SME Manufactureres in Quebec: Adding services to boost competitiveness and the bottom line

Download the PDF version

About this publication

Publication author : McGill University and the Conference Board of Canada

Collaborator : Canada Economic Development for Quebec Regions

Publish date : July 25, 2012

Summary :

This report is the outcome of research by McGill University and the Conference Board of Canada to identify how adding a service offering can benefit Quebec’s small and medium-sized manufacturers. It explores which service provision strategies are most effective (outsourcing services or providing them inhouse), outlines common challenges in providing services, and proposes practical solutions for overcoming these challenges.

Table of Contents

  1. Ackowledgements
  2. Executive Summary
  3. Chapter 1 - Introduction
  4. Chapter 2 - Literature Review
  5. Chapter 3 - Survey Results
  6. Chapter 4 - Case studies
  7. Chapter 5 - Conclusions and Recommendations
  8. Appendix A - Bibliography

Ackowledgements

This report was prepared by The Conference Board of Canada, in collaboration with McGill University, with the financial support of Canada Economic Development for Quebec Regions.

Special thanks go to Douglas Watt for his thoughtful feedback as the internal reviewer of the report.

We extend our thanks to the two external reviewers of this report: Dr. Saibal Ray and Dr. Onur Hisarciklilar, Department of Mechanical Engineering, McGill University.

The findings and conclusions of this report are entirely those of The Conference Board of Canada. Any errors or omissions in fact or interpretation remain the sole responsibility of The Conference Board of Canada.

About McGill University

McGill University is one of Canada’s best-known institutions of higher learning and one of the country’s leading research-intensive universities. With students coming from about 160 countries, McGill has a student body that is the most internationally diverse of any medical–doctoral university in Canada. McGill was ranked as the top university in the medical–doctoral category by Maclean’s magazine (2005–11), and it has been consistently ranked among the top 20 universities in the world by Times Higher Education.

Executive Summary

At a Glance

In response to changing patterns of international trade and industrial organization in the global economy, small and medium-sized enterprises (SMEs) have had to determine how they can best compete in an open market and overcome significant challenges caused by large differences in the costs of labour and materials around the world. The trend toward one world market for labour, capital, goods, and services, coupled with the breakdown of vertical integration among many multinational corporations, is an important feature of the modern economy.

Examples of competitive strategies from different industries and different countries point to how successful manufacturing firms are adding services to their product offerings. Services are defined as “intangible products that are not goods, such as accounting, banking, cleaning, consultancy, education, insurance, know-how, medical treatment, [and] transportation.”1 Services can be hard to identify as having separate economic value because they are often closely associated with a good.

SMEs have to determine how they can compete and overcome significant challenges caused by large differences in the costs of labour and materials around the world.

Companies are leveraging the knowledge of their products and markets to exploit opportunities upstream and downstream in their value chain to add more value and develop stronger client relationships. Before a product is manufactured, services associated with the product may include research and development, product and process design, and procurement of the raw materials and finished goods required to manufacture the product. Following manufacturing, other services that can come into play include inventory management, transportation, customs brokerage, marketing, sales, installation, maintenance, repair, and recycling or disposal of a product. These services, comprising many subcategories and applicable to subassemblies and parts of the product, were once fully carried out by the multinational corporation. Today, however, each of these services is increasingly an opportunity for SMEs to create a new service.

There are several reasons why product manufacturers should seek to integrate services into their core product offerings:

Potential Challenges in Providing Services

For manufacturing companies, the transition to adopting a service offering is contingent upon overcoming several hurdles:

An SME has particular issues to consider in making a service offering that depend on its business environment and its position in the value chain. These are its access to customers, the complexity of market needs, its competitive differentiation, and whether it is a supplier to original equipment manufacturers (OEMs) or is an OEM itself.

Key factors for SMEs were in-house expertise, knowledge of foreign languages and regulations, knowledge of clients’ needs, and the ability to provide solutions.

In our survey, 45 per cent of Quebec-based manufacturing SMEs identified the need for qualified personnel as a major challenge in making a service offering. Other challenges lay in accessing client needs (12 per cent), identifying what specific services to provide (12 per cent), competition (3 per cent), and accessing significant capital to fund the development of new service offerings (1 per cent).

Survey respondents indicated that they were able to overcome these challenges by consulting with OEM clients, partnering with distributors, hiring or developing service management functions, and developing specialized personnel and expertise. The key factors that helped SMEs deliver services to their clients were in-house expertise and knowledge of their products, knowledge of foreign languages and regulations, knowledge of clients’ needs, and the ability to provide solutions.

Keys to Success

Successful companies interviewed for our case studies exhibited the following common attributes. They:

Best Practices

SMEs can benefit from undertaking a series of planning and action steps that enable them to develop optimal service offerings that complement their product offerings. The following best practices are recommended for SMEs that are developing and implementing a strategy for providing services:

Chapter 1 - Introduction

Chapter Summary

In the past several decades, patterns of international trade and industrial organization have changed significantly. The trend toward one world market for labour, capital, goods, and services, coupled with the breakdown of vertical integration among multinational corporations, is an important feature of the modern economy. Increasingly, multinationals have been redefining themselves by focusing on “innovation and product strategy, marketing, and the highest value-added segments of manufacturing and services, while reducing their direct ownership over [redefined] ‘non-core’ functions such as generic services and volume production.”1

The trend is toward one world market for labour, capital, goods, and services coupled with the breakdown of vertical integration among multinational corporations.

These changes are leading to vast transformations. Industries and firms that were formerly stable and competitive have had to evolve or disappear. Large companies have had to find ways to leverage the best available resources on a global scale. Meanwhile, smaller-scale companies have had to determine how they can best compete in an open market while overcoming significant challenges caused by large differences in the costs of labour and materials around the world.

Examples of competitive strategies from different industries and different countries point to how successful manufacturing firms are adding services to their product offering. Companies are leveraging valuable knowledge of their products and market to exploit opportunities upstream and downstream in their value chain, aiming to improve their competitive position and develop stronger client relationships.

The concept of manufacturers generating revenues by looking upstream and downstream in their value chain is well illustrated by the “smiling curve.”

Service offerings can be an extremely important strategy for small and medium-sized enterprise (SME)2 manufacturers seeking to increase their corporate revenues and profitability. These manufacturers provide services such as procuring third-party components and integrating them with their manufactured product into a larger assembly; testing and quality control; managing finished goods inventories, transportation, and logistics for the end user; installation; training; maintenance; and recycling of products at the end of their life cycle. Other services include participation in the product development process, such as designing to client specification and designing for manufacturing.

The concept of manufacturers generating revenues by looking upstream and downstream in their value chain is well illustrated by the “smiling curve” first proposed by Stan Shih, the founder of Acer, an IT company based in Taiwan.3 (See Exhibit 1.) Shih observed that in the computer industry both ends of the value chain command higher values than the middle part, where manufacturing of a product takes place. Although this model is not necessarily applicable to the same degree within other industries, it demonstrates a range of strategies and opportunities for service offerings that can be found at either end of the value chain.

Exhibit 1
The Smiling Curve

Exhibit 1 shows the Smiling Curve. It displays the production chain activities related to the value-added level. The first production chain activity is the Concept/R&D; it has a high value-added level. Next is the Branding activity, its value-added level is lower. The third activity of the production chain is the Design with a lower value-added level than Branding. The production chain activity with the lowest value-added level is the Manufacturing.  The fifth activity is the Distribution. Its value-added rank is the same as the Design activity. The sixth activity on the production chain is the Marketing and it is about the same value-added level as the Branding activity. The final activity is the Sales/After service with the same value-added rank as the Concept/R&D activity.

Source: The Smiling Curve: Stan Shih.

This report focuses on effective service provision strategies that are applicable to various manufacturing SMEs in Quebec. It identifies approaches that have been successful in practice, the benefits and challenges that were encountered, and the practical solutions employed to overcome the challenges.

The report is organized as follows. Chapter 2 reviews the literature on the benefits and challenges for manufacturing companies that add a service offering, including effective strategies and best practices. Chapter 3 describes the results of an online survey of Quebec manufacturing SMEs. Chapter 4 reports the findings of interviews with and cases studies of a selection of Quebec SMEs that have successfully implemented a service offering. Chapter 5 presents conclusions, best practices, and recommendations.

Chapter 2 - Literature Review

Chapter Summary

Services are defined as “intangible products that are not goods, such as accounting, banking, cleaning, consultancy, education, insurance, know-how, medical treatment, [and] transportation.”1 Services can be hard to identify as having separate economic value because they are often closely associated with a good. For example, the delivery of a service such as a medical diagnosis may be captured in the financial charge for administering an associated good such as a dose of medicine. The same is true when the value of the service of making the detailed design of a product is built into the price of the product itself.

Services can be hard to identify as having separate economic value because they are often closely associated with a good.

The concept of the value chain associated with a product further highlights the number of services that are part of a product’s life cycle. For example, before a product is manufactured there may be research and development, conceptual and preliminary design, detailed design, production planning, and procurement of raw materials and finished goods required to manufacture the product. Each of these services, once fully carried out by the original equipment manufacturer (OEM), is increasingly a candidate for outsourcing. Moreover, looking deeper into detailed design, for example, there are services offered for computer-aided design or for the structural analysis of more complex products, which in some cases are outsourced. Following manufacturing, the services that can be associated with a product may include inventory management, transportation, customs brokerage, marketing, sales, installation, maintenance, repair, and recycling or disposal.

There are several well-established reasons why product manufacturers should seek to integrate services into their core product offerings:

Examining the life cycle of products manufactured by a company can often point to the potential additional services it may be able to provide.

In response to new global competition, a manufacturing company can strategically seek to move to a different position in the value chain, where its offering can provide greater added value. This can be accomplished by moving downstream in the value chain—adding services such as inventory management, logistics, assembly or “kitting” of components, quality certification (to standards established by clients’ certification authorities), installation, and maintenance—or moving upstream in the value chain toward a greater role in product development.

Examining the life cycle of products manufactured by a company can often point to the potential additional services it may be able to provide. A manufacturing company’s knowledge of its products and markets gives it an advantage in identifying what these potential services are and in providing them either by developing the capability internally or by outsourcing it.

Implementing Services

For manufacturing companies the transition to providing services is contingent upon overcoming several hurdles:

Framework for SMEs Offering Services

Although these hurdles are common to manufacturers of all sizes, SMEs face particular issues. In a multi-case study on SME capital goods manufacturers in Italy, Sweden, and Switzerland, Gebauer and colleagues found that strategies for developing a service offering depended on:

According to that study, the SME’s business environment can be described according to four dimensions:

  1. The number of customers. SMEs can either concentrate on few customers that are typically strategic partners or on many customers.
  2. Access to customers. SMEs can either sell their products directly to customers or through distributors. Distributors often limit SMEs’ ability to obtain information about the diversity of target customer needs, but they can be useful in optimizing selling costs and reaching many customers.
  3. Complexity of market needs. SMEs must respond to differing customer requirements by increasing the individuality of their offerings.
  4. Competitive differentiation. SMEs with few customers are able to create strategic partnerships where they can learn about customers’ needs and serve as an important resource. SMEs with many customers tend to have technological equality among their products.11

These four dimensions define two distinct business environments, referred to here as type A and type B. (See Table 1.)

Different strategies for implementing a service offering are applicable in each of the four cases shown in Table 2: non-OEM suppliers selling to few customers (environment type A); non-OEM suppliers selling through distributors (environment type B); OEMs selling to few customers (environment type A); and OEMs selling through distributors (environment type B).

Table 2 summarizes the insights for SMEs gained from the research of Gebauer and colleagues,12 listing service strategy formation and implementation actions used by Western European SMEs to successfully make service offerings. It shows the various paths that SMEs in each business environment type took to recognize and persuade management and employees of the economic potential of providing services, of developing or procuring the requisite expertise, and of successfully deploying the service offering in the market. This research is useful to Quebec SMEs seeking to develop their own service offerings and supports the findings in the present report.

Table 1
Two Business Environment Types

Type A
Few customers
Type B
Many customers
Type A
Direct access to customers
Type B
Distributors limiting access to customers
Type A
Sophisticated needs across all customers
Type B
Sophisticated but fragmented service needs
Type A
Competitive advantages through customer collaboration
Type B
Technological equality for products
Source: Gebauer, Paiola, and Edvardsson, “Service Business Development.”

Table 2
Service Business Development Strategies for SMEs

Strategy formation
(A) Suppliers selling to few customers
  • Defining a service strategy for logistic and repair services
  • Defining a service strategy for R&D-oriented services
Strategy implementation
  • Defining a service development process
  • Involving customers and logistic service providers in the development process
  • Facilitating interfirm collaboration with customers and logistic providers
  • Setting up a repair centre
  • Convincing engineers to value co-production of customer solutions as strategic opportunities
  • Facilitating engineers to serve as trusted advisors
  • Recruiting engineers with technical skill(s)
  • Developing for customer-focused attitudes
  • Integrating engineers into key account teams
  • Monitoring customer profitability
Strategy formation
(B) Suppliers selling to distributors
  • Reconsidering the service approach from the sales channel perspective
  • Defining a strategy to improve customer service of distributors
  • Defining a service strategy to move downstream in the value chain
Strategy implementation
  • Developing consulting services for distributors
  • Facilitating entrepreneurial orientation for management
  • Installing a special distributor training function
  • Implementing a service development process
  • Involving customers in the service development process
  • Recruiting technical skill(s) and customer-focused attitudes
  • Defining service-related performance measures for the service function
  • Diffusing service skills across the network of subsidiaries
  • Forming a distinct service unit at headquarters
  • Running subsidiaries as service units
  • Setting up team-based key performance indicators
Strategy formation
(C) OEMs selling to few customers
  • Deriving a relationship-based service portfolio including maintenance services with few design and construction services and/or basic services
Strategy implementation
  • Convincing management and employees to understand the strategic potential of services
  • Facilitating manager coaching of employees in customizing services
  • Recruiting and developing skill(s) and customer-focused attitudes
  • Forming a matrix organization with services as a separate function
  • Setting up rules for sharing resources between the service and manufacturing function
  • Defining service-related performance indicators for the service function
Strategy formation
(D) OEMS selling to distributors
  • Reconsidering service process configuration between distributors and SMEs
Strategy implementation
  • Setting up interfirm collaboration with distributors and customers
  • Understanding the value of service-related collaborations with distributors
  • Modifying management and employee behaviour toward being a service partner and leader in service performance
  • Setting up a training centre for distributors
  • Recruiting and training of technical service skills at the distributor level
Source: Gerbauer, Paiola, and Edvardsson, “Service Business Development.”

Chapter 3 - Survey Results

Chapter Summary

An online survey in English and French, containing primarily multiple-choice questions, was sent to approximately 2,500 Quebec-based manufacturing SMEs. Respondents were asked to specify responses where none of the choices was suitable. Completed surveys were received from 113 participants, nearly 80 per cent of whom indicated that their companies offer services to clients. The average number of employees per company was 97, and the average yearly revenue was just over $18.6 million. Attributes of the responding companies are presented below.

Attributes of Responding SMEs

Eighty-four per cent of respondents indicated that their clients are businesses, 12 per cent indicated government, and the remainder served consumers or all sectors. (See Chart 1.) Only 1 per cent of respondents sold products directly to consumers.

Chart 1
Types of Clients Served
(percentage of firms; n=113)

Chart 1 shows the types of clients served in percentage by firms.  84% of the clients are businesses, 12% government, 1% consumers and 3% all of the above.

Note: Respondents were asked “What type of clients does your company serve?”
Source: McGill University.

Of the SMEs providing services, 63 per cent have offerings that are upstream of manufacturing (product design). Less than half offered services that are downstream of manufacturing (testing, maintenance, incorporating other components together with their product to produce subassemblies, logistics, distribution, and kitting of other components together with their products). (See Chart 2.)

Chart 2
Services Provided
(percentage of firms; n=89)

Chart 2 shows the kind of services provided by the interrogated firms: 23% do distribution, 23% offer logistics, 62% propose design services, 42% offer testing services, 36% are providing maintenance services, 18%, do kitting and 35% are proposing subassembly services.

Note: Respondents were asked “What services does your company currently provide?”
Source: McGill University.

Most of the business is custom, with 60 per cent of SMEs indicating their business model is make to order (already designed; made when the order arrives), 25 per cent indicating engineer to order (designed, then made), and 15 per cent indicating make to stock (already designed and made to prepare for a possible order). (See Chart 3.) Customized product offerings are highly correlated with the provision of services. Engineer-to-order and make-to-order firms are most likely to provide services, and make-to-stock firms are least likely to provide services. (See Chart 4.)

Customization may be associated with increased offering of services because both activities require a capacity to innovate, either incrementally or radically, in order to meet customer needs. In addition, SME owner-operators may place a higher intrinsic value on customization and innovation than do large firms. The ability to innovate—and thus customize products and create services—may actually be easier for SMEs than for large firms. This is because large firms often depend on large-scale production, which usually entails a higher degree of standardization than is found in SME offerings.

Chart 3
Main Business Model
(percentage of firms; n=111)

Chart 3 shows the distribution of the main business model among the firms: 60% use a make to order model, 25% are using the engineer to order model and 15% of the firms use a make to stock business model.

Note: Respondents were asked “What is your company’s main business model?”
Source: McGill University.

Chart 4
Main Business Model and Service Offering
(percentage of firms; n=111)

Chart4 is showing the relation between the main business model and the service offering.  90% of firms provide services when they use an engineer to order as their main business model.  This percentage is only of 80% when the main business model is make to order.  When the main business model is make to stock, the proportion of firms providing services falls to 50%.

Note: Respondents were asked “What is your company’s main business model?”
Source: McGill University.

Almost half (46 per cent) of the companies that responded to the survey indicated that they designed more than 80 per cent of their products. (See Chart 5.) Product design is not correlated with the offering of services, suggesting that an SME does not necessarily consider product design to be a service offered to clients when it designs, manufactures, and markets its own product—that is, it considers product design to be part of the product offering. (See Chart 6.)

Chart 5
Products Designed by Company
(percentage of firms; n=112)

Chart 5 shows the percentage of product designed by the company: 46% of the firms designed more than 80% of their products, 28% create between 40 and 80% of their product, 21% are producing less than 40% of their product and 5% designed none of their product.

Note: Respondents were asked “What percentage of your current products were designed by your company?”
Source: McGill University.

Chart 6
Products Designed by Company and Service Offering
(percentage of firms; n=112)

Chart 6 is about the relation between the percentage of products design by company and the service offering. When the firms design more than 80% of their product, they provide services in a proportion of 75%. This relation is of 87% when the companies create between 40 and 80% of their product. It is of 78% concerning firm designing less than 40% of their product. When there is no local designing, 65% of companies offer services.

Note: Respondents were asked “What percentage of your current products were designed by your company?”
Source: McGill University.

More than half of respondents indicated that less than 40 per cent of their products are incorporated into another company’s end products, with 22 per cent having none incorporated at all. (See Chart 7.) This finding is an indication of the SMEs’ position in the value chain and, as discussed in Chapter 2, has implications for the strategies that could be used in offering more services to clients. Companies whose products are not incorporated into other companies’ end products are slightly less likely to offer services. (See Chart 8.)

Chart 7
Products Incorporated in Other Businesses’ End Products
(percentage of firms; n=111)

Chart 7 show the rate of products incorporated in other business end products: 23% of firms have a rate superior to 80%, 21% possess a rate between 40 and 80%, 34% are below 40% and 22% of firms have no product incorporated in other business end products.

Note: Respondents were asked “What percentage of your company’s products are sold to other businesses and incorporated into their end products?”
Source: McGill University.

Chart 8
Products Incorporated in Other Businesses’ End Products and Service Offering
(percentage of firms; n=111)

Chart 8 is relating the rate of products incorporated in other businesses end products and the percentage of firms offering services. When products are incorporated in other businesses end products at a rate superior of 80%, the firms offer services in 83% of time. The rate of services providing is 78% when the rate of products incorporated in other businesses end products is between 40 and 80%. In case of no product use in other businesses end product, the services provide rate is 66%.

Note: Respondents were asked “What percentage of your company’s products are sold to other businesses and incorporated into their end products?”
Source: McGill University

Chart 9 shows the degree to which SMEs own their distribution channels. As described in Chapter 2, distributors often limit SMEs’ ability to obtain information about target customer needs—information that can be helpful in optimizing selling costs and reaching more customers. As shown in Chart 10, the extent of SME ownership of distribution channels does not correlate with services offered, even though ownership of distribution channels is important in developing the strategy needed to implement a service offering.

Chart 9
Ownership of Distribution Channels
(percentage of firms; n=110)

Chart 9 shows representation of ownership of distribution channels: 38% of firms integrated more than 80% of their distribution channels, that rate is of 16% of firm that own between 40 and 80% of their distribution channel, 12% of companies own less than 40% of their distribution channel and 34% own no part of their distribution channel.

Note: Respondents were asked “Approximately what percentage of ownership does your company possess over the distribution channels?”
Source: McGill University.

Chart 10
Ownership of Distribution Channels and Service Offering
(percentage of firms; n=110)

Chart 10 showing the relation of ownership of the distribution channels and the service offering. Companies that own more than 80% of their distribution channels provide services in a rate of 79%. That rate goes up to 94% when they own between 40 and 80% of their distribution channels. Concerning those who own less than 40% of their distribution channels, those firms provide services in a rate of 77%. When the firm does not possess any part of their distribution channels, only 68% of them offer services.

Note: Respondents were asked “Approximately what percentage of ownership does your company possess over the distribution channels?”
Source: McGill University.

Although the majority of SMEs do not outsource their service offering (nearly 70 per cent use in-house resources exclusively), a substantial minority of nearly 30 per cent use a combination of in-house operations and outsourcing to provide services to clients. (See Chart 11.) In some instances, the reason for involving in-house staff along with outsourcing to provide services is that firms offering sophisticated or complex customized products feel the need to offer correspondingly complex “high-touch” services. High-touch services require a close understanding of the customer’s needs, which is best provided by in-house staff who are already working with the customer on their products.

Chart 11
How Services Are Provided
(percentage of firms; n= 113)

Chart 11 shows how the services are provided: 69% of firm use in-house resource, 1% of them use outsourcing only and 30% use both method.

Note: Respondents were asked “How does your company provide services to clients?”
Source: McGill University.

Closer contact with customers and end users of products is necessary to correctly tailor a service offering and to maintain and enhance client relationships.

Gebauer and colleagues,1 as well as Oliva and Kallenberg,2 point out that manufacturing companies must find ways to have closer contact with customers and end users of their products. This contact is necessary to correctly tailor a service offering and to maintain and enhance client relationships. Outsourcing services makes it more difficult to improve understanding of customer needs and generate more orders. Although it may initially be necessary to outsource part of a service offering until the company can build its own capabilities, in the longer term it is better to own the service offering to ensure its quality and to be closer to the customer.

Thirty per cent of companies interviewed for the present report use a combination of in-house staff and outsourcing to provide some part of their service offering. Companies outsourced services when they lacked the necessary in-house expertise, or when the volume of business for a service did not warrant investing in an in-house capability. In many cases, companies outsourced installation and maintenance services. Given that the companies interviewed are small and many have customers around the world, outsourcing is a reasonable option.

Benefits of Providing Services

Two-thirds of SMEs that provide services attribute up to 20 per cent of their revenue to their service offering, while another 24 per cent state that between 21 and 60 per cent of their revenue is from services. (See Chart 12.) This finding indicates that successfully offering services can make a significant contribution to the revenues of product manufacturers. In addition, fully 92 per cent of SMEs providing services stated that their service offering has increased their ability to sell their manufactured products.

Chart 12
Revenue Attributed to Sale of Services
(percentage of firms; n=86)

Chart 12 shows the rate of revenue attributed to sale of services: 5% of firms have no revenue due to sale of services, 67% have between 1 and 20% of revenue due to sale services, 24% of companies declare between 21 and 60% of their revenue due to sale of services and 4% firms got more than 61% of their revenue due to sale of services.

Note: Respondents were asked “Approximately what percentage of revenue do you attribute to the sale of services?”
Source: McGill University.

Chart 13 shows the proportion of service sales attributed to customers that did not buy SMEs’ manufactured products. More than one-third of respondents are selling services to some clients that do not purchase their manufactured products, indicating that new clients were found as a result of service offerings.

Chart 13
Services Sold to Non-Purchasers of Firms’ Products
(percentage of firms; n=87)

Chart 13 represents the services sold to non-purchasers’ of firms’ products: 64% of the firms declare not to sale any services to non-purchasers of their firms’ products, 31% provide less than 40% of their total services sold to non-purchasers and 5% of firms state to offer between 40 and 80% of their total services to non-purchasers’. No one is selling more of 80% of its services to non-purchasers.

Note: Respondents were asked “What percentage of your services are being sold to non-purchasers of your manufactured products?”
Source: McGill University.

Challenges in Offering Services

Forty-five per cent of survey respondents indicated that a major challenge they face in offering services is the need for qualified personnel. Twelve per cent indicated that a major challenge is difficulty accessing clients because products were sold via distributors, while another 12 per cent identified difficulty determining what complementary services to provide. Eighteen per cent pointed out other challenges such as competition and the need for significant capital. (See Chart 14.)

Chart 14
Major Challenges in Making a Service Offering
(percentage of firms; n=113)

Chart 14 shows the major challenges in making a service offering: 45% of firms are declaring that the major challenge is the need for qualified personnel, the answer is the difficulty accessing clients because of distributors for 12% of companies, 12% of firms think it is the difficulty to determine what complementary services to provide and 18% of companies declare it is something else.

Note: Respondents were asked to “identify any major challenges that your company faced in making a service offering.”
Source: McGill University.

Potential Solutions to Challenges

Most commonly, firms overcome the challenges involved in making service offerings by consulting OEM clients. (See Chart 15.) Among the 18 per cent of survey respondents who indicated “other” ways to overcome the challenges, some reported training their own employees, purchasing components from low-cost sources in Asian countries, restructuring their sales and marketing efforts, and creating their own distribution network.

Respondents also itemized changes they had made in their companies to overcome the challenges. These changes included:

In addition, respondents identified the following key factors as having helped them deliver services to their clients:

Chart 15
Solutions to Challenges
(percentage of firms; n=113)

Chart 15 shows the solutions to challenges: 7% of firms think it is to purchased or partnered with other firms, 20% of companies opt for hired a services manager, 13% of firms would partnered with distributors, 34% of companies choose to consulted OEM clients and 18% think it is none of the above.

Note: Respondents were asked to “identify how your company was able to overcome these challenges.”
Source: McGill University.

Government Assistance

Finally, respondents were asked to suggest what government could do to make it easier for SMEs to offer services. (See Table 3.)

Twenty-six per cent of respondents expressed interest in receiving online information about best practices and tools that they could use to increase their service offerings. However, 46 per cent selected “none of the above.”

The low percentage of respondents identifying a need for financial incentives and tax credits may reflect the fact that this option was not offered in the survey; however, it may also indicate that the greater impediment to action is lack of expertise, not the need for financial encouragement. One other area for government assistance that was not covered in the survey is the offer of “live” professional advice and mentoring from government experts and successful business operators who have experience adding a service component to their business. A number of firms might have found this option attractive.

Table 3
Suggestions for Government Support
(percentage of firms; n=113)
Information sessions (e.g., webinars) 14
Website that provides best practices and real corporate examples that demonstrate strong financial and non-financial benefits 26
Calculation tools that can forecast potential profit increases over time and estimated amount of ROI* 11
Financial incentives or tax credits 2
None of the above 46
*return on investment
Note: Total does not add to 100 due to rounding.
Source: McGill University.

Chapter 4 - Case studies

Chapter Summary

Interviews were conducted with 10 companies that responded to the survey and had a service offering. The following five case studies are based on these interviews and were chosen to illustrate real corporate examples of strategies and best practices for providing services.

VibroSystM Inc.

Corporate Overview

Located in Longueil, Quebec, VibroSystM is an OEM that sells all of its products to other businesses. The company was founded in 1986 to commercialize a promising technology for the dynamic measurement of key performance characteristics of rotating machines. Since then, it has broadened its product line and market by developing innovative and specialized measuring products based on patented technologies. The company serves public and private electric power producers (hydroelectric, fossil fuel, and nuclear), “mining, pulp & paper, equipment manufacturers, engineering firms, laboratories and research institutes.”1 Its products can be found in many locations across the world, in well over 1,000 installations.

VibroSystM manufactures its products at its facility in Quebec mainly out of purchased parts. Approximately 30 per cent of its products are custom-made for the needs of specific clients, but its main business model is make to order from its product line. Almost all of VibroSystM’s products have been designed in-house, and the company works continuously to develop new products. VibroSystM owns about 50 per cent of its distribution channels.

Service Offering

According to the company’s commercial representative, VibroSystM sends field engineers to each installation site to ensure that its products are properly installed and working. It maintains sufficient service engineers on staff to support its installed base of products around the world. The company has offered this service since its inception.

The five case studies were chosen to illustrate real corporate examples of strategies and best practices for providing services.

In addition to the basic service, which is considered part of its product, VibroSystM also offers consulting services to help interpret data provided by its products on the health and operating performance of rotating machinery. When analyzed, these data can also be used to optimize and enhance performance. VibroSystM designs and builds specialized systems to suit unique situations where measurements of key characteristics of rotating machinery are required and cannot be met by any of the standard products. Consulting services are considered a profit centre with its own profit and loss accounting. Services now comprise approximately 15 per cent of the company’s revenues.

VibroSystM has moved toward both ends of the smiling curve with its service offering. By installing and supporting its products at its clients’ sites, it continues to gain knowledge about their needs. It has used this knowledge to develop new products to better serve its broader market. It has also used this knowledge to find innovative ways to use its products to provide additional services such as diagnostics and consulting.

VibroSystM began operations with a service culture, in that it immediately began installing and supporting the products it sold. It has thus been in the installed base service market from the outset. To extend beyond this service offering, VibroSystM changed the focus of its interactions with customers from transaction-based to relationship-based, by offering diagnostic consulting and ongoing support for customer installations. To reinforce this point, the commercial sales representative described the company as providing risk management systems for electricity generation companies, indicating that its offering was considered not simply a device but a package of devices and data interpretation for managing the technical risk of breakdown of rotating machinery.

VibroSystM’s success is based on two factors: its patented technology for dynamic measurement of key performance characteristics of rotating machines and its ability to discover its clients’ needs for innovative associated services and customized products. Success with services strongly supports and reinforces continued success with products.

Gentec

Corporate Overview

Gentec “designs, produces and markets custom solutions in the electrical power, data acquisition, signal processing, and power management fields.”2 The company started out as a contractor for Hydro-Québec, conceiving, designing, and manufacturing a data acquisition system according to the utility’s specifications and requirements. In recent years, it has started to diversify its client base and to market its capabilities in electronics manufacturing services and in designing data acquisition systems and industrial power supplies. It markets its own product lines of battery chargers, inverters and uninterruptible power supplies, energy management systems for commercial buildings, lighting control systems, and power factor correction systems.

A company of about 175 employees, Gentec manufactures its products at its own facility from mainly purchased parts and components. Approximately 70 per cent of its products are custom-made (engineered to order), and it has designed some 60 per cent of its current products. Its clients, which are exclusively businesses, sometimes co-design the products Gentec manufactures. Gentec owns approximately 70 per cent of its distribution channels, and about 30 per cent of its products are incorporated into its clients’ end products.

Service Offering

Gentec describes its service offering as follows: “From design to shipping to the end user, including production, integration and final testing, our engineering and fabrication services give you a turnkey solution without having to associate with third parties to develop and make the product.”3

Success with services strongly supports and reinforces continued success with products.

To develop the services it offers, Gentec had to reorganize its operations. The company hired a new director of business development who had extensive experience in the electronics manufacturing service sector. It also created a new sales department and reorganized its purchasing, manufacturing, and design operations to respond more quickly to the needs of its new clientele. And it hired and trained technical sales support staff to provide liaison between individual clients and the design and manufacturing departments for each project. This has helped to ensure that clients’ requirements are properly communicated to the operations functions within the company. The company says that adding services has increased its ability to sell its manufactured products.

Gentec attributes approximately 20 per cent of its revenue to services that it provides exclusively through its in-house operation, and the company is planning for sales from services to reach 30 per cent of the total by 2015. More than 60 per cent of Gentec’s services are sold to customers that do not buy its manufactured products.

Building on its experience as a supplier to Hydro-Québec, Gentec has instituted services on the product development and engineering side of the value chain, and on the integration, testing, logistics, and shipping side, thus exploiting both sides of the smiling curve. Gentec has embraced a customer-centred culture, and it has revamped production and design with processes, machinery, and equipment to improve flexibility and response times.

The relationship with Hydro-Québec has also helped Gentec build an international clientele and develop its technological and operational competencies to create innovative new products and services.

Mailhot Industries

Corporate Overview

Mailhot Industries is a designer and manufacturer to hydraulic cylinders. The company manufactures and markets these products mainly to equipment manufacturers in the construction, waste disposal, mining, and snow-removal sectors for use in their end products. It is a relatively large SME with five plants and two distribution centres, exporting to 14 countries. The description of the company on its website states: “We partner with our customers to understand the application at hand then develop the cylinder to suit the environment it will live in. We offer a full line of rod and telescopic hydraulic cylinders. Each and every one of our products are [sic] built to exacting standards utilizing liquid ionic nitriding on all steel components, then backed by the leading warranty in the business and parts that are available [through] our distribution system.”4

Mailhot has over 250 employees and manufactures all of its products in its own plants out of mainly raw materials. Many of its products are custom-made (engineered to order), but the company considers its business model to be make to order. The company is continually designing new products, and approximately 70 per cent of its current products are designed in-house. Mailhot’s customers are other businesses, which sometimes contribute to the design of new products. Mailhot owns about 50 per cent of its distribution channels, and more than 80 per cent of its products are incorporated in its clients’ end products.

Service Offering

Mailhot’s service offering is in product development, diagnostics, and testing and maintenance of hydraulic cylinders for its clients. In addition to carrying out repair, installation, and exchange/recycling of cylinders, it has a surface treatment and tribology laboratory (established in 2007) to study surface wear and find innovative surface treatments. It offers consulting services, data collection and analysis, and custom-designed approaches to dealing with the environments in which its clients’ equipment operates. The company has designed and implemented many innovative solutions in its products that keep it at the forefront of its industry.

Mailhot has set up two subsidiary organizations to provide some of its services. These are Technique Surface Innovation and TSLab. Based in Quebec, these companies were formed in partnership with the European company HEF Group, which has been a leader in tribology for over 30 years. The companies provide consulting and diagnostic services, as well as innovative solutions, that address problems of wear and abrasion associated with hydraulic cylinders. These services are offered both to purchasers and non-purchasers of Mailhot’s hydraulic cylinders. TSL’s website states:

TSLab’s specialization in tribology, a leading-edge application of surface engineering, is a novel technology showcase for the latest methods applied to mechanical contact analysis in general and the implementation of avant-garde technology solutions.5

The website also notes that the company offers:

  • concrete solutions to specific failure issues or damage;
  • improvements to existing components;
  • assistance with design or development of new tools;
  • results that can be applied industrially;
  • development of surface treatments in response to specific requests; and
  • knowledge transfer, training, equipment, and technology upgrades.6

Mailhot believes that the partnership-based relationships it has developed with its clients are a key factor in helping the company deliver services to these clients. Although the company attributes less than 5 per cent of revenues to the sale of services, the service offering has generated several important benefits such as more clients and more credibility in the marketplace. It has also enabled the company to greatly increase technology and knowledge levels within the company.

Mailhot Industries has moved toward both ends of the smiling curve of its value chain, adding maintenance, repair, and diagnostic at one end, and research and new product development at the other. To implement this strategy, the company has developed collaborative relationships with its customers and increased its level of technological expertise. This allows it to solve problems for its customers, enabling them to produce better equipment by providing them with hydraulic cylinders that can withstand challenging operating conditions.

Without its service offering the company would not normally have had direct contact with end users. By acquiring and developing the service offering and specialized expertise (via Technique Surface Innovation and TSLab), Mailhot has established a point of contact with end users, enabling it to diagnose problems relating to wear and abrasion and to develop improved solutions for its clients. The knowledge gained through this experience has enabled the company to improve its position in the global market and its overall market share.

Mailhot has found ways to maintain strong contact with the end users of its products although it sells internationally through distribution channels. This has allowed the company to gain knowledge about the conditions in which its products operate and to come up with innovative diagnostic services and products that make it a leader in its market.

Elite Windows and Doors

Corporate Overview

Elite is a manufacturer of windows and doors for the residential market, employing over 130 people in Quebec. It operates out of two plants and has several product lines, which are sold through a distribution network in Ontario, Quebec, the New England states, and other international markets. Approximately 60 per cent of its products are made from raw materials, and more than 80 per cent of the products are custom-made. Elite considers its business model to be engineer to order, and the company has designed about 50 per cent of its current products. It continuously develops new products, sometimes with input from clients. Elite owns less than 20 per cent of its distribution channels.

Service Offering

Elite offers after-sales service, technical support, and product development as services. Its approach has been to understand the needs of its clients (building contractors) and the needs of the end users (home owners) in order to solve their problems and provide services accordingly. The company’s product and process design responds to clients’ needs for a fast response to custom orders, with 15 days to delivery from order.

Elite’s products respond particularly well to market demand for products that are energy-efficient, easy to maintain, aesthetically pleasing, and easy to install. Within the framework described in Chapter 2, this company is an OEM in business environment type B, characterized by “many customers, distributors limiting access to customers, sophisticated but fragmented service needs, and technological equality for products.”7 The company has achieved its alignment with its customers by maintaining relationships with building contractors and consumers, listening to their needs, and obtaining the technological and operational knowledge needed to provide solutions.

Elite is able to maintain relationships with clients and end users—even though many of its products are sold via distributors—by providing after-sales service and technical support directly to its clients. It competes by continuously improving its products and production capabilities to meet the needs of the marketplace for efficiency and timeliness. Elite does not track revenues from services separately. Rather, it sells services bundled with its products in order to maintain its competitive advantage.

Successful companies produced customized products and services, understanding that more innovative and high-end products lead to greater profit.

By providing customized products rapidly and embedding the latest technological and aesthetic design features in its products, Elite provides value to its market that cannot be easily replicated.

Marquez Transtech Ltd.

Corporate Overview

Marquez Transtech specializes in thermoforming extruded and reinforced plastics and manufacturing assemblies and components from composites. It employs 130 people and has annual revenues of $10-15 million. About two-thirds of its customers are in the aerospace sector, with the balance being primarily bus manufacturers.

Originally a manufacturer of fibreglass components for recreational equipment and buses, the company has since 2005 developed an offering for the aerospace sector, based chiefly on composite-based systems and components. It has developed unparalleled expertise in this relatively new technology, which enables it to make low-pressure air distribution systems, interior furnishings, and window assemblies for aircraft. Rather than defining itself as a build-to-print supplier (manufacturing according to someone else’s design), Marquez has strategically positioned itself as a designer of these systems, developing products for its customers based on stringent requirements. Marquez designs to customer requirements in areas such as weight, geometry, stress, aesthetics, flammability, and noise. As part of this process, the company must also prove its product complies with specifications set out throughout the product life cycle.

Service Offering

Through ongoing research and development programs, engineers at Marquez have, for example, developed innovative, lightweight low-pressure air distribution ducts for commercial and business jets. The provision of product development services gives the company a competitive edge in the supply chain of large multinational OEMs. A company brochure states:

Engineer to Engineer: Our Trademark ... We work as partners with your product development team. Whether working to specs or in charge of design; whatever the performance criteria, weight, rigidity, total costs ... we will enhance the product value, performance and development time.8

With this philosophy and through developing its own competencies in computer-aided design and production, Marquez has more than doubled its sales since 2005, gained new clients in the aerospace sector, and built an array of products attesting to its ability to solve problems for its clients. It does not track the specific contribution of services as a separate profit centre. Instead, it bundles these services into its contract pricing.

By mastering the technology behind its products, Marquez has assumed a role in the product development process that was once performed by its OEM clients. It has also assumed a role in logistics and integration by providing complete subsystems and including purchased components with its manufactured products. Marquez has accomplished this by hiring highly qualified engineers and obtaining modern equipment. It has built relationships that are based on effective communication between its engineers and those of its OEM clients.

Marquez has moved from fibreglass to composites, adopting this new technology in response to a perceived need in the marketplace. It has acquired the knowledge and talent to move from manufacturing products based on clients’ drawings to designing the products it offers. And it has successfully penetrated new markets in the aerospace industry, first in Quebec and then internationally, establishing a reputation as an innovative designer and manufacturer.

Summary of Case Study Findings: Keys to Success

Successful companies interviewed for the case studies exhibited the following common attributes. They:

Chapter 5 - Conclusions and Recommendations

Chapter Summary

Developing new service offerings can be an extremely important strategy for SME manufacturers seeking to increase their corporate revenues and profitability, and wanting to sustain the value of their product offerings. Services that these manufacturers provide include procuring third-party components or parts and integrating them with their manufactured product into a larger assembly; testing and quality control; managing finished goods inventories, transportation, and logistics for the end user; installation; training; maintenance; and recycling of their products at the end of their life cycle. Other services include participation in the product development process, such as in design to client specification and design for manufacturing.

Examples of successful strategies from different industries and from various countries point to how successful manufacturing firms are adding services to their product offerings. Companies are leveraging valuable knowledge of their products and markets to exploit opportunities upstream and downstream in their value chain, improve their competitive position, grow revenues, and develop stronger client relationships.

Our survey of manufacturing SMEs in Quebec revealed that many currently offer some services. Survey respondents demonstrated an array of approaches to the service market, from providing after-sales service in support of their products to offering one-stop turnkey solutions to customers. The best practices and strategies are summarized below.

The potential benefits for manufacturing SMEs of incorporating services into their mix of offerings were highlighted in our survey and interviews. In addition to increasing revenue and profits, service offerings were found to enhance the competitive position of a manufacturing company and provide a more long-term and stable source of revenue.

To respond to new global competition, a manufacturing company can strategically extend its role along the value chain, providing value-added offerings in the form of both products and services. The goal of adding value and obtaining corresponding gains in revenue and profits can be achieved by reaching further down the value chain toward the end user—adding services such as inventory management, logistics, assembly, kitting of components, quality certification (to standards established by clients’ certification authorities), installation, and maintenance—or by reaching upstream in the value chain toward a greater role in product development.

By examining the life cycle of its products, a manufacturing company can identify potential services it could offer, either by developing the capability internally or by outsourcing it.

A manufacturing company’s ability to broaden its offerings to include new services depends on overcoming several hurdles:

In developing service offerings, SMEs have to take into account their particular position in the value chain, especially as it influences their ability to make contact with their customers and end users of their products. The case studies showcased in Chapter 4 readily attest to the variety of ways companies are able to maintain or improve contact with their customers and identify service opportunities in these relationships. In each case, companies developed new services and acquired the new knowledge suited to the new opportunities.

SMEs demonstrated an array of approaches, from providing after-sales service in support of their products to offering one-stop turnkey solutions to customers.

The majority of SMEs surveyed do not outsource their service offering. Often, the reason for involving in-house staff in providing services is that firms offering sophisticated or complex customized products feel the need to offer correspondingly complex high-touch services. Such services require an intimate understanding of customer needs, which is best provided by in-house staff who are already working with customers. Companies that outsource services do so when they lack in-house expertise or when the demand for a service—such as global installation and maintenance—does not warrant investment in an in-house capability.

Cultural change within a product-centred manufacturing company may be necessary for it to become more customer-oriented. Moreover, providing services may be beyond a company’s current competencies, creating the need for significant planning and investment in knowledge acquisition for success. Many Quebec SMEs that successfully implemented service offerings cited their acquisition of qualified personnel and in-house training as key elements in their success.

SMEs can benefit from undertaking a series of planning and action steps aimed at developing optimal service offerings that complement their product offerings.

Providing services in addition to a product offering amounts to moving up the smiling curve, either toward downstream services needed after fabrication or toward services that can be provided in research and product development upstream of fabrication. Perceiving demand from customers for new services is a key element in initiating new services. Most often this can be accomplished by leveraging a company’s knowledge of the product and its market. SMEs that do not sell directly to their clients may be able to gain more knowledge of their clients’ needs by providing after-sales service, installation services, or product information services. Implementing new service offerings often requires planning, developing customer-focused attitudes, and acquiring suitable managerial and technical skills.

In order to achieve the best results, SMEs can benefit from undertaking a series of planning and action steps aimed at developing optimal service offerings that complement their product offerings. The following are recommended best practices for SMEs when developing and implementing a service provision strategy:

1 Oliva and Kallenberg, “Managing the Transition.”

Appendix A - Bibliography

Anderson, E.W., C. Fornell, and T.R. Roland. “Customer Satisfaction, Productivity, and Profitability: Differences Between Goods and Services.” Marketing Science 16 (1997), 129-45.

Bitran, G.R., and M. Lojo. “A Framework for Analyzing Service Operations.” European Management Journal 11 (1993), 271-82.

BusinessDictionary.com. Services. (accessed December 13, 2011).

Gebauer, H., M. Paiola, and B. Edvardsson. “Service Business Development in Small and Medium Capital Goods Manufacturing Companies.” Managing Service Quality 20 (2010), 123-39.

Gentec. Engineering and Manufacturing. (accessed December 14, 2011).

Mission Gentec ... We Ship to Specs! (accessed December 14, 2011).

Gereffi, G., J. Humphrey, and T. Sturgeon. “The Governance of Global Value Chains.” Review of International Political Economy 12:1 (2005), 78-79.

Heskett, J.L., W.E. Sasser, and L.A. Schlesinger. The Service Profit Chain. New York: The Free Press, 1997.

“In Search of Fiat’s Soul.” The Economist (June 3, 2000), 69-70.

Knecht, T., R. Leszinski, and F. Weber. “Memo to a CEO.” The McKinsey Quarterly 4(1993), 79-86.

Mailhot Industries. Welcome to Mailhot. (accessed December 14, 2011).

Marquez Industries. Marquez Aerospace: Low Pressure Air Distribution System

Oliva, R., and R. Kallenberg. “Managing the Transition from Products to Services.” International Journal of Service Industry Management 14 (2003), 160-72.

Quinn, J.B. Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry. New York: The Free Press, 1992.

The Smiling Curve: Stan Shih. February 10, 2010. (accessed December 13, 2011).

TSLab. Consulting Services. (accessed December 14, 2011).

Wise, R., and P. Baumgartner. “Go Downstream: The New Profit Imperative in Manufacturing.” Harvard Business Review 77 (1999), 133-141.

VibroSystM, VibroSystM—Who We Are.” (accessed December 14, 2011).

Date modified: