On this week’s podcast, I welcome Dr. Andreas Schroeder, Digital Lead of The Advanced Services Group at Aston Business School back to discuss the ways in which Servitization and sustainability are linked. The Advanced Services Group is preparing for its Servitization Live event, which runs October 4-6 in a hybrid format, and sustainability is one of the major themes being covered.
According to Dr. Schroeder, sustainability and Servitization are closely linked and companies with interest in either area should understand the connection. “The way I understand sustainability, there are societal obligations, and then, of course, companies have their own strategies,” he ways. “What I argue is that these are not contradictive to each other. A good-run business, or specifically a business that tries to move into the advanced services space, naturally needs and contributes to sustainability objectives. These are not two diverging interests that need to be balanced out. The interesting thing is that these are very well, and very nicely, aligned.”
The Advanced Services Group has seen an increase in Servitization efforts driven by sustainability-related motivation. “There are different kinds of motivations driving Servitization,” says Dr. Schroeder. “Quite a number of them come from the digital angle – companies that have digitized products and are looking for business models that help drive more value out of the investment in digital. The other bucket is companies that have an edge in product innovation but are feeling competition creep up and are getting squeezed on price, so they look to Servitization to make use of innovation and expertise without having to compete on price. Now, though, we see also where companies literally see the absolute need – the constraints that the traditional business models put on the way they can interact with customers.”
In London, for instance, there are a number of industries being impacted by sustainability-driven legislation that need to completely reimagine their business to comply. “Every manufacturer will have to meet these new requirements and all the alternative technologies are electronic-based. They will be more expensive, more difficult to maintain, require different kinds of care, and do not fit traditional models. This means companies coming to us and saying, ‘We see how the market is being constrained for us,’ for the right reasons, they don’t even blame legislators for it. Again, coming not from altruistic motives, but somebody as a leader of a business that needs to make sure that they have a business in 15 years’ time,” describes Dr. Schroeder.
Exploring the Intersection Points
Whether you’re feeling the pressures of legislative change related to sustainability initiatives, or simply have a commitment to making a positive impact, Servitization is a lever to explore. However, even if sustainability isn’t a key driver for you at the moment, understanding how Servitization based strictly on the business decision will have an impact on sustainability is interesting to explore and, I’d argue, important to understand. So, let’s examine some of the intersection points.
First, products developed with the goal of Servitization and delivering outcomes in mind will be more sustainable than those developed with the restriction of prioritizing acquisition cost. In a traditional model, products are designed and manufactured to the degree that the market will bear in the sense of selling that product under a traditional, capital-based sales model. This naturally puts certain restrictions on innovation because it would take the product beyond its tolerated price point.
But in the Servitization model, where the manufacturer is retaining ownership of the product and responsible for delivering the outcome, it often makes sense to invest more in the production of the product to extend its lifecycle, because ultimately, they are now benefiting from that longer-term view. Innovation now will help them in terms of their ultimate profits in the way that the market won’t bare on a capital-expenditure model.
“In a traditional business model, the objective is to make a profit margin, of course. The objective for design is not necessarily to look at the full lifecycle of the product. The objective of design and production of the product is to make it attractive for purchase. There will be a lot of innovations that companies would have in their drawers that would not meet the price point that they’ve identified for their customers, so these will not be developed,” explains Dr. Schroeder. “When we look at a change of business model, from a product to a Servitization context, a lot changes. The objective is not to design to sell for an immediate price point, but to be able to deliver services on the back of a product for a longer period of time. The Servitization contracts we’re looking at are 10-year contracts where the company designs a product, and knows that they are responsible for its use, and service, and outcome, and possibly efficiency for a ten-year period. They will naturally design the product in a different way.”
The freedom to design differently results in longer lasting and easier-to-use products. “When we look at developing products in a Servitized context, there is no interest in companies having to replace products repeatedly, there is no interest in that. The interest there is efficiently, in an optimized way, maintaining this product in use, because they benefit from products in use, not products in sale,” says Dr. Schroeder. “The other part is, again, every service, every repair, is now to the detriment of the manufacturer. It’s a cost to the manufacturer, so they will design in a way that things naturally are easier to service.”
But the impact isn’t just on product design and production, it is also on product use. “When the product is being managed by somebody who has designed the product to be longer lasting, who has penalties around inefficiencies, there will be more focus on maintaining and making sure the product runs on maximum efficiency. That’s where the digital part comes in, a lot of monitoring along the side to ensure that this is in place,” explains Dr. Schroeder. “These are some of sustainability benefits of Servitization that are part of the business model. They are not an extra, kind of an ethical or moral obligation, this is to optimize the business of the manufacturers in advanced services context.”
While for many Servitization’s impact on sustainability may be a happenstance of a financially versus environmentally driven business decision, the reality is that sustainability will inevitably become more of a driver. Some companies are already feeling this pressure, or proactively taking these steps, but for those that aren’t this is an opportunity to be proactive versus reactive and to give yourself some headway to make necessary changes. “This dimension will expand. As an example, in the UK we now have legislation that by 2025 no gas boilers can be installed in new houses. For a manufacturer of gas boilers that means if they don’t change technology, they have no business. Forget about the moral obligation and the environment constraints of gas boilers, from the legislative point of view they do not have a business within four years’ time. They are looking at more advanced technology, but these options are more expensive, more difficult to manage, and require more looking after than traditional gas boilers,” explains Dr. Schroeder. “They are now turning to advanced services to make sure that their higher-value technology can still be put into market. Americans have similar sustainability goals – in nine years’ time, 50% reduction of CO2 emissions. There will be, if there aren’t yet, significant legislation coming out and new technologies coming on the market to meet these goals. If the goals are met or not, the legislation will be there, incentives will be there, and the penalties will be there. Again, we are in the space where new technologies, as I described with the gas boilers, come onto market, possibly at a different price point, requiring new business models for these companies to remain viable.”