SERVICE-BASED STRATEGY

1. ► ► ► ► SERVICE-BASED STRATEGY Prof. Horst O. Bender, Ph.D. Rotterdam School of Management Erasmus University (NL) THESEUS Institute (F) hobender@B2B-MSI.com

2. INTENT TO REPURCHASE IS STRONGLY INFLUENCEDBY SERVICE PERFORMANCE Repurchase Intention Service Problem No Problem Industry Travel & Leisure 70% 93% Auto Repair Service 44% 87% 60% 93% Telecommunications 40% 73% Financial Services Petrochemical Products 70% 91% Life Insurance 69% 89%

3. THE PRODUCT-SERVICE CONTINUUM Service and Product Service Dominated Product and Service Product Dominated Pure Service Pure Product Avoiding the price-sensitive customer Avoidance of margin pressure Potential for product differentiation Significance of information technology Proximity to customers

4. CUSTOMER PERCEPTIONS: Service: What is delivered? Service delivery process: Howis it delivered? Service supplier: Whodelivers it? THE CUSTOMER AS CO-PRODUCER J L ServiceProvider THE SERVICE DELIVERY SYSTEM Client

5. SERVICE QUALITY: A VICIOUS OR VIRTUOUS CIRCLE Cut the workload by eliminating non- value-adding work Action to cut costs Continuous improvement Profits fall Cut the workforce but the work remains the same Higherproductivity Satisfied customers Morale falls Ordersdecline Higher profits Satisfied employees More investment projects Customersdefect Best employees leave Customer service suffers Expand the workforce Vicious Circle Virtuous Circle

6. THE “SERVQUAL” MODEL Expected Service Perceived Service Service Offered Technical Quality (What?) Functional Quality (How?)

7. SERVQUAL MODEL: IMPORTANCE TO CUSTOMERS Ability to perform the promised service Reliability 32 Responsiveness Delivering real and prompt solutions 22 Service Quality 19 Competent and friendly staff Assurance 16 Customer understanding and care, ease of access, communication Empathy 11 Tangibles Tangible parts of service operations Source: Zeithaml, Parasuraman & Berry

8. THE PREMISE OF CUSTOMER SERVICE STRATEGY • The purpose of business is to generate and keep customers • Customers are generated and kept through products and services that offer superior value • Superior profit performance will result from the timely provision of value and from exercising cost control CUSTOMER THE ESSENCE OFSTRATEGY: VALUE,COST AND SPEED Technical Value Service Value VALUE/ SPEED VALUE/ SPEED COST/SPEED COMPANY COMPETITOR

9. THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES EARLY EXAMPLE: OTIS ELEVATOR OTISLINE (1984) • “When elevators are running really well, people do not notice them….Our objective is to go unnoticed.” • Bob Smith, Executive Vice President • and Chief Operating Officer

10. THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES EXAMPLE GENERAL ELECTRIC • “Jack Welch is remaking GE - Again. From health care to utilities,Welch sees big growth in sophisticated services that spring from GE’s core strengths”Business Week, October 28, 1996 • Aircraft engines:Signed a 10 year, $2.3 billion deal with British Airways to do engine maintenance work. GE aims to double engine servicing revenues to $4 billion by 2000. • Power Generation: Sees a $1b business operating and maintaining power plants in the U.S. and Europe. • Transportation: Pursuing locomotive maintenance deals. Will sell and service 150 railroad engines for Burlington Northern. Also developing an electronic tracking system to help railroads manage rolling stock more efficiently. • Medical systems: Launched an aggressive push to service rival manufacturers’ medical equipment. Is now signing exclusive multiyear service deals with big hospital chains and buying up independent service shops. • Nearly 70% of GE’s 2001 profit comes from services (up from 16.4% in 1980)

11. THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES EXAMPLE BOEING • “Boeing struck a deal with DHL to modify 44 used jetliners, then deliver and maintain them long term. The transaction is valued at more than $2 billion. • Boeing’s newly reorganized aviation-services unit will convert the jets to package-freight aircraft, then sell and lease some of the jets back to the air-carrier unit of DHL. • Boeing will provide all maintenance services through subcontracts with maintenance shops. • Use of Boeing engineering and parts-distribution services is assured. • Boeing is in talks with at least four other major carriers aimed at similar contracts. • Boeing is modeling its efforts on successful initiatives by General Electric.” • Wall Street Journal Europe, October 5, 1999

12. THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES EXAMPLE LEXUS (U.S.) • Lexus USA studied the whole car owner cycle - shopping, purchasing, owning, driving, servicing and trading in - to uncover every source of customer dissatisfaction - and optimized value to the customer at each step • Notifies the buyer for scheduled maintenance • Picks up the car and returns it, and includes a free loaner and car wash • Provides 24-hour road service • Sets goals for resale value and has programs to buy back used cars. Trade-ins are highest in industry • Aimed for higher profits for dealers - for new cars, reconditioning and resale • Service charges low - to achieve a larger percentage of the service base. Post-warranty service 80% of customers vs. industry figure of 30-40% • Best parts inventory management system - higher parts availability, lower inventory costs -average of $100,000 per dealer vs. $200,000 industry average • Two percent of Toyota’s sales, 33 percent of its profits

13. THE PROFITABILITY OF TECHNOLOGY-BASED BUSINESSES IS INCREASINGLY DRIVEN BY SERVICES • Caterpillar uses information technology to improve customer service.It installs diagnostic chips in all its new machines, which alert local dealers, via satellite, if a machine is in need of a new part • In moving in logistical services, Caterpillarleverages its spare parts core competence.Worldwide, Caterpillar distributes about $3.3 billion worth of components a year for customers. These include Delco, Siemens, Hewlett-Packard, Sun Microsystems, New Holland, Hyundai, Chrysler and Hiab. Sales of annual logistical service operations are estimated $ 200 to $ 300 million. The business is expanding at some 30% p.a. • Business Week August 27, 1997 EXAMPLE CATERPILLAR

14. DIAGNOSING PROFIT OPPORTUNITIES: PROFIT POOLS U.S. AUTO INDUSTRY PROFIT POOL 25 Leasing 20 Extended Warranty 15 PROFIT MARGIN Repair Service 10 Auto Loans Auto Insurance 5 Auto Manufacturing Parts Used Car Dealers 0 100% 0 New Car Dealers Gasoline Auto Rental SHARE OF INDUSTRY REVENUE Source: Gadiesh and Gilbert,HBR May/June 1998

15. DIAGNOSING PROFIT OPPORTUNITIES: PROFIT POOLS PC INDUSTRY PROFIT POOL 40% 30 PROFIT MARGIN 20 Microprocessors 10 Software Services Other Components Personal computers 0 100% Peripherals Source: Gadiesh and Gilbert,HBR May/June 1998 SHARE OF INDUSTRY REVENUE

16. WHERE THE MONEY IS Personal Computers: Annual Cost of Use in Network: $6,259 Automobiles: Total Annual Cost: 5.5X Product Costs Locomotives:Total Annual Cost of Rail Operations: $29 billion 100% Network Administration Yard Operations, Railroad Administration, Other Other Network Technical Support Finance Network Equipment 80% Repair Train Operations Nonproductive Operations by End User (Downtime, File Management, etc.) Insurance 60% Gasoline 40% Infrastructure Administration Technical Support Freight Car Services 20% Desktop Hardware New Car Purchase Locomotive Services Locomotives 0% Total Expenditure: 5X Product Costs Total Expenditure: 21X Product Costs Total Expenditure: 5.5X Product Costs

17. CUSTOMER SERVICE CHOICE • Service Pricing: • Bundled • Unbundled Comprehensive Service Process Service Product/System Service Component Service General Service Service Depth Service Timing: Pre-sale At sale Post-sale Downstream

18. MATCHING SERVICE DEPTH TO CUSTOMER BUYING ORIENTATION • EXAMPLE ABB SERVICE • Comprehensive service:taking over themaintenance function of the customer's plant or substantial parts thereof • Process service:the maintenanceof sections of the customer'smanufacturing process, includingnon-ABB equipment. Process maintenance goes beyond individual machines • Product/system service:the on-site repair by ABB specialists. Requires captive parts • Component service:the repair of productsin ABB workshops. Generally reduced inimportance because of improved reliabilityof products • General service:small repairs and mainlystandardized services. Intense competitionof local independent maintenance companies Low Comprehensive Service Process Service Price Sensitivity Product/System Service Component Service General Service High Low High Service Dimensionality

19. EXAMPLE OF COMPREHENSIVE SERVICE:SKF TROUBLE-FREE OPERATION TM • “We promise you increased uptime and reduced costs!” • Basic TFO Services • Inspection • Technical assistance • Failure analysisExpanded TFO Services • Training• Plant maintenance assessment • Application engineering • Reliability systems - local and via satellite • Installation services • Predictive and preventive maintenance programs • Inventory consolidation • Root cause failure analysis • Mapping • Lubrication and filtration management • Store audits • Equipment maintenance and monitoring - • Bearing rework fans, pumps, gear boxes and spindles • • Precision balancing • • Precision alignment • • Productivity management process • • Application-specific training • • Technology upgrades

20. EXAMPLE OF COMPREHENSIVE SERVICE:SKF TROUBLE-FREE OPERATION TM • Step 1. Becoming partners. • Step 2. Defining problems and setting goals. Examples: - Cost reduction - Bearing consumption - Reliability - Breakdown response - Stock levels - Availability. - Quality and technical support … • Step 3. Freeing tied-up capital. • Step 4. Reducing purchasing costs. • Step 5. Selecting the right bearing. • Step 6. Caring for your bearings. • Step 7. Condition monitoring. • Step 8. Using the right tools and lubricant. • Step 9. Training. • Step 10. Prolonging bearing life.

21. MEASURING PERFORMANCE • Product margin vs. service margin • Downstream margin = sum of all service margins • Customer profitability • Profit per installed unit • Share of customer’s total downstream-activity system • Total customer return over the life cycle

22. E-SERVICES: GE TURBINE OPTIMIZER “Turbine Optimizer provides you with the tools and information to help you maximize your GE Gas Turbine, Steam Turbine and Generator investment” • GE’s Turbine Optimizer is an online service tool that provides: • Unit specific information • Fleet comparison data for specificGE Gas Turbine frame sizes • “What-if” scenarios that demonstrateperformance enhancements realized when specific upgrades areperformed against the current unit • List of GE packaged offerings • GE technical information letters and publications • List of monitoring and diagnostics service offerings • Ability to request quotations and buy online www.gepower.com

23. DIAGNOSTICS

24. 1. IS THERE AN OPPORTUNITY FOR DOWNSTREAM SERVICES? • Ratio of installed baseto new product sales • Life cycle economic activity asa multiple of product cost • Difference between downstreamprofit and product profit 1A. Attractiveness of Downstream Business Ratio = ..... Low High Multiple = ..... High Low Product profit = .......% Downstream profit = .......% Low High Downstream Moves are: Relatively Unattractive Attractive and Imperative

25. 1. IS THERE AN OPPORTUNITY FOR DOWNSTREAM SERVICES? • Magnitude of productdifferentiation • Market share of top five customers • Share of total profit earnedfrom top 20% of customers 1B. Product and Market Structure Significant Patent Position Commodity Superior Brand Technology Lead Share top five = .......% Low High Share top 20% = .......% Low High Downstream Moves are: Relatively Unattractive Attractive and Imperative

26. 1. IS THERE AN OPPORTUNITY FOR DOWNSTREAM SERVICES? 1C. Power of Distribution Channel • Importance of distributorsin your marketing mix • Distribution expenses as a percentage of product price • Degree of channel concentration:market share of top five distributors • Degree of channel innovationand multiplication High Low Continue with the following questions only if distributors are a relatively important element of yourmarketing mix. If they are not, downstream services are attractive Dist. and selling exp. = .......% Low High Top five distributors = .......% Low High Stable and monolithic Dynamic and multiplying Downstream Moves are: Relatively Unattractive Attractive and Imperative

27. 2. WHAT IS THE MAGNITUDE OF THE OPPORTUNITY? 100% Service Costs (as %of total life cycle expenses) 80% Service Profit Margin: .....% 60% 40% Hardware Costs (as %of total life cycle expenses) 20% Hardware Profit Margin: .....% 0%