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Some of the world’s leading companies IBM, General Electric, Rolls-Royce, Ericsson, and EDS among them — now compete by providing integrated solutions rather than making stand-alone products or selling services.1
Suppliers of products as diverse as information technology systems, trains, aircraft engines and telecom systems have achieved success with this approach by providing innovative combinations of technology, products and services as high-value unified responses to their business customers’ needs.2 For example, Rolls-Royce plc competes by providing airlines with “Power By The Hour” — selling the jet engines along with the services to maintain, repair and upgrade them over many years. And providers of services such as IT, telecom network management and technical consultancy now compete by offering solutions that incorporate products from a few select manufacturers. Electronic Data Systems Corp., the global IT service provider, has built the capabilities to manage and integrate different suppliers’ technologies and products as part of its business outsourcing solutions.
The shift has been underway since the early 1990s. Looking just at the manufacturing side, a growing number of manufacturers have begun providing services to finance, operate, maintain and upgrade an installed base of products — their own and, increasingly, those of other manufacturers. Services are attractive because they provide continuous revenue streams, have higher profit margins and require fewer assets than manufacturing. By the late 1990s, revenues obtained by servicing an installed base represented from 10 to 30 times the value of new product sales.3 For example, Ericsson estimated in 2001 that the costs of purchasing a mobile communication network represented only 6% of the total costs of operating a network over a 10-year period. Across a range of manufacturing companies, service revenues now represent an average of over 25% of total revenues.4 For some, such as Rolls-Royce and IBM Corp., services that add value to the physical product now account for more than 50% of their revenues.5
But customers are not paying just for an integrated package of products and services. They are buying guaranteed solutions for trouble-free operations. The onus is on the providers of integrated solutions to identify and solve each customer’s business problem by providing services to design, integrate, operate and finance a product or system during its life cycle.
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1. The trend toward solutions was foreseen by P.F. Drucker, “Innovation and Entrepreneurship: Practice and Principles” (London: Heinemann, 1985), 231. For a discussion of the emergence of customer solutions business models in the 1990s, see A.J. Slywotzky and D.J. Morrison, “The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits” (Chichester: John Wiley & Sons, 1998); and A.C. Hax and D.L. Wilde II, “The Delta Model: Adaptive Management for a Changing World,” MIT Sloan Management Review 40, no. 2 (winter 1999): 11–28. For a discussion of consulting capabilities required for customer solutions provision, see R. Sandberg and A. Werr, “The Three Challenges of Corporate Consulting,” MIT Sloan Management Review 44, no. 3, (spring 2003): 59–66.
2. Integrated solutions is one of several service-based business models; see R. Wise and P. Baumgartner, “Go Downstream: The New Profit Imperative in Manufacturing,” Harvard Business Review (September–October 1999): 133–141; and R. Oliva and R. Kallenberg, “Managing the Transition from Products to Services,” International Journal of Service Industry Management 14, no. 2 (2003): 160–172. However, previous research is limited to individual cases of companies or specific industries and neglects to identify the role of systems integration and the range of service capabilities required for integrated solutions provision. For a systematic empirical study showing how companies across industries are building specific capabilities for integrated solutions, see A. Davies, P. Tang, T. Brady, M. Hobday, H. Rush and D. Gann, “Integrated Solutions: The New Economy between Manufacturing and Services” (Brighton: SPRU-CENTRIM, 2001), 1–43.
3. Wise and Baumgartner, “Go Downstream,” 134.
4. See P. Koudal, “The Service Revolution in Global Manufacturing Industries” (New York: Deloitte Research, 2006).
5. For a discussion of services added to the physical product, see J.B. Quinn, “Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry” (New York: The Free Press, 1992); and M. Sawhney, S. Balasubramanian and V.V. Krishnan, “Creating Growth with Services,” MIT Sloan Management Review 45, no. 2 (winter 2004): 34–43.
6. For a firsthand account of IBM’s move into integrated solutions, see L.V. Gerstner, Jr., “Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround” (New York: Harper Collins Publishers, 2002).
7. Several authors assume that the shift toward integrated solutions can be understood as a movement downstream from manufacturing to services, including Wise and Baumgartner, ”Go Downstream” and Oliva and Kallenberg, “Managing the Transition from Products to Services.” However, cross-sectoral research has found that companies are also moving into integrated solutions from a base in services. See A. Davies, “Moving Base into High-value Integrated Solutions: A Value Stream Approach,” Industrial and Corporate Change 13, no. 5 (2004): 727–756; and A. Davies and M. Hobday, “The Business of Projects: Managing Innovation in Complex Products and Systems” (Cambridge U.K.: Cambridge University Press, 2005).
8. For an in-depth discussion of systems integration, see M. Hobday, A. Davies and A. Prencipe, “Systems Integration: A Core Capability of the Modern Corporation,” Industrial and Corporate Change 14, no. 6 (2005): 1109–1143.
9. An organizational model for solutions is developed by several authors: See N.W. Foote, J.R. Galbraith, Q. Hope and D. Miller, “Making Solutions the Answer,” McKinsey Quarterly (2001): 84–93; J.R. Galbraith, “Organizing to Deliver Solutions,” Organizational Dynamics 31, no. 2 (May 2002): 194–207; and J.R. Galbraith, “Designing Organizations: An Executive Guide to Strategy, Structure, and Process” (San Francisco: Jossey-Bass, Wiley, 2001). However, these authors assume that back-end units are in-house because their research is based on vertically integrated manufacturing companies like IBM, Nokia and Sun Microsystems. For a model that recognizes that integrated solutions providers can originate from services and that back-end units can be external to the company, see A. Davies, T. Brady and P. Tang, “Delivering Integrated Solutions” (Brighton: SPRU-CENTRIM, 2003): 1–34.
10. For a discussion of repeatable solutions, see A. Davies and T. Brady, “Organizational Capabilities and Learning in Complex Product Systems: Towards Repeatable Solutions,” Research Policy 29, (2000): 931–53; Galbraith, “Organizing to Deliver Solutions”; and T. Brady and A. Davies, “Building Project Capabilities: From Exploratory to Exploitative Learning,” Organization Studies 25 (2004): 1601–1621. The concept of replication is discussed by S.G. Winter and G. Szulanski, “Replication as Strategy,” Organization Science 12, no. 6 (2001): 730–743.
11. E. Cornet, R. Katz, R. Molloy, J. Schädler, D. Sharma and A. Tipping, “Customer Solutions: From Pilots to Profits” (Boston, Massachusetts: Booz Allen & Hamilton, 2000), 1–15.