research@hec - Issue#3 - (Page V)

How to Develop Profitable Services Many western manufacturing companies are having to differentiate themselves because they're facing stiff competition in the commodities market. Turning to product-related services and solutions could be regarded as a purely defensive reaction. But Wolfgang Ulaga believes developing these value-added services provides companies with opportunities for growth. Services are also a powerful way to achieve ‘customer lock-in’, by using what the professor describes as a Trojan horse approach, i.e. entering into a customer's business and gradually extending the offering. But for every success story, at least five companies struggle to turn a profit from their service businesses. The HEC professor doesn't think it's particularly easy for companies to move into services: they need to adapt to meet completely new demands and this requires them to acquire skills that they don't necessarily have. Wolfgang Ulaga has therefore identified four key steps that companies must follow on the path to service profitability. While 50% of some manufacturing companies' revenue comes from services, other companies are struggling—and even failing—to turn a profit from their service businesses. Following three years of research, Wolfgang Ulaga has developed a four-step process that guarantees service profitability for companies. Based on an interview with Wolfgang Ulaga and his article “How to Sell Services More Profitably”* (Harvard Business Review, 2008). M ARE YOU ALREADY A SERVICE COMPANY? ‘What's interesting is that many product companies are already in the business of delivering services but are missing out on the revenues they could generate,’ explains Wolfgang Ulaga. Selling a machine implies that the company can install and repair it. This represents huge, immediate, and untapped potential. Companies must first analyze INDUSTRIALIZE THE BACK OFFICE What are the visible and hidden costs of service production and delivery processes? The second step consists of identifying the costs in order to differentiate the most profitable services from lossmaking services. Wolfgang Ulaga has identified companies with well-developed, tailor-made service offerings that are very costly and not at all profitable. ‘There has to be a balance between the personalization and standardization of the service offering,’ he says. This involves building flexible service platforms and exploiting process innovations made possible by new technologies. The world's leading bearings manufacturer SKF is a successful service provider—the company provides customers with access to an electronic monitoring tool via a secure Internet browser that alerts them about potential machine failure. what services they already provide. An audit of existing services provided by the company's divisions and international subsidiaries is a prerequisite for uncovering profitable existing service offerings. The best method is to task a senior executive with the job of switching services from free to fee, i.e. charging for services that previously were free. That's what Air Liquide did in the mid 1990s when it decided to charge a rental fee of 5 to 7 euros per cylinder per month—this generated several hundred million euros a year in fees. CAREER Wolfgang Ulaga is an associate professor at HEC School of Management (Paris), where he teaches Marketing Management and Business-toBusiness Marketing. In addition, he designs and delivers customized executive programmes to companies. Before starting his career in academia, Dr. Ulaga worked in Frankfurt and Paris as a consultant for DML & Associés, an international management consulting firm. June-July 2008 • research@hec V http://www.hec.fr/hec/eng/professeurs_recherche/p_liste/p_fiche.php?num=170

Table of Contents for the Digital Edition of research@hec - Issue#3

Cover & Contents
The Role of Research Chairs at HEC
Radical Innovations in Major Companies, by Sihem Jouini
How to Develop Profitable Services, by Wolfgang Ulaga
Loss Aversion and Decision-Making, by Mohammed Abdellaoui

research@hec - Issue#3