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From manufacturing industry to a service economy, |
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1 THE FIGURES SHOW THAT IT IS HAPPENING NOW No national statistics are available for the shift from a manufacturing industry to a service economy. However, estimates can be made for key market segments. The EU market for 'products sold as services' in 1998 is estimated at 758 billion Euro, or 10% of GDP. Within this segment, selling the function of products (through e.g. fleet management) accounts for 60% (equal to 6% of GDP); while remanufacturing services account for 40% (4% of GDP). In comparison, manufacturing accounted for 17% of U.S. GDP in 1997 (for 20% in the EU), for 15% of total U.S. employment and 26% of corporate profits. Experts agree that the shift from manufacturing to services has gone much further in the USA than it has in Germany and Japan, its main competitors. In the European remanufacturing sector, revenue today comes predominantly from the building and construction industry. In contrast, the USA has a well developed market for the remanufacturing of components, estimated at 50 billion US$ per annum, 50% of which are in the field of remanufacturing of components for road vehicles. This report states the facts, provides a structure for analysis and gives concrete examples with figures for leading edge companies. It emphasises aspects of competitiveness and technology. 2 A NEW WAY OF
CORPORATE THINKING The prospects for companies that shift from manufacturing to services are bright. A strong first mover advantage is to be gained in the shift to services; a new way of thinking greatly facilitates the shift: - strategy as a means to creating the future, rather than extrapolating it from the past, - vertical integration from the plant to the customers, rather than from the suppliers to the plant, - a performance-based asset management of the 'installed base' of goods, rather than a cost reduction-based production management Three key issues have come to light: advantage through science, extended performance responsibility (EPeR), and job creation. Not all issues are open to all product groups. The report is structured as a matrix of product groups and strategies to give the reader an easy access to the options that apply to his field of activity. 3 A BRIGHT OUTLOOK All the
leading edge companies interviewed expect to double or quadruple their share of
revenue from selling services instead of products by the year 2010. This
implies changes in the structure and the rules of the game, which are detailed
in the report. This changes affect business managers as much as investers and
bankers. Fleet management (selling the function of goods) today gets its revenue predominantly from 'durable goods', i.e. from transport services (e.g. railways and airlines); second is equipment leasing. The highest potential for future competitiveness and technological innovation, however, is in the fields of 'consumption goods' and of 'catalytic goods'. Existing research is focused on durable goods thus and misses the most profitable areas which also have the highest gains in eco-efficiency! This study analyses consumption goods, catalytic and durable goods, and includes prevention strategies - the ultimate sale of knowledge and performance instead of material goods. Remanufacturing includes a huge hidden sector of in-house remanufacturing by fleet managers. This sector develops highly innovative technologies, but acts as a 'closed shop'. It includes armed forces and major industrial corporation and could be larger than remanufacturing by independent firms. Statistically speaking, it is virgin territory. The report shows limits: while retaining ownership is a successful strategy for durable goods, owning the distribution channels may be the only option for consumption goods. 4 THE SHIFT IS BUSINESS DRIVEN The main driver is business itself: a change in the way we look at business opportunities Many manufacturing industries are caught in a rat race of falling revenues from their products, increased competition and increasing production costs. The solutions to this problem have been cost cutting, re-engineering, a bigger economy of scale through globalization; but the present business focus is often still on improving manufacturing. The solution proposed in this study is a fundamental switch to selling the performance of goods instead of the goods themselves; a situation where shareholder value and income increase, while production costs are decreasing; where market capitalization increases even if production does not. The business focus is now on vertical integration to reach, win and satisfy the final customer. The strategies to achieve this differ mainly according the type of
product. The full report is thus structured as a matrix of strategy and product
types. Key driver no 2: scientific innovation and technology to build an eco-efficient economy After nature conservation and clean technologies (100% yield), the third objective in the move towards a more sustainable economy is a substantially increased resource productivity; to design smart solutions that earn higher profits from each pound of material. This goal cannot be achieved with linear improvements of existing manufacturing technologies. It calls for a change in strategy, bold innovation and a shift to new technologies based on modern science, including life sciences and material sciences The report shows which scientific domains contribute to the shift from manufacturing to service in relation to strategy and product combinations. The third main driver is shareholder value A comparison of the biggest companies by sales volume v. market capitalization shows that investors at the stock market systematically rate companies selling services higher than those selling products. This is due to the considerably higher rates of return on equity in services, compared to production, in the modern economy. A shift from manufacturing industry to a service economy can greatly increase the shareholder value of a corporation. 5
'LOOPS OF
VIRTUE' PUSH THE SERVICE ECONOMY Other factors driving the shift are hidden inside the new service economy itself: - win-win synergies that only develop between companies selling services instead of goods, such as carpet leasing by Interface to facility managers; or the sale of the function of washing through 'smart electricity meters' by Electrolux, - a first mover advantage that is possible in services and some of the new technologies. This is counter-intuitive to managers in manufacturing with its disadvantages of prototype technology for first movers, - changes in strategic thinking: 'closing the loops' through e.g. integrated product policy (IPP) for durable goods means achieving the highest re-sale value from used goods and components, instead of aiming for the lowest recycling costs. - structural change: the importance of manufacturing in the industrialized economies continues to decline. In the US economy of 1960, for instance, manufacturing accounted for 47% of corporate profits, 31% of jobs and 27% of GDP. By 1997, these figures had decreased to 26% of profits, 15% of jobs and 17% of GDP. - Sectorial efficiency revolutions. In addition to 'doing things right', the name of the new game is 'doing the right thing'. The result can be quantum leaps in technological advantage and competitiveness. The key corporate strategy to take advantage of these business opportunities is selling performance, services or results, instead of goods. This in turn changes the distribution of risks and income throughout the economy. For durable goods, the main tools of the past were clean production processes and 'Eco-Design' efforts to dematerialize products. The new strategy complements these with commercial innovations aimed at a more intensive and a longer utilization of goods. It includes preventive engineering and an eco-efficient operation and maintenance of the goods. Consumption and catalytic goods have a larger lever for resource efficiency in life sciences and material sciences. Bio and gene technology can replace parts of the chemical industry, with increases in 'resource productivity' by factors of up to 40'000. This introduces a new dimension in the discussion of 'resource productivity'. 6
SOME OBSTACLES OBSCURE THE CHANGE Insufficient national statistics. The data are imprecise, and falsified by new trends such as outsourcing. If a company supplies both goods and services, its output, profit and jobs are allocated to the sector in which it is biggest - creating a potential for 'sudden landslides' in national accounts. Outsourcing 'falsifies' national accounts in other ways. If a manufacturer outsources its IT department, it changes from manufacturing to services. But if an airline turns its maintenance department into an independent company, its jobs and activity change in the statistics from services to manufacturing. Regional differences. The shift from manufacturing to services, and from selling goods to selling the performance of these goods, has gone much further in the USA than it has in Europe or Japan. The report looks into the reasons for these differences. Cultural differences in eco-efficiency. In Europe, the sustainability discussion has so far focused on the ecologic potential of eco-efficiency, i.e. on durable goods, as the biggest resource flows are caused by construction and other heavy industries. In the USA, the emphasis is on the economic potential of sustainability, e.g. life sciences. The social compatibility, the third factor of the sustainability triangle, has not yet received much attention. Social aspects are included in the report with regard to the job creation potential of the strategies. 7 THE TABLE OF CONTENT OF THE FULL REPORT
 These are key ideas that are sketched out but still need to be developed? They could also be used in the sales letters, differentiated to investment guys, manufacturing / service companies, policy makers / ministries. Historically, from processes to products to a future based on fulfilling customer needs (check Natural Capitalism). Historically, from the clean process technology focus of the 1980's (responsible care) and product stewardship focus, to the IPP Integrated Product Policy of the 1990's; and now to a service economy focused on the performance of goods during their full utilization period or application. We can identify a long list of discontinuities and examples to illustrate each one of them. In conclusion, we need to acknowledge the signals (weak as they may be) of the emergence of a new competitive landscape where the rules of engagement may not be the same as they were during the '80s, or even the '90s. Implications for corporate strategists Strategy is no longer an extropolation of the past, but a challenge of creating the future. How do I guess the contours of an evolving economic structure and therefore, the rules of engagement in a new and evolving game? Implications for competitiveness from advantage through lower
costs to advantage through innovation technological convergence - such as that between chemical and electronic companies, computing, communications, components, and consumer electronics; food and pharmaceuticals; new types of commercial competitors (e-commerce. Implications for technological innovation from process technology to science for solution knowledge Implications for technological innovation in eco-efficiency from clean production processes to resource productivity from the disadvantages of prototype technology (learning from the early innovators) to exploiting the first mover advantage Implications for commercial innovation from selling products to providing the service of customer satisfaction Implications for product-design from durable to consumption goods, from eco-design to science Implications for 'greening the corporation' from compliance to business leadership as innovator in sustainable solutions from substituting one dirty input for another cleaner one in current production processes to rethinking the business, Implications for policy From command and control, to incentives for business and technology leadership. From economic instruments to tax 'bad' solutions, to instruments encouraging innovation and scientific discovery. How can Risk Management instruments from insurance be used for policy guidance on technology policy / technology choice (to evaluate/judge the future evolution) As long as conserving nature and
health was concerned, the State was in the driver seat of 'sustainability',
through command-and-control instruments such as legislation. Industry had to
comply, insurance to pay for clean-up if sudden and accidental. In other cases,
the State and/or industry had to pick up the bill (Superfund, product
liability, etc). With the shift from conserving nature and health (costing money) to a higher resource productivity (meaning increased competitiveness), the rules have changed. (In comparison: Eco-efficiency combines all three issues of nature, health and resource productivity). The State should define a new industrial policy based on incentives - not command-and-control! Industry has to find better business solutions through innovation. And insurance now has a key role of providing free-market safety nets for this innovation. For uninsurable risks (low number of losses combined with extremely high loss volumes, such as nuclear risks; or unacceptable risks, such as genome manipulation), traditional insurance can not intervene, even if new tools may be able to (through e.g. ART, alternative risk financing). The State therefore still has to legislate this type of risk, defining what industrial activities are allowed, what forbidden. For insurable risks (that is pure risks), it is sufficient for the State to legislate mandatory and 'unlimited' product and environmental liability insurance. Entrepreneurial risks (also uninsurable) still have to carried by the innovators (or their venture capitalists), according to the economic principle: the higher the risk, the higher the expected return. In the world of resource productivity, the name of the game is innovation and speed. And there is normally a first mover advantage. Europe is generally more risk averse than the USA - Europe now suffers a 'cultural disadvantage' in driving competitiveness. 6 THE REPORT: a matrix of scientific
innovation and product types, The types of scientific innovation and products taken into consideration are: 'consumption' goods (fuel, paint, agro-chemicals, medicine) - with solutions in the field of life and material sciences P1 consumption materials, mostly organic:
medicine, agrochemicals; life sciences P2 dissipative products: Lycra, steel; smart products through material sciences P3 catalytic goods - solutions in the field of logistics 'electro-mechanical' goods - solutions in the field of Eco-Design and product-life extension technologies P4 mobile durable goods P5 immobile durable goods The strategies taken into consideration are: Sufficiency strategies S1 Sufficiency and prevention: loss prevention, waste prevention, energy savings, zero energy houses, Management efficiency Efficiency strategies S2 Manufacturers selling services with a corporate responsibility from cradle back to cradle S3 Fleet managers with cradle to cradle product responsibility S4 Fleet managers with responsibility for operation (no
manufacturing)
Extended quality guarantees for goods by manufacturers (IPP) Service contracts E-business
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