Finnish industrial companies´ services business development

Looking at 2014 reports of nine Finnish “big companies focusing on industrial products and services”, as listed in the Helsinki stock exchange, ie Cargotec, Huhtamäki, Kone, Konecranes, Metso, Outotec, Valmet, Wärtsilä and YIT, there is a positive and interesting development of what services business bring to the companies´ overall strategy and future outlook.

Services business is not systematically reported by all companies in their financial statements, yet clear development and focus of services business is found. For example, Konecranes splits its business clearly in two areas: equipment and services, and reports 2014 services as maintenance and modernizations business, with a 0,7% improvement from previous year. Metso reports services as part of their annual net sales and gives a share of 55% of last year total turnover, increase from previous year though down from record results in 2012. Outotec reports a 9% increase in its service business of net sales in 2014 (including comparable currency fluctuations) and continues to have higher share of services of its net sales.

Based on the financial information, it seems that services business may account for approximately 23-55% of these companies´ total net sales, yet in some cases the profitability of the services business may be better than that of equipment sales. I do not see any of the companies taking steps to fully servicizing the business, à la former IBM, ie equipment still seems to be a strong foothold of any industrial company today, though services is clearly giving a buffer to possibly weaker equipment sales.

Where is the future focus of these companies in regards to their services? According to financial reports and CEO overviews, it looks like there is a lot of expectation on growth. And how do the companies plan to grow their services business? Several companies are heavily focusing on future trends like industrial internet and mobility (Wärtsilä, Cargotec, Valmet). Almost all companies have mentions or a full strategy focusing on improved customer understanding. Huhtamäki talks about “increased sharing of customer know-how and knowledge”, and “…focus on higher consistency in managing customer interfaces”. Kone discusses “understanding customer needs, refining promise and offering…”, “…better use of data (eg remote monitoring) …optimizing maintenance schedules, routes, tasks…” and in general focusing on increased share of planned maintenance and repairs ie looking into better productivity. Konecranes, too, talks about improved focus on customer understanding and even a member of a senior management team is responsible for “Customer experience and service offering”. Some companies are linking the customer performance targets to sustainability, like Valmet, who is clearly listing “customer sustainability needs”.

The market continues being challenging for all companies. This puts additional pressure in sharpening the strategies and considering key values to customers. Metso strategy summarizes well targets of more or less any industrial company in Finland today: “…we are focusing on being close to customers, listening to their needs, renewing our offering to meet their changing needs…”

And my learning of the quick analysis? Finnish industrial companies have built their foundation on products, but services business is there to stay, and helps companies grow. Finnish companies are learning how to better understand customer needs and serve them, improving their services offering, and providing efficiency or even business improvements. This requires learning, customer focus and new commercial competences, complementing technical and engineering skills. There is a new demand also in company management, looking holistically across trends, even on the consumer side, to learn about how digitalization and data changes our way of working and provides more predictability and opportunities.

Take care with “customer code of conduct”

Helsingin Sanomat recently wrote about the newest cat-café, opened in Helsinki, Kamppi, to attract people to have a cup of coffee while watching and playing with live kittens. As such, cat cafés in Finland are a miracle due to the strict health policies, but the café in Helsinki is not even the first one in Finland.

Having humorously suggested cat-cafés to Finland 5 years ago, I now have to come back to the service approach this trend is paving way for.

While some cafés may be barely surviving due to big capital investments or hobbies or side-businesses of their owners, cat-cafés have raised a lot of interest and ended in even recommendation to book a time slot beforehand.

What attracts people to these cafés? Apparently something that Starbucks invented already years ago, the cafés can be much more than a place to have a cup of coffee. They are a place to experience, socialize, share, even tell your secrets to a little kitten.

What is important in a service setting is the concept of who else is included in your service experience. Regardless of if you really interact or socialize with somebody, the profile or behaviour of others may influence what services you end up paying for. In a cat-café, it may not even be people´s general love for animals, but possibility to show care or be cared for.

In “Responses to other similar customers in a serviced setting – analyzing the moderating role of perceived performance risk” (Journal of Services Marketing volume 28 issue 2, 2014), the concept of “other customers” is a useful thing to know as it appears that individuals are not only more attracted to others who share similar attitudes, but are also more influenced by them. Previous researchers have suggested that service firms should not be afraid to establish, communicate and enforce codes of conduct for customers (Journal of Services Marketing volume 28 issue 2, 2014).

In the newest cat-café, according to Helsingin Sanomat, “the kittens are not to be lifted nor patted if the kitten is sleeping”. Customers who enter are given rules to obey, which they even pay for since they feel they are getting a return.

The code of conduct is an interesting service concept, which may sound limiting, yet on the other hand it may provide a feeling of security: you know the rules, and you may be happy once they are clearly spelled out, leaving no possibility of guessing nor feeling insecure.

Apparently the cats, reported by Helsingin Sanomat, as well as summer holiday (?), have made me to re-launch the blog on service management.

Mission accomplished

After two years, my studies on service excellence are completed. During the two years I spent numerous hours working on the modules, resulting in various reports, case studies, exams, and finally the final thesis. This blog has been one outcome of my studies and I wanted to elaborate on selected topics related to service business as part of my learning experience.

The objective of my studies was to learn and update my knowledge about the business environment, including strategy, management and leadership since my MSc studies about 20 years ago. I chose focusing on service organizations and service excellence since I consider it a clear direction for several industrial companies as well as the future of developing the experience economy. Combined with my marketing background, I`m happy of what I´ve learnt and what I´ve focused on. The key learnings for me have been the need on internal communications and involvement of the organization throughout service development and differentiation of services based on customers needs. These studies have helped me in my current job, working on a customer focused strategy for a service organization.

It´s strange not having a business book or articles to read or a case report to write during a weekend or during summer holiday but I´m finally looking forward to spending a "real" holiday since a long time, just enjoying the spare time and having a break.

This blog will officially end though I may occasionally be inspired to share some further experiences related to services. I can warmly recommend similar learning experience for anybody who might consider taking a new challenge.

Services 2020

Tarja Tuominen from the Confederation of Finnish Industries (EK) presented a study by EK explaining the general forces for change in service industries operative environment. She also elaborated on competences required in 2020 for international service organizations.

According to EK study, the key forces for change are
a) globalization - enhancing internationalization and multiculture of services, multinational companies, increased competition and new kind of businesses
b) technological development and digitalization, creating prerequisites for services
c) networking - creating business opportunities across service sectors
d) ageing - threat for a competent workforce, setting challenges for responding to customer needs.

The underlying theme within Tuominen´s presentation was customer needs. Tuominen emphasized how we face customers, how we evaluate their needs, how we fulfil the requirements and competences providing the services.

Another trend within the services evolution seemed to be convergence of service sectors. You can see integration of services within various branches, resulting in providing packages of services. In Finland an example of such are the combinations of social services, real estate, retail and IT services, which can be seen merging for eg senior citizens.

According to EK, the trends and change factors set requirements for new competences towards 2020. The common competences needed are social skills, international operations and utilization of technologies. This does not sound like a groundbreaking news - but in the current market environment service providers already face problems of operating in the global market, lacking needed skills. Although companies are not active in the international market, globalization will affect domestic operations as well. It is important to be able to anticipate changes.

I think we say we learn for life. But there has to be some thought and discipline in regards to what takes the Finnish industries - and service businesses - forward internationally. Thus, engines for change are needed in a planned, systematic way, including educational plans as well as companies HR and HR development strategies.

Competitive advantage - defining the sweetspot to complement your strategy

In strategy creation, there are two schools that bring benefits to strategy approach: planning and position school. The planning school is more traditional, providing a clear framework, tools and process for the strategy creation. The planning view includes a deliberate long term plan, carried out by top management. According to Kimmo Suominen from Perfecto, the position school for strategy creation is focusing on the analytics – how an organization positions itself to its environment with a most profitable way and thus finds a competitive advantage.

If you compare the two schools of planning and position, the planning school, through its formalization of the strategy, has traditionally a more visible role whereas position, through the analysis part, has not yet evolved to a systematic part of the strategy creation process.

Companies through their strategy creation approaches typically have defined vision, mission and values, but as Collis and Rukstad (HBR, 2008) point out, there are typically so many elements that people get confused to what is essential and what drives the implementation really forward.
In addition to the typical definitions, what would help companies is a clear definition of the competitive advantage. According to Collis and Rukstad, “your competitive advantage is the essence of your strategy: what your business will do differently from or better than others defines the all-important means by which you will achieve your stated objective. That advantage has complementary external and internal components: a value proposition that explains why the targeted customers should buy your product and a description of how internal activities must be aligned that only your firm can deliver that value proposition.” Therefore, clarifying the strategy in described form, in addition to the value and vision statements, would clarify the direction better for the employees and help set correct shorter term objectives.

What companies could do is use eg The Strategic Sweet Spot model in Collis and Rukstad (2008) ie finding the sweet spot that aligns the firm´s capabilities with customer needs in a way that competitors cannot match given the changing external context – factors such as technology, industry demographics and regulation.

Summarizing the competitive advantage would bring a welcome addition to the strategy elements, including a) objectives, ie ends of the strategy, b) scope, the domain of it and c) advantage, the means of achieving the end.