Navigating the COVID-19 crisis through servitization
COVID-19 will fundamentally change the manufacturing industry. Digitalisation will accelerate, business models change, and service-led growth intensify. While the effects on many firms are, and will be, severe, those who can seize the opportunities that digital servitization bring, will be better able to bounce back. In a unique study of manufacturing firms in Northern Italy we show how servitization can help companies to mitigate the effects of the COVID-19 crisis and adapt to the “next normal.”
A new type of crisis
The COVID-19 pandemic has caused vast economic breakdown across the world, as customer demand and industry activity and confidence have collapsed. Business activity across the eurozone collapsed to a record low in March 2020, and US industrial production showed the biggest monthly decline since the end of the Second World War. Manufacturing is expected to be one of the sectors most severely affected in terms of the negative impact on economic output. For example, the aviation industry probably faces the gravest crisis in its history according to Airbus CEO Guillaume Faury, and global car sales have plummeted. In the UK, sales fell by 97% in April 2020, the worst month since 1946.
Servitization - the shift from a product-centric to a service-centric business model and logic - has traditionally helped manufacturing firms to stabilise their businesses in turbulent times. During the world financial crisis 2008-09, product sales in many industries plummeted, or even halted, whereas the service side of businesses was much less disrupted. Even if a buyer could not afford or did not need to buy a new product due to a lack of available liquidity and customer demand, the products in use still required regular service. Therefore, many manufacturers could still sell spare parts and provide high-margin field services (Kowalkowski & Ulaga 2017).
The current crisis caused by the COVID-19 pandemic is, however, fundamentally different in several ways since production and economic activities have been partially or totally interrupted in several geographic areas with unforeseen implications. Hence, executives need to understand how to cope with such a calamity and how, once the immediate crisis is over and restrictions are gradually lifted, firms can recover and return to a next normal and build resilience for future disruptive crises. Drawing on data from 177 survey respondents (35% large firms and 65% SMEs) and 16 depth interviews with executives from Northern Italy, we provide guidelines for how industrial firms can navigate through disruptive crises such as the COVID-19 pandemic (Rapaccini et al. 2020).
The service business shows higher resilience
Our data, collected between mid-March and mid-April, show that the COVID-19 lockdown greatly impacted both product and service businesses, but service businesses are showing higher resilience. Based on the results, we estimate that, even in the two weeks before the lockdown, field operations in the industrial sectors were running at around 30%-40% of normal volume overall, with execution times slowed down due to several constraints and mandatory precautions. Despite this critical situation of field operations, executives generally found the transition from office to remote working remarkably smooth; the shift to remote working for millions of employees did not cause significant problems or disruptions.
Most executives, regardless of the industry, anticipate a substantial impact on product sales: 66% expect negative or very negative consequences whereas only 6% expect limited or no impact. Overall, managers expect double-digit declines in turnover at the end of the year. Exceptions to the above are 1) sales of some consumer products through e-commerce channels (e.g., printers and related consumables for the domestic market) boosted by the need for rapid activation (in a few days) of remote working and 2) sales of products and solutions through calls for tenders, with customers from the public administration or regulated sectors.
The difference between expectations on product sales and service sales is striking. Whereas 49% of executives expect negative or very negative consequences on service sales, 24% expect limited or none impact. The impact on basic services, such as reactive field service, is much higher than on more advanced and digital services: 40% of executives expect negative or very negative consequences whereas 28% expect limited or no impact. For advanced services, such as connectivity-based services and customer solutions, only 21% expect negative or very negative consequences whereas 58% expect limited or no impact.
Our research clearly points to the fact that the exploration of digital servitization possibilities is going to be accelerated by the challenges posed by the pandemic. About 57% of the survey respondents claim that their innovation initiatives related to the introduction of new service technologies and the development of new digital services will be highly or very highly accelerated by the pandemic. This acceleration is mainly related to technologies that are closely linked to the development of advanced service and digital offerings (e.g. connected products and data valorisation, diagnostic and preventive maintenance, remote troubleshooting) rather than more radical changes that entail more uncertainty and longer time to market.
Building resilience for today and tomorrow
To be able to navigate the crisis and build resilience during the next normal, firms should consider building resilience in each stage of the crisis management model which is outlined in Exhibit 1. Resilience is the ability to prepare for unexpected events, respond to disruptions, and bounce back. There are four elements of resilience that firms need to master - preparedness, agility, elasticity, and redundancy - each corresponding to one of the stages in the model.
Exhibit 1. A four-step COVID-19 crisis management model (Rapaccini et al. 2020, p. 232)
Calamity. The first phase concerns awareness; understanding needs and risks, and elaborating scenarios. In this phase, all firms activated task forces and crisis units for managing the situation.
Quick and dirty. During this phase, energy was directed to the implementation of simple solutions to provide continuity, as much as possible, to the business and deliver much of the backlog orders. Meeting customer needs and trying to mitigate the impacts of restrictions was imperative. Another consideration concerns the need to act instantaneously, since there is no time to develop new solutions from scratch. For this reason, firms tried to make the most of the resources and technologies they had already developed or introduced.
Restart. This is the phase Italy entered on May 4th, which means that businesses have been reactivated. Key questions at this stage are: What products and services will be demanded at the restart? What portion of the demand has been lost, and what has just been delayed? Which adaptations to our production capacity will be requested to cope with demand peaks? What capabilities should we develop to face the complexity of the business environment? Many executives expressed concern about new possible upsurges in the spread of the virus. Thus, being prepared to rapidly bounce back to previous lockdown conditions (e.g. return to remote working) as well as recover normal activities and businesses is a must-have in this stage.
Adapt to the next normal. Besides adapting the current measures, this stage may involve creating new practices, reconsidering established business models, changing configurations, and strengthening network relationships. Even more than today, industrial firms should focus on digital servitization through the development of novel solutions consisting of both traditional services and new digital components. Firms with adequate risk management capabilities may even offer full-risk contracts with guaranteed results and even COVID-19 - compliant or COVID-19 risk-free offerings. In the next normal, innovative firms should therefore consider the full spectrum of service growth opportunities and provide solutions whose elements are not easily separable as they interact synergistically for value creation.
To diagnose a company’s resilience, executives can apply the self-assessment tool presented in Exhibit 2. The questions are grouped according to the four elements of resilience presented in Exhibit 1. To survive and strive, our research suggests that firms should focus even more on business models based on advanced service provision and customer centricity, and on building crisis resilience to cope with different types of global emergencies by investing in adequate human and digital resources. By doing so sooner rather than later, our research suggests that they will position themselves for success in what will become the next normal.
Preparedness
Was your organisation aware of the risks that could arise in the face of global emergencies (health, environmental, social, and economic)?
Were the impacts on product and service businesses promptly and correctly appraised with the information and methods available?
Has the experience gained in dealing with the coronavirus pandemic generated (new) organisational and technical knowledge that can help dealing with future crises?
Agility
How promptly did your organisation react to the restrictions imposed on the movement of people and goods?
Was your organisation able to implement quick and smooth solutions to ensure customer service during the lockdown?
Were you satisfied with how your applications and IT infrastructure have supported the staff to work and provide customer support remotely?
Elasticity
Was your organisation able to put in place appropriate solutions for restarting the business after the lockdown based on a satisfactory trade-off between security (workers, customers, suppliers) and efficiency?
How effectively did you deploy additional resources to fulfil the delayed product and service demand and face any rebound that showed up at the restart?
Can the resources that you plan to deploy be rapidly and securely deactivated in case emergency restrictions bounce back?
Redundancy
Does your organisation plan to increase critical resources, such as spare parts stocks and skilled technicians, that can be deployed in proximity to your customers?
Does your organisation plan to increase the adoption of digital technologies as well as ensure infrastructure redundancy for the delivering of advanced services?
Does your organisation plan to develop new offerings that could be more attractive for customers and industries greatly affected by the coronavirus pandemic?
Exhibit 2. Key questions about resilience (Rapaccini et al. 2020, p. 235)
About the authors
Dr Christian Kowalkowski, Professor of Industrial Marketing, Linköping University, Sweden
Dr Mario Rapaccini, Associate Professor of Innovation Management and Strategy, University of Florence, Italy
Dr Nicola Saccani, Associate Professor of Production and Logistic Systems, University of Brescia, Italy
Dr Marco Paiola, Associate Professor of Business Strategy and Service Management, University of Padua, Italy
Dr Federico Adrodegari, Researcher, University of Brescia, Italy
References
Kowalkowski, C. & Ulaga, W. (2017) Service strategy in action: A practical guide for growing your B2B service and solution business, Service Strategy Press, Scottsdale, AZ. www.ServiceStrategyInAction.com.
Rapaccini, M., N. Saccani, C. Kowalkowski, M. Paiola, & F. Adrodegari (2020), “Navigating disruptive crises through service-led growth: The impact of COVID-19 on Italian manufacturing firms,” Industrial Marketing Management, Vol. 88, pp. 225-237. https://doi.org/10.1016/j.indmarman.2020.05.017.