of a sports facility or an airport.
The projects are typically designed in one-off or very small batches for a unique application, eg providers of post-acute and aged health care in the home for the customised treatment of individual patients.

The classic case of project-based firms applies in the building and construction industry where the customer requires more than the building itself, including the finance to buy it, the insurance to protect it, expertise to install it, landscaping to enhance its appearance, advice on how to maximise returns from it and/or expertise in managing it.

Project-based firms respond by providing planning, installation, technical support, environmental analysis, design and engineering, systems integration, economic assessments, procurement advice, legal advice, training, and facilities management and operations support.
  • The AEGIS study identified eight key drivers leading to this picture of the convergence of products and services. These are:
    - customisation and the power of the client (customer demand for greater value and attention to specific needs);

    - position of the firm in the supply chain of its product (influences both the potential to offer services and the kinds of services offered);

    - the novelty of the products (novelty creates demands for training and information on product use);

    - cost considerations (the more expensive a product is, the more likely are clients to request maintenance services);

    - geographical proximity to final markets (the further away, the more likely are services such as maintenance to be added);

    - added functionality requirements (demand from customers for additions to basic products);

    - regulations and standards surrounding a product (which encourage provision of compliance services);

    - outsourcing (which encourages supplier firms to add services to their product).
  • This blurring of manufacturing and services affects the way enterprises structure their organisations and their relationships external to the firm. Successful product-service linkages are likely to require:

    - new and unusual mixes of managerial, technical and co-ordination skills;

    - stronger organisational capabilities in integrating products and services, and in redefining customer service;

    - movement away from traditional functional divisions based on production, sales, marketing, finance and the like;

    - increased proficiency in building and maintaining strategies for collaboration and external partnering;

    - greater cross-sectoral collaboration with the potential for more knowledge-sharing and innovation in the enterprises participating in these alliances.

Why is this important?

  • This study allows us to better understand the new business models and industry structures emerging in practice in Australia today, as enterprises seek to compete in an increasingly globalised and volatile business environment.
  • It provides a warning against making business strategy or public policy decisions based on a simplistic view of manufacturing in decline and services on the rise. The reality is more complex and blurred, where products and services are coming to resemble one another in a multiplicity of new competitive strategies being adopted both by manufacturing and service firms.
  • The convergence between products and services is making both manufacturing and service firms more knowledge-intensive and innovative. Devising new business offerings stretches the technical, managerial and marketing capabilities of firms, resulting in distinctive know-how and intelligence which in turn, drives their innovation and competitiveness.
  • This study explores the rich dynamic between manufacturing and services, so that we can better appreciate and foster these new competitive capabilities for Australia as the industrial age morphs into the new knowledge economy.
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