Digital services in the industrial sector: digital servitization starts with redefining your value proposition

Breaking down the benefits of successful digital services and products:

• By creating new USPs enterprises enhance the appeal of their products, and by lengthening product life cycles (e.g. through updates) keep customers loyal for longer.
• Enterprises benefit from additional sales from new revenue models, such as pay-per-use billing where the customer pays for using the product rather than owning it.
• Enterprises can generate new, recurring after-sales revenues from items like paid updates.
• Enterprises can analyse customer behaviour, and use data to better attune their products and services to the customer and identify any new opportunities.
• By using advanced analytics tools, enterprises can more effectively oversee their supply chain, reduce the risk of disruption and boost their operational resilience – a key competitive advantage, particularly in periods of crisis.

Read more about this topic in the first blog post of our series “digital services in the industrial sector”: 'Apps deliver innovative product USPs and novel digital revenue models for the industrial sector'.

Digitalisation fundamentally changes the business model, but for manufacturers in particular, it also fundamentally changes the nature of their offering. Digital Servitization – the transformation from product manufacturer to provider of digital or hybrid services – necessitates some far-reaching changes to your overall business organisation and to your business model.

So how do businesses go about achieving a successful digital servitisation transformation?

The first step in successful digital transformation is redefining your value proposition – the heart of every business model. That’s the view expressed in the recent Gartner® report “Digital Transformation Starts with Redefining Your Value Proposition.” Once you’ve redefined your value proposition, you then need to address the resulting “dependencies between strategy, capabilities, financial, business and operating models.”

Changing from a product to a service-oriented value proposition – when implementing digital services, for example – impacts on several overlapping areas. “These include the financial model and how the enterprise makes money, how it makes decisions, what resources it most needs, and what capabilities are most highly prized.” There’s no standard solution here. Changing the value proposition does not always lead to a set list of changes to other elements. It depends how radical the change is and what element is changing. We looked at strategies for enterprises to realise successful radical change in our study “How to make radical innovation work for you”.

To illustrate this, Gartner® distinguishes three design patterns for changing your value proposition. We discuss these three patterns below and use three real-world projects to showcase how enterprises can redefine their value proposition and how this impacts strategy and other components of the business and operating model.

Design pattern 1: Create a new value proposition

The ripple effect: how creating a new value proposition impacts the rest of the business

In general, when they create a new value proposition, businesses are also defining new strategic objectives. That could mean, for example, that, in addition to conventional sales targets, they will also aim to increase the number of platform users by 10% over a 12 month period. Redefining the value proposition has ripple effects right across the enterprise. According to the Gartner® report, these include:

1. Implementing the new strategy requires a new business model. By offering digital services, the business model changes from providing high-quality physical products to providing digital services.
2. Getting this new business model up and running requires new capabilities to enable the development and operation of a digital platform and to create a new digital ecosystem consisting of development partners, other partners, customers and internal stakeholders. Enterprises will also have to manage new risks, such as reputational risks from external partners on your platform.
3. When it comes to selling your digital services, you will need to create new incentives to incentivise staff to sell services and products. You will need new resources (e.g. personnel) and processes, and new governance to manage platform and ecosystem partners.
4. Putting in place a new financial model is also essential if your transformation is to succeed. In practice, for example, it pays to offer some services free of charge and additional premium services for a fee.

As a business, you need to be clear that these effects do not follow a linear sequence. There are complex dependencies which will cause bounce-backs. Amazon, for example, found that its delivery partners were not able to achieve one-hour delivery, so instead built its own in-house logistics capability. These dependencies mean you need to be flexible enough to identify any changes needed to make the new value proposition work in near real-time. Creating a new value proposition is the most high risk of our value proposition design patterns, and requires the most far-reaching changes.

Design pattern 2: Expand the value proposition

The ripple effect: how expanding the value proposition impacts the rest of the business

Expanding the value proposition is often the choice of enterprises which want to change but are reluctant to take on the risk of creating a new value proposition. This design pattern still generally requires some changes to the business and operating models. For example, let’s say an equipment manufacturer wants to move to a machines-as-a-service model. As discussed in the Gartner® report, the new strategy will have ripple effects on both the business and operating models.

1. Enterprises have to adjust their business model, for example by introducing pay-per-use models and targeting new customers who are interested in using rather than purchasing a machine. 
2. An expanded value proposition necessitates an expanded operating model. That means new processes and resources, for example new partners, to enable the enterprise to realise a more individual, customer-centred approach. This in turn requires the enterprise to acquire new capabilities in areas like customer services, sales and accounts.
3. And speaking of accounts, you also need a new financial model. Rather than getting a one-off payment for a machine that gets fed back into manufacturing and other working capital requirements, you get a monthly subscription fee. The financial model therefore changes from adding value as a one-time event to adding value as a continuous process.

Expanding the value proposition entails an intermediate level of risk and the changes are less far-reaching than the first of our design patterns. But here too, enterprises need to be aware of complex dependencies and be prepared to be flexible.

Design pattern 3: improve the value proposition

The ripple effect: how improving the value proposition impacts the rest of the business

Improving the value proposition requires changes to the operating model, but not to the business model. It is the least aggressive design pattern and does not require a total business transformation. But improving the value proposition is digital optimisation, and this can provide a foundation for future digital business transformation. And, as Gartner® sets out in its report, improving the value proposition also gives rise to a range of ripple effects:

1. Enterprises need new capabilities to introduce more intelligence and automation into their manufacturing process. To improve margins, you need to rapidly identify, vet and automate as many business and IT processes as possible.
2. Delivering new capabilities requires an improved operating model. That means orchestrating the use of multiple technologies, tools or platforms across the enterprise.

Recommendation

There’s no universal way of modelling in detail the ripple effects resulting from adjusting the value proposition for any of these three design patterns. Gartner® has therefore developed a framework that enterprises can use after adjusting their value proposition to determine impact and dependencies in other areas. Gartner® provides diagnostic tools and frameworks for identifying dependencies, orchestrating changes, and creating plans to address these dependencies.

Here at Zühlke, we provide you with exclusive access to this framework and actively support you to progress digital transformation in your enterprise rapidly and effectively. So please feel free to contact us!

SOURCE:

Gartner, Digital Transformation Starts With Redefining Your Value Proposition, Rui Zhang, Kristin Moyer, Hung LeHong, 13 June 2022.

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