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After After-Sales: New Business Models Tempt, Fail Industry

January 27, 2017 • STRATEGY & MANAGEMENT, Global Business, Marketing & Consumers

By Olaf Plötner

The after-sales-based business models of industrial enterprises are endangered. Simultaneously, modern data-based technologies enable the development of complex service solutions – so called business models 4.0. Olaf Plötner, Dean of Executive Education at ESMT Berlin, describes the potential success of these models as well as the nine major cost traps that are impeding their success.

 

In 2001 Siemens AG launched Soarian, a data-driven platform designed to revolutionise the inner workings of hospitals and other healthcare organisations. By constantly collecting and evaluating performance data, Soarian sought to improve healthcare workflow – better orchestrating patients, treatments, departments, and products while identifying systemic weaknesses and inefficiencies for optimisation.

Despite a promising launch in the North American market and the acquisition of high-profile customers, Soarian fell short of profitability targets for years. As a result, in 2014 Siemens sold the business for US$1.3 billion to Cerner, a renowned healthcare sector IT and consulting firm.

Siemens was not new to the healthcare sector. For more than a century, the company had profited from diverse industries, including healthcare, where it focused on the development, production, and sale of medical imaging equipment via subsidiary Siemens Healthcare (now Siemens Healthineers).

How then could such a well-established medical equipment manufacturer, with such a strong and diverse customer base, nevertheless fail to profit from a revolutionary medical solutions platform?

 

Old Revenue Sources, New Revenue Streams

Traditionally, many industrial enterprises gain their profits in “after-sales services” – i.e., repair and maintenance services as well as the sale of spare parts. Today, however, three threats make this business revenue model increasingly endangered:

Low Purchasing Power: New customers in emerging and developing markets lack the spending power needed to purchase either high-quality products or after-sales services.

Copycat Products: Third-party companies are copying the more expensive spare parts of established brands, undercutting after-sales profitability.

The “China” Phenomenon: State interventions, like those that China imposed on German premium car manufacturers in 2014, can force manufacturers to lower the prices of spare parts.

Despite these threats, innovative developments in the IT sector create possibilities for tapping great sales potentials. Two factors are especially important:

Data Mining: There are a surging number of options for generating and analysing real-world data – information that can be captured autonomously and transmitted anonymously back into production and service processes. For example, a modern aircraft engine features over 3,000 sensors, allowing its manufacturer to monitor performance and to act before anything goes wrong.

Connectivity: Global networking – between humans, between machines, and between machines and products – is the new standard. According to a 2011 white paper by Cisco Internet Business Solutions Group, by 2020 the number of connected devices will outnumber people by a factor of six.

There are gradual signs of these changes in industrial markets, and each region has its name for this transformation. The US calls it the “Internet of Things”. South East Asia coined “Made in China 2025”. With a nod to changes in industrial manufacturing specifically, Germany is calling it “Industry 4.0”.



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About the Author

Prof. Olaf Plötner is Dean of Executive Education at ESMT Berlin. Dr. Plötner’s current research and teaching focus is on strategic management in global B2B markets. His research has been portrayed in journals such as Industrial Marketing Management and Journal of Business and Industrial Marketing as well as in leading international media such as CNN, Wall Street Journal Europe, Times of India, Frankfurter Allgemeine Zeitung, China Daily Europe, and Financial Times.

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