By Brad Cho, CEO of Vision Arena
Manufacturing has returned to the spotlight since the global financial crisis. Even in the United States, where it had long been overlooked in favor of the financial industry, manufacturing’s ability to create jobs and tangible added value has led to a White House policy promoting a manufacturing revival. Alongside developments such as environmentally friendly electric vehicles and 3D printing technology, the servitization of manufacturing is also influencing this trend. Nike, too, has evolved from a company that simply made and sold shoes into one that offers individuals a service for creating customized shoes through Nike ID.
Going a step further, Nike Plus provides a community where people who enjoy exercise around the world can connect with one another and compete over their records. With a wristband-style activity tracker, it is now expanding its scope beyond running to every kind of exercise. As product life cycles grow ever shorter, this may be a survival strategy for an era in which only companies with direct customer touchpoints and the ability to detect what customers want can stay ahead. In Finland, one company charges according to the number of elevator trips instead of selling elevators. It generates revenue through an installed-base model, like water purifier rentals, rather than through sales. Shapeways, called the second Amazon, has taken the reverse approach by industrializing a service. It gathers a wide range of 3D drawings uploaded by people, produces them on demand whenever an order arrives, and then ships them. It has already become the largest shopping center in the realm of physical objects sold from an information warehouse in the cloud. This article examines changes in manufacturing simultaneously through the servitization of manufacturing and the industrialization of services, as well as their future impact. *Contents 1. Manufacturing Returns to the Spotlight
- Can Nike and LEGO Be Faulted for Reinventing Themselves?
- The Value of Services as a Customer Platform
- The Industrialization of Services Driven by 3D Printers
- The Future Value Embedded in the Servitization of Manufacturing
- Challenges Ahead
- Manufacturing Returns to the Spotlight
Investment in manufacturing has recently been increasing gradually in the United States. Because manufacturing has traditionally been considered more effective at creating jobs than finance or service industries, the rise in U.S. manufacturing investment has generally been welcomed. Apple decided to bring part of its Mac assembly line, previously outsourced to China, to the United States. Walmart, itself an emblem of outsourcing, also pledged to buy U.S.-made products and put them on store shelves over the next ten years. The scale alone is $50 billion, equivalent to KRW 60 trillion. So why is manufacturing rising again in the United States?
First, wages for workers in emerging economies such as China have risen every year, driving up production costs, while higher fuel prices have significantly increased the cost of transporting finished products by air and sea. In contrast, the development of alternative energy sources discovered in the United States, such as shale gas, has improved the economics of using domestically produced energy. Beyond these cost changes, shifts are also occurring in markets and technology. On the market side, rapidly changing customer needs and shorter product life cycles are gradually reducing the utility of mass-production systems designed for long life cycles. Instead, establishing production bases close to consumer markets, quickly changing products in response to consumer feedback, and adapting to the market have begun to be seen as a better way to survive.
On the technology side, advances in hardware/software for manufacturing environments have enabled low-volume, high-mix production, while environments where designs can move directly into production are becoming more widespread. Three-dimensional printing, a recent focus of attention, can be seen as a key technology accelerating this change. It was previously used mainly to create prototypes, but thanks to the development of diverse materials and software, the spread of technology following the expiration of key patents, open-source technology development, and the wider dissemination of knowledge through communities, 3D printing technology is now preparing to move from the enterprise market to the consumer market.
Although some manufacturing is returning to the United States, experts expect the main form to be factories operated with advanced machinery and small workforces, rather than traditional factories that generated large numbers of jobs. A change in the physical location of manufacturing alone does not have great significance for us. More importantly, the boundary between manufacturing and service industries is already disappearing.
This is because services can overcome one of manufacturing’s greatest weaknesses: the lack of a foundation for customer relationships. A company that first encounters its customers in the market when it sells a product should already be considered less competitive. Only companies that have already met their customers before entering the market can now achieve sustainable competitiveness. This is why the servitization of manufacturing matters so much.
- Can Nike and LEGO Be Faulted for Reinventing Themselves?
Is Nike still a marketing company?
Nike is known as a company that focuses on marketing and design while outsourcing production completely. It is particularly famous for its distinctive sports-star marketing, including the use of Michael Jordan in advertising. Because most sports are broadcast and consumed through TV, television advertising has long been a central part of Nike’s marketing.
However, Nike has recently reduced the marketing budget it poured into TV by nearly 40 percent, while spending on other, nontraditional marketing methods is said to account for one-third of its total budget of nearly 3 trillion. One surprising fact is that Nike achieves more exposure every day through service touchpoints such as the Nike Plus website and through social-network communities than the Super Bowl, which draws nearly 200 million sports fans worldwide and commands astronomical advertising costs.
In 2006, Nike created an online community for people who enjoy exercise through running with Nike Plus. As is widely known, it began as a joint project with Apple. It started with a Nike activity sensor fitted into a shoe and connected to an iPod. Nike then created an electronic watch that could measure physical activity and recently even introduced the innovative Fuel Band. In last year’s book Velocity, Stefan Olander of Nike’s Digital Sport team, who leads the conversation, explains the reason for Nike’s transformation. “For a sustainable customer relationship, the best approach is to build a scalable customer platform and then meet customer needs across digital and offline touchpoints.” – Velocity, p.236 For Nike, services have become a powerful marketing tool for developing and maintaining customer relationships. Nike’s marketing has evolved beyond TV advertising through sports stars to encompass service marketing that communicates with customers and maintains relationships. The following remark by Nike CEO Mark Parker is worth considering. “In the past, the way we connected with customers was, ‘Here is the product, and here is the advertising. We hope you like it.’ Today, we connect through conversations.” [2] I wonder whether the day will come when we call Nike a service company that sells athletic shoes. Come to think of it, Zappos calls itself ‘a service company that sells shoes.’ The service has a slightly different meaning, but given Nike’s transformation so far, it does not seem entirely impossible.
LEGO Dreams of Being More Than a Toy Company
LEGO is no longer simply a toy company. It conducts a variety of collaborative activities through its consumer community, putting it well ahead of competitors that struggle to catch up. LEGO, famous for its construction toys for children, became exposed to competitors making similar block products around 1988, when the protection periods for many of its patents expired.
From that time, it began actively seeking product differentiation and links with its consumer community. LEGO MindStorm was the result of its product-differentiation efforts. It overturned the conventional belief that toys built from blocks do not move by creating a moving toy. MindStorm also expanded its customer base beyond children to older adults, the so-called kidult segment. LEGO then officially provided a way for consumers to design and customize their own LEGO blocks through LEGO Factory.
Under the name DesignWithMe, LEGO would manufacture a block design I created, package it attractively, and send it to me. The service officially ended around January 2012 because it produced fewer impressive products than expected while incurring high operating costs. LEGO continued to offer the ability to create custom LEGO block toys on a computer, however, and allowed users to purchase individual blocks if they wished. Instead, LEGO partnered with the Japanese company CUUSOO to collaborate with consumers in a different way. Community members evaluate custom LEGO toy designs uploaded by consumers, and only those receiving a positive response selectively proceed to actual product development. The person who provided the original design idea receives a share of the revenue.
LEGO’s decision shows that mass customization is more sustainable and effective when many ideas generated within a community are filtered through consumer evaluation and improvement and then ultimately realized by the design team, rather than simply reflecting individual preferences one-to-one. LEGO recently launched Mindstorm NXT, evolving MindStorm from a moving toy into a robot. Equipped with light, touch, and ultrasonic sensors, it acts as a robot that perceives and responds to its surroundings. Users can change the robot’s behavior and responses themselves through simple programs. With a creative consumer community and the launch of robot toys whose behavior people can modify directly, LEGO can now attempt some remarkably fresh ideas. Robots imagined by individuals and uploaded to the community can be commercialized through LEGO. We can therefore expect to see LEGO become a company that makes the robots consumers imagine.
- The Value of Services as a Customer Platform
Global manufacturers are already busy turning products into services and upgrading them into customer platforms. Beyond the Nike and LEGO cases discussed above, automobile companies have also recently begun actively pursuing this transformation into customer platforms. A closer look at this movement shows that turning manufacturing into a customer platform restores customer relationships that distribution had obscured and raises the quality of those relationships to another level.
Let us briefly examine the strategic considerations involved in transforming manufacturing into a customer platform.
1) Provide services closely connected to the product
A product transaction ends once the product is sold, but a service provides a link that sustains the customer relationship. By developing services related to core product lines and integrating them closely with the products, the products themselves evolve into customer touchpoints. Manufacturers’ customer-marketing touchpoints were traditionally sales offices, call centers, and service centers. Now that the relationship touchpoint is always near the customer, however, the value of that connection is immense.
The shoes Nike created in partnership with Apple automatically calculated the distance run by connecting to an iPod and allowed users to view their records online. The Nike website, which preserves customers’ activity records, became a service marketing center that could increase loyalty and present new offers to customers.
2) Channel product consumption into a community
The social era has come of age. Manufacturers also need to examine whether the process by which customers consume products can be reinterpreted as socially meaningful activity. Nike initially provided the service as a tool for saving personal activity records and reviewing exercise habits. It has now become a game arena where people share their activity records with acquaintances and compete in running records even with strangers nationwide.
What began with the individual expanded to networks of close acquaintances and ultimately developed into a community of everyone with similar interests. If manufacturers generate ideas about the interests consumers can share around product use, products can become meaningful vehicles for activating consumer communities.
3) Personalization Tools vs. Collaborative Production Tools
Global manufacturers generally began transforming themselves into customer platforms by providing personalization tools. Examples include Nike allowing people to save their own activity records or design their own Nike shoes through Nike ID, and LEGO providing a design tool that let people create the new LEGO blocks they wanted.
As this model develops further, communities form among consumers. At the next stage, manufacturers seek to involve consumers in product R&D—so-called Collaborative Production. Through CUUSOO, LEGO turns popular user-created designs into products and returns a portion of sales revenue to the designers.
Nike has not progressed as far as collaborative production, but by activating its community it obtains activity-record data from large numbers of people, increasing the potential to use those data in product R&D. Prominent companies recently gaining attention for collaborative production, such as Quirky and Local Motors, are also inspiring established manufacturers.
- The Industrialization of Services Driven by 3D Printers
Examples of 3D printers being integrated in the form of services can already be found in many places. One company that identified the market opportunity especially quickly and leads the field is Shapeways. Known as the Amazon of 3D printing, Shapeways is thriving after receiving more than 50 billion won in investment.
Shapeways is a company that lets members of the public register three-dimensional design files, prints physical objects with a 3D printer whenever requested, and ships them. Although it is not yet widely familiar in Korea, it has more than 300,000 members, and more than 6 billion products are already registered there. Because its products can be printed in various materials and easily customized, the number is counted more broadly than for conventional physical goods.
Even with that qualification, the figure of 6 billion is undeniably remarkable. The 6 billion products held in an online data repository rather than a warehouse are ready to emerge into the world through 3D printers whenever people want them.
The factory Shapeways established in Queens, New York, at the end of 2012 had 50 industrial printers installed and could produce 1 million consumer products each year. Every product made there is Made in USA. Given that a significant share of the products sold by Amazon, the world’s largest online shopping mall, are Made in China, the industrialization of services through 3D printing also appears likely to lead naturally to an increase in U.S.-made products.
Will companies such as Shapeways remain competitive even after 3D printers gradually become available to the general public? Considering the substantial investment the company has received recently, it is clearly being assigned meaningful value over the long term. When more than a certain quantity must be printed, even if it falls short of mass production, its use of industrial 3D printers will continue to provide a strong price advantage.
Having already achieved economies of scale, it can also secure a significant cost advantage in areas such as printing materials. Its most important competitive advantage remains: the 6 billion product designs it has already secured will be both its greatest asset and the foundation for building business models using 3D printers.
For example, like Apple selling music online or Amazon selling books, Shapeways could expand into a content business that earns revenue by distributing 3D designs. It holds a warehouse of virtual products reflecting the physical world: designs for every product individuals could print on a 3D printer at home. Selling access to 3D designs that can immediately be printed as objects clearly appears to be an area that could become commercially viable at some point. By then, not only individuals but also professional design studios and large corporations may seek revenue from distributing designs rather than products.
- The Future Value Embedded in the Servitization of Manufacturing
From a strategic perspective, providing a product in the form of a service offers several advantages. When products are supplied as an installed base and revenue is generated through services, a company can secure recurring sales. Revenue naturally increases as more products are installed and their utilization rises. Once a product has been installed at a customer’s location, it is unlikely to be removed again. This is closely related to human psychology, because an installed service resembles a postpaid model in which users pay for what they use.
When people pay in advance to buy something online, they must first pass their own test of why they should buy it. With a postpaid model, however, after receiving the item they instead ask why they should return it. Because the process begins by putting the item in the customer’s hands, it can be seen as having safely passed the test of why the customer should buy it. This is also consistent with why it is harder to refuse when merchants put something free in the hands of passersby and then offer to sell them something else. Perhaps the awareness that receiving something creates an obligation to provide something in return is deeply rooted in the psychology of humans as economic animals.
Such a strong capacity to retain customers also means it is easier to prevent them from defecting to competitors. If manufacturers engage sufficiently in dialogue with customers while integrating services, they will be able to win customers’ hearts away from the promises made by other companies that merely manufacture and sell products in the market.
- Challenges Ahead
To summarize
Manufacturers of consumer goods must now actively consider service integration, consumer-community activation, and the provision of tools for personalization and collaboration so they can use the product itself as a customer-marketing touchpoint. Of course, rather than expecting this process to produce immediate results, its primary significance should be understood as bringing product-related consumer touchpoints from existing distribution networks back to manufacturers. By securing fans who support their products, companies can increase customer engagement before entering the market and thereby build a higher level of competitiveness.
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[References] 1. Velocity: The Seven New Laws for a World Gone Digital, by Stefan Olander and Ajaz Ahmed / translated by Baek Seung-bin, Seedpaper, published November 2012 2. Nike’s Marketing Mojo, CNN.com, http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/ 3. How Nike’s Marketing Revolution has resulted in a 40% reduction in TV and Print Advertising in the U.S., Flurry, http://www.fluffylinks.com/nike-digital-marketing 4. The Era of Co-creation, http://www.computerweekly.com/feature/The-era-of-co-creation 5. Lego Digital Designer, http://ldd.lego.com/ko-kr/6. The American Manufacturing Renaissance Has Gone Mainstream, BusinessInsider.com, http://www.businessinsider.com/time-magazine-manufacturing-cover-2013-4
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- Made in USA, Times, http://business.time.com/made-in-the-u-s-a/dd