2. Research Review
2.2 The motivations of “servitization”
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competitive advantages and enhance the firm’s performance. This defintion combines the main characterstics of servitisation that are the main concern of this research,
“change process”, “service”, “customers’ needs” and “competitive advantages”.
2.2 The motivations of “servitization”
Servitization can add essential value for the growth and competitiveness for manufactures because it can contribute to the increasing demand and complement the sales or better use of tangible products (Mathe and Shapiro, 1993). The three factors that drive companies to pursue a servitization strategy are suggested in the literature as financial, strategic (competitive advantage) and marketing (Mathe and Shapiro, 1993;
Mathieu, 2001b; Gebauer and Friedli, 2005; Gebauer et al., 2006; Gebauer and Fleisch, 2007).
(1) Financial：According to Gebauer and Friedli (2005) and Wise and Baumgartner, (1999), services can retain averagely higher margins than products and generate substantial revenue from an installed base of products with a longer life cycle. It helps the company for regular income and balances the risk of declining sales in mature markets and unfavorable economic cycles (Brax, 2005; Malleret, 2006).
Especially in the price-sensitive industry, these products combining with service are less sensitive to competition (Malleret, 2006), and also tend to provide higher levels of profitability when compared with offering the physical product alone (Frambach et al., 1997).
(2) Competitive advantage：Companies combine with service elements to differentiate pure manufacturing products and also gain important competitive opportunities.
When competitive advantages are mentioned, a growing number of authors state that the differentiating strategies based on product innovation, technological
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improvement or low price and so on are becoming more difficult to maintain (Frambach et al., 1997; Mathieu, 2001b; Gebauer and Fleisch, 2007). However, competitive advantages achieved through services are often more sustainable. Since services are less visible and more labor dependent, services are more difficult to imitate (Oliva and Kallenberg, 2003; Gebauer and Friedli, 2005; Gebauer et al., 2006). Services help companies establish intimate relationships with clients (Gebauer and Friedli, 2005; Oliva and Kallenberg, 2003). The value added by services can enhance the value customers place on homogeneous physical products and make customers perceive them as customized (Frambach et al. (1997).
(3) Marketing：Marketing is generally recognized as the use of service to sell more products based on customers’ needs (Mathe and Shapiro, 1993; Gebauer et al., 2006;
Gebauer and Fleisch, 2007). It is argued that services have a great influence on purchasing decision and tend to motivate repetitive sales (Malleret, 2006; Mathe and Shapiro,1993).
This section reveals that servitization can improve low-profit situations and revenues in manufacturing. However, for manufacturers transitioning from purely manufacturing to integrating products and services can be quite complex. The next sections therefore focuses the transformation process that can guide a manufacturing firm to successfully implement a service strategy.
2.3 The role of customers in servitization
“Servitization” is largely driven by customers. A major aspect of servitization strategy is its strong customer-centric outlook. Customers are not just provided with products they can be satisfied with, but also concerned with “consumer experience.”
This means the products should provide what they want, even if this requires the
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incorporation of products from other companies (Miller et al., 2002; Davies, 2004;
Vandermerwe and Rada, 1988). Successful companies recognize the necessity to ensure close customer relationships, establish routines and communications for satisfying customers (Levitt, 1983). Oliva and Kallenberg (2003) consider customer orientation service consisting of two separate elements. Firstly, a shift from offering product-oriented services to “user’s processes” oriented services. For example, a shift from a focus on ensuring the proper function or use of the product to pursue efficiency and effectiveness of end-user’s processes relating to the product. Secondly, a shift of the nature of customer interaction from transaction-based to relationship-based. For example, a shift from selling products to establishing and maintaining a relationship with the customer.
2.4 The process of “servitization”
Manufacturing companies that decide to utilise service-oriented strategies have to adapt their organizational structures and processes (Mathieu, 2001b; Gebauer and Friedli, 2005; Oliva and Kallenberg, 2003; Gebauer and Fleisch, 2007). This section reviews literature that discusses the processes manufacturers should follow to successfully move to service stages and what capabilities should they develop during the processes.
Oliva and Kallenberg (2003), explore the factors required when creating “service”
in the context of capital equipment manufacturers. Moreover, they also suggest a structural approach to navigate the transition. Figure 2 is the process defined and below are some descriptions.
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Figure 2. The servitization process in capital equipment manufacturers 3a. Expanding to relationship-based
services Trigger
Customer’s request
Utilization of service infrastructure Goals
Increase utilization of service infrastructure
Actions
Assume operating risk: pricing in terms of availability
Achieve cost advantage through:
economies of scale, learning curve, network effects
3b. Expanding to process-centered services
Trigger
Customer’s request
Utilization of PD skills Goals
Increase utilization of PD and system integration capabilities Actions
Develop consulting capability
Create “new” distribution network
Expand to include other manufacturer
4. Taking over the end user’s operation Triggers?? Goals?? Actions??
Entering the Install Based service market Triggers
1. Profitability potential 2. Competition
3. Customer satisfaction 4. Management change Goals
(1) Tab the revenue in the IB service market Actions
(2) Definition and analysis of IB market
(3) Create separate organization to market and deliver service (4) Create infrastructure to respond to local service demand
Consolidating product-related services Triggers
1. Customer’s’ complaints 2. Competition
Goals
3. Improve efficiency, quality and delivery time Actions
4. Move services under one roof
5. Monitor effectiveness and efficiency of service delivery 6. Add services to support quality initiative
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1. Consolidating product-related services：The first step taken by the firms is to consolidate the firm’s existing service offering under a single organizational unit.
The goal is to improve the service performance. This happens when organizations find out that services are an important component of the consumer satisfaction indicators and want to improve the delivery of those services.
2. Entering the installed base service market：During this process, the firms identify a profit opportunity within the service operation in the previous stage or after seeing a competitor work with high margins in the service market and setting up the structures and processes to exploit it.
3. Expanding to relationship-based service/process-centered services ：The expansion of the service offering takes place when the core functionality of the service organization has already been set, and it may happen through two distinct transformations. The first transition is to change the focus of customer interactions from transaction- to relationship-based. The second transition is to change the focus of the value proposition to the end-user from product efficacy (i.e. whether the product works) to the product’s efficiency and effectiveness within the end-user’s process.
4. Taking over the end-user’s operation：In this stage, the manufacturer becomes“pure service organization”, which includes taking over an end-user’s maintenance or operating organization.
Also, according to Davies (2004), a framework is developed to analyze business strategies for developing integrated solutions. Four main stages have been identified through researching five companies in capital goods industry. There are four capabilities need to cultivate; operations, business consultancy, finance and integration (see figure
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Figure 3. The process of developing into integrated solutions
Gebauer et al. (2011) integrates the findings of the relevant research into a conceptual framework which contains four parts; drivers, offerings, capabilities and organization (see figure 4). Drivers have inspired capital equipment manufacturers to create service offerings that meet customer needs in different levels. Accordingly, services can be added into a product lifecycle. For example front-end services, product sales and operations and back-end services. Developing each value-added service not only involves direct changes to the capabilities of company, but also has some challenges for existing organization functions, such as research and development (R&D), product design and production, finance, and human resource management.
Moreover, to enable capability development and cross-functional cooperation, manufacturing companies have to transform their organizational arrangements.
Earlier
(Backwards) Vertical moves (Forwards) Capabilities
Operations Business consultancy
Finance Integration
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Figure 4. An integrated framework of servitization
Based on the above knowledge, it is clear that in order to adopt value-add services into the original operation value stream paths are used. They all begin from the upper stream that focuses on manufacturing or raw materials. Then to the lower stream, which focuses on marketing. However, this literature relates more to capital goods than consumer goods (Davies,2004; Oliva and Kallenberg,2003 ). They are less focused on changes from Products to “Back-end services”. Shih (1996) points out that although the failure rate of OBM is high, it is helpful for manufacturers to have long-term
Business Drivers
To satisfy customer’s need over time
To achieve competitive advantages
To enhance financial performance Driver
Implication for organizational arrangement Offerings
Capabilities
Organizations
Front-end Service Product-sales and operations
Back-end Service
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development. In Taiwan, there are successful cases, but seldom research to integrate them and show the transformation path they took. To fill this gap, this research focuses on how manufacturers changed from OEM/ODM to OBM utilising value stream paths and figuring out what capabilities they need to develop during these changes.
2.4 The value stream from OEM/ODM to OBM
This paper mainly focuses on the continuum of value stream from pure-product to pure-service providers. According to Womack and Jones (1996), value stream identifies the physical activities from manufacturing products to services, flowing from raw materials to the final customer. From the beginning of manufacturing firms moves along the value stream as they develop more product-related service. At the end of the value stream, service organization products only accounts for a small part of their value proposition. Oliva and Kallenberg (2003) have designed a product service continuum (see Figure 5 ) to define the changes. This is a continuum from traditional manufacturer where companies merely offer services as add-on to their products, through to service providers where companies have services as the main part of their value creation process This paper mainly focus on the transition along the value stream from OEM/ODM to OBM.
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Figure 5. A product service continuum (Chase, 1981)
2.4.1 The Value differences between OEM/ODM and OBM
The global industrial value chain can be simply divided in to three parts, R&D, manufacturing and marketing(Shih,1992). Companies owning brands often put emphasis on R&D and marketing, they outsource the manufacturing process to manufacturers. This is so called subcontracting (Ouinn, 1994). According to Hobday (1995), there are two major kinds of subcontracting in Asia. They are OEM (Original equipment manufacturing) and ODM (Original design manufacturing).
The earliest OEMs appeared in 1950s. International electronic companies were looking for subcontracting manufacturers overseas to assemble products in order to gain lower costs. After the products have been assembled, those companies would put on their brand and sell globally (Hobday,1995). According to Liu (1989), OEM means a company who is subcontracted to manufacturer products, or who provide certain technologies that do not pose a threat to the contractor. So manufacturers can produce products that meet the quality and specific requirements.
According to Chen (1997), OEMs produce products totally in accord with what their What do you offer
Service as “add-on” Tangible goods as “add-on”
Relative Importance of tangible services
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customers’ requireme. OEMs are responsible only for assembly of products. Other requirement like delivery deadlines, the use of raw materials, specification and so on are all regulated by their customers.
ODM (Original Design Manufactures) means manufacturers not purely assembly products but also have the abilities to design or help their customers design their products.
ODMs need to have the ability to design and produce products (Chen,1997). ODM may have higher value than OEM, because they offer their customer more service “design”, however, they are still in the “ manufacturing” stage of Shih’s (1992) smiling curve.
OBM (Own brand manufacturer) means from product design, manufacturing, marketing and services are all conducted by manufacturers who create their own brand.
The brand leads the implementation of those activities. OBM offers whole activities in the value chain (Chen,1997).
According to Shih(1992), going from a OEM/ODM to OBM, the manufacturer has developed into higher value position. The processes of branding plays an important role in endowing products with symbolic meaning. Products can be clearly defined, evaluated and measured. They offer functional interest. Brand offers products a value other than function (Kim,1990). Dodds et al. (1991) evaluates the relationship between customer’s cognitive and price, brand and the name of the shop. Supporting the idea that the value of the brand would affect customer’s perception of the products quality and value.
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3. Field study – methodology
3.1 Case study methodology
Research methodology is chosen from three dimensions; types of research questions, degree of control subjects, and events and the degrees of focusing on historical events or phenomena (Yin, 1994). Case study methodology is suitable for the types of questions
“why” and “how”. Research subject is the phenomena happening now and the researcher cannot control the phenomena (Zhou, 2009). This is a common methodology in humanities and social sciences. It can usually explain, explore and evaluate research questions and attempt to answer the questions relating to the phenomena or concepts (Yin, 2003). The main purpose of this research is collecting practical information and developing from existing theories. In related research reviews this methodology has also been used in the same fields of research (Oliva and Kallenberg , 2003;Davies, 2004).
Therefore, using case study methodology in this research is appropriate.
Sources of this case are the following: (1) Research review: including mass media reports and journal articles like Journal of manufacturing technology. (2) File records:
including company official website and company published book. (3) Interview:
according to the specific questions arising out of the research framework planned in this research.
3.2 In-depth interview
This research uses in-depth interviews. A common methodology used in qualitative research. Mainly focusing on the oral conversation between interviewer and respondents.
The purpose is to exchange opinions. Interviewers can analyze interviewees’ motivations, thoughts, attitudes and insights into a certain topic through interviewing. This kind of
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methodology is a positive social interaction. The interviewing data is the result of the interaction (Yuan, 2002).
This research uses face to face interview. There are three kinds of interviewing methods; structured interviews, unstructured interviews and semi structured interviews.
This research uses semi structured interviews. A structured interview is a highly control way to interview. Certain interviewing methods like questionnaires include questions, sequenced and then recorded. Semi structured interviews have three main characteristics.
Firstly, there is a certain topic and few questions, but interviewer does not need to stick to those specific questions. Secondly, before the interview the interviewer can schedule some online questions. However, when interviewing, interviewers can change or think about new questions in accordance with interviewees’ responses. The way to ask questions and the sequence of the whole process can also change freely. Thirdly, the interviewer does not need to use certain intonation or text to interview, but according to the answer of respondent. As for unstructured interviews, there is no certain topic, conversation between interviewer and respondents is totally free (Yuan,2002). The different servitization paths from OEM/ODM to OBM between each company and different industry that company belongs to. This research mainly focuses on a certain topic. Semi-structured interviews are thus chosen.
3.3 Research subject
This research mainly focuses on consumer goods industry because past research mainly focused on capital goods industry. Of Taiwan’s goods exports in 2012, approximately 99 percent were from the industrial sector, while agriculture goods comprised around 1 percent of exports. In terms of imports, over 77 percent of Taiwan imports are of agricultural goods and raw material, reflecting Taiwan’s limited arable
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land and lack of indigenous natural resources. Capital goods are the next largest imports (14 percent), followed by consumer goods (approximately 10 percent)( Joshua, 2014).
The consumer goods industry is a localized industry in Taiwan, as shown in the above data. Its relationship with end customers in Taiwan is closer than capital goods industry.
How manufacturers view the demand of end customers is more important in consumer goods industry. Some capital industry marketers are more concerned with the specifications of products than with how these specifications respond to customer needs (Hutt and Speh,1992). Furthermore, the acceptance of the necessity of formal market research about the demand of end customers has proceeded slowly in capital industry marketing relative to that in the consumer goods industry (McTarish and Maitland, 1980). One possible explanation is because in capital goods industry, some of the companies have grown successfully on the basis of engineering skills and technological development (McTarish and Maitland, 1980). Many managers in such firms are promoted out of engineering and R&D departments. It is not unusual, therefore, that technical values tend to dominate their decision making. Due to the difference between capital goods industry and consumer goods industry, this research mainly to explore more about consumer goods industry.
In order to understand the value-added paths from OEM/ODM to OBM, this research centres on three representative and distinguishing firms in the suitcase, shoe and IT industry, namely Lian Yin, DAPHNE and ASUS. These three companies are representative of the OEM/ODM industry over the past 60 years. The servitization process from OEM/ODM to OBM may not be the best way for OEM/ODM companies to transform. Though it is a possible way to increase success.
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3.3.1 Lian Yin
From manufacturing suitcases in Shanghai and wholesaling them in Taiwan, the primary business of Lian Yin is now selling, renting and fixing travel related suitcases and bags. Lian Yin created two brands, LY (Lian Yin) and AllezVoyager. Products manufactured and sold by Lian Yin have an unlimited duration and unconditional after sale fixing service.
The reason why Lian Yin is a good representative case is because it depends on a suitcase renting and fixing service. It was these services that made the brand famous Lian Yin is one of the top companies in suitcase industry. Lian Yin is a SME(small and medium enterprise) depending on very limited resources, but has still been very successful at developing its own brand. The company has many mass media organisations requesting interviews in recent years and its stores often have 1000 customers per day to visiting them.
3.3.2 DAPHNE
DAPHNE’s founder company is “EZ capital”. Originally manufacturing low-end shoes in Taichung, DAPHNE now has the second largest market share in China.
DAPHNE now has three different price-level of products, Shoebox, DAPHNE (D18), DAPHNE (D28). Plus agent brands, AEE, Amedo and AREZZO. Shoebox focuses on a lower price level and now has 1500 retail stores. DAPHNE (D18) and DAPHNE (D28) focuses on the mid price level, but each has a different target market. D18 is targeted at young women from ages 18 to 25. D28 targets a more mature market of women aged from 25 to 45. As for agent brands, DAPHNE uses them to supplement its brand and product line. In total, in china, DAPHNE has more than 6000 stores. In 2012, it also
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returned to Taiwan and opened 100 stores. This is its first step towards internationalization. DAPHNE’s product line now includes clothes and accessories. As
returned to Taiwan and opened 100 stores. This is its first step towards internationalization. DAPHNE’s product line now includes clothes and accessories. As