Capturing the Value of Supplementary Services

Powerful Essays
40

The McKinsey Quarterly 2006 Number 1

Daniel Chang

The right service strategies for product companies

T he right service strategies for product companies As products evolve into commodities, services become more important.
But companies that play this new game must understand its rules.

Byron G. Auguste, Eric P. Harmon, and Vivek Pandit

As relative newcomers to the service economy, many product companies

have yet to make money there. Until recently, brisk sales growth, buoyed by a rising tide of demand for services, kept trouble from view. But as the estimated $500 billion “embedded” service sector (Exhibit 1, on the next spread) becomes more competitive, too many companies find themselves grappling with strategic questions they should have resolved when first entering the market: are they offering embedded services for offensive or defensive purposes? Are they playing a skill- or a scale-based game?
Confusion about fundamental issues of strategic intent and the source of competitive advantage now seriously hampers the profitable pricing and delivery of embedded services and the effective management and governance of product and service organizations alike.
That strategy must precede structure has been a tenet of good management since Alfred Chandler published his seminal studies in the field of business history, in 1962.1 But product companies in the embedded service sector lack the strategic clarity needed to make sensible decisions about how to design businesses. Some view internal service businesses as a growth platform but structure and run them as an adjunct to product businesses.
Others stumble by pursuing scale-based business strategies in skill-based
1

Alfred D. Chandler Jr., S trategy and Structure: Chapters in the History of Industrial Enterprise, Cambridge,
M A: MIT Press, 1962.

41

The McKinsey Quarterly 2006 Number 1

42

Article at a glance
Profits from service businesses have disappointed

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