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Sales 4.0 needs a new value proposition

Although the European mechanical engineering sector would seem to be doing well, with its annual growth rates of around seven percent in recent years, ever more companies in it are losing their competitive edge. To counteract this trend, they are starting to adapt their business models.

Too many companies are unable to boast significant growth in new markets, customer segments or business models, and instead are resting on the laurels of their past successes. A joint study conducted by Germany's mechanical engineering association VDMA and McKinsey in 2016 titled "How to succeed: Strategic Options for European Machinery" shows which developments are forcing the companies to act: "Macroeconomic and technological shifts are emerging, and the players in this field risk losing their competitive edge if they can't develop growth strategies or build adaptive organizations able to react to the changes." The study found that the weaker growth outlook, in particular in China, Russia and Latin America, means that it will in future no longer suffice to simply grow along with the market. Companies will have to either take market shares off their competitors, conquer new markets such as the ASEAN countries, or add services to their offering.

Digitization is always a catalyst of change today. Not only are more and more competitors coming out of the woodwork with new, digital business models, digitization also accelerates the speed at which the customers of the mechanical engineering industry develop. In the automotive field, this can be seen in the rapid advance of electromobility and car connectivity, which necessitates efficient management of the entire value chain at OEMs and suppliers. It will be crucial for the supply industry and the makers of plant and machinery to help their customers with this development, to accelerate processes, improve efficiency and find new ways to offer them more added value and generate higher revenues. Services and digital technologies will force their way into the foreground of the offering here, often building on the company's core technical expertise.

New sources of differentiation

To set themselves apart from the competition in ever tighter markets, companies are focusing increasingly on additional value for the customer, by no longer structuring themselves as parts or machine manufacturers or system providers, and instead developing themselves into service and solution providers. Digitization offers many new possibilities here. One need think no further than the cloud technology. Differentiation will in future not happen machine by machine, but by means of a packaged solution comprising the machine, physical services and data-based services. What it is all about, throughout the entire value chain, from development to production to after sales service, is improving efficiency, increasing flexibility and reducing costs. So Sales 4.0 also has to come up with a new value proposition. With new hybrid products, smart services arise from the combination of product and data based services. But that means that the price models that have applied to date lose their validity. Sales has to look into how the new offers are to be priced. It will have to develop an understanding for what is a standard service and which services can be sold additionally. This is true, for example, for development and innovation projects, which are increasingly being realized together with the customer. Sales is today integrated far more closely into the customer's value chain, and has to develop an understanding of systems and processes in its markets and customer groups that goes beyond mere technical competence. Prices are being aligned more with the services. Hardware is being relegated to the rank of an accessory, or even integrated into the service prices, for instance through leasing or sharing models. At the same time, this gives rise to new sources of profit for the solution providers, because the new price models are less comparable than traditional product prices, and the complexity of the solutions reduces the number of competitors.

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Data availability offers opportunities

The role of data will keep on growing. Greater data availability gives the engineering industry and makers of industrial products the opportunity to help customers with smart, digital service solutions. This in turn alters the demands on the sales organization, with sales staff becoming mediators and facilitators between the customers and the other involved parties both within and outside the company. That means they have to put the entrenched silo mentality behind them, because the more blurred the boundaries between industries, technologies and companies become, the more networks and cross-industry alliances form. Customers and business partners become an active part of the company and value-generating processes. Production and high-quality services dovetail increasingly, causing smart services to emerge from pure industrial products. That requires networked thinking, more open-mindedness and flexibility, so that the value proposition can be fulfilled.

"Customer expectations and the offers being made to customers are changing how sales works. This leads to numerous adjustment processes within the enterprise and possibly even to a modification of its strategic orientation."

Sascha Hackstein, formerly Director and Head of Solution Group Mechanical and Plant Engineering

Using the right channels

And on top of all that, the customer itself is also being changed by digitization and the internet. Today's customer makes use of a wide range of information sources and communicates in various channels. If you want to sell, you have to supply the applicable channels with information, communicate and position yourself there. And that can only work if the sales and marketing organization is set up in a way that aims to professionally contact and inform its customers and target groups via the various communication channels. Furthermore, Sales also has to know what sales channels it has a chance to be successful in. It may have to cooperate with others, for example with market platforms, as they can open up new channels and customer groups to their participants, and even offer access to new know-how. But channel management via e-commerce and market platforms is today hardly used at all to generate growth. That is because neither the products nor the services of the mechanical engineering industry can be sold through online channels in the traditional sense. Most important in that field is increasing brand awareness and attracting attention, forming relationships with potential customers in order to be able to see what they need and serving those needs. Sales has to advise, support, explain services and build up confidence through these channels, in order for customers to recognize the value and be willing to pay the extra price for it. Then, because of the complexity and individualization of the service, the sale itself is closed personally by highly qualified staff.

Case Study 1: Service in the focus of Business Development

A manufacturer of technical components and systems offered good quality customer service, but its sales figures in this field were well below those of comparable companies and did not even come close to reflecting the potential that was actually provided by the products it had installed on the market. The reason was the lack of professionalism in its approach to the service business.

To rectify this, the project defined the potential and attractive segments of the market and answered strategic questions such as "Which services do we want to offer to which customers in which markets in the future?". The company management then defined a service portfolio comprising new and existing services. The extensive service catalog that resulted, with clearly worded service descriptions and customer benefits, was one of its kind on the market.

The second step was to define the sales channel. Part of the portfolio was used in the OEM customer segment as a way of acquiring new clients. Crucial to success here was a clear definition of the services and strong support from the Service unit during the offering process. The Sales team was given tools to assist them that were easy to use. Service sales were included in the sales objectives and the measurement of success. A sales team dedicated to the service business was built up for end customers and users, whereby its communication and coordination with the "traditional" sales team was of particular importance. Parallel to this, a marketing concept was developed for this team, with a trade fair exhibit, advertising, printed material, an approach specific to the target group and active addressing of the market and individual customers. At the same time, transparency was brought to the numbers, which required a reconstruction of the reporting system, and in addition, a systematic forecasting and budgeting process with a horizon of several years was introduced.

Summary: The newly created Service Business Development instance introduced new technical services and business models on the basis of the classical service portfolio. Revenues from services doubled within the space of a few years and they now make a significant contribution to the company's sales.

Case Study 2: From Equipment Vendor to Solution Provider

This company produces cables and cable systems for a variety of markets, such as the mobile telephony, rail, infrastructure and IT industries. The focus of its business is on hardware, for which it has catalogs, a web shop and a dealer network. Key customers were increasingly putting the company under pressure through calls for tenders, and the competition from the Far East was eating away at the market with comparable technical specifications at far lower prices. Services were integrated into the contracts. They were merely a side business for Sales, despite the fact that legislation is making guaranteed services ever more important.

A customer survey showed that it was more the services than the products that enabled the company to set itself apart from the rest, because the market players from the Far East are not competitive in that area; something that becomes apparent already in the poor availability of spare parts that they offer. The management decided to change the sales approach accordingly. A service catalog was compiled with 200 services listed, with prices and various service levels. The base level remained included in the price of the hardware, but was at a relatively low, legally required standard that was also offered by the Asian competitors. Hardware prices were lowered a little, and because services have to be sold in a completely different manner than products, training courses were held for the sales staff. The entire company communication shifted from a focus on hardware and equipment, to "solutions".

Summary: The market position was shifted from equipment to solution provider. In some cases, the competitors from the Far East are now used as pre-suppliers, and their products upgraded by adding services. The Service unit today makes major contributions to the company's sales and earnings.

"The price models that have been used to date are no longer valid for the new hybrid products and the combination of products with services ("solutions'')."

Sascha Hackstein, formerly Director and Head of Solution Group Mechanical and Plant Engineering

Sales 4.0 – What has to be done?

If reading this has made you think: perhaps it is time to take a look at where my company is today, and where I would like it to be in the future. You need to answer the following questions:

  • What is our position on the market in terms of our service offering and competitiveness?
  • Do we offer our services systematically and for a price or are they run more incidentally as part of the product business?
  • What service products and business models do the company and its competitors have today, and in which business processes does the company have its strengths and weaknesses?
  • What are the strengths and weaknesses in the business models of the competitors and potential market disruptors?
  • What might possible new business models for the company look like and which prototypes can the company use as a blueprint?
  • Which new smart services and business models are on the shortlist and should be quantified?
  • Which business opportunities and investments do the optional, new business models entail by comparison? What would the cost of implementation be?
  • Which business model(s) are to be implemented and how can all divisions and employees be included and motivated?
  • What measures and milestones are to be executed and achieved in the next two years and how high are the internal and external costs?
  • What are the "gates", i.e. the criteria of the various milestones that help manage the further steps? What form of organization is the right one? Who is to take on which responsibilities in the business development process?

 

Sales 4 .0 is a management topic: In future, the mechanical engineer will become a service provider. This is a strategic issue and a transformation that not only has to be structured, it also has to be executed responsibly. Not only must the right competencies and sufficient management resources be available in the company, the management also has to continue to run the daily business during the process. Professional external management support can resolve this bottleneck and also bring transformation experience and new ideas into the company.

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Article published in DIE NEWS 04/2017.
By Sascha Hackstein, formerly Atreus Director and Atreus Manager Ingmar Brunken

Atreus is the leading interim management provider in Germany and one of the largest in its field in Europe. We solve difficult operational management and transformation problems quickly and reliably. Contact us and find out how we can help you master your situation with management expertise that is available at short notice and that is the perfect fit for you.

Atreus is a co-founder of Globalise – the market’s leading and largest provider of international interim management. Accelerating change and delivering success. Worldwide. Structured as a global group of leading interim management firms, Globalise has the reach to support you in solving your company’s most important issues around the world.