Making Solutions the Answer

Many companies hard-pressed to maintain their margins through products alone are turning to 'solutions.' But to succeed, they must not only embrace competitors but also often turn away existing customers. In all sorts of industries, companies that traditionally have made and sold stand-alone products are changing their strategies. They are creating high-value by integrating various products and services--even merging the supplier's and the customer's operations--to solve a complete customer problem. IBM, for example, rakes this approach when it builds and runs the entire infrastructure of a business-to-business e-marketplace for the chemical industry. Solutions are proving lucrative for many companies, even as the profitability and growth of their products have come under pressure. In the case of IBM, $38 billion of its revenue--43 percent of the total--now comes from the solutions--related businesses it has developed since the early 1990s. The market rewards this growth generously, seeing it as durable shareholder value built upon hard-to-copy capabilities, light capital investment, and customization that resists commoditization. Thus IBM improved its market-to-book ratio by 600 percent between 1990 and 1999. [1] Getting it right But it is mighty hard to get right, and many companies fall far short in the attempt. Throughout the 1990s, Xerox promoted itself as a documents solutions company but struggled to execute successfully in making the transition. Hewlett-Packard wrestled with three attempts over a decade to integrate its full range of products and technical capabilities into customer solutions. One company that is currently trying to make the transition is Cummins India Limited (CIL), a subsidiary of US-based Cummins. CIL has long dominated the market for diesel engines in India. In the late 1990s, when the opening up of the Indian economy began to dent CIL's profit margins, the company started to develop solutions: commercial customers were provided with dependable backup power, for example, to cope with the country's unreliable electricity grid. CIL'S managers and engineers had concentrated for decades purely on the performance of the company's diesel engines; now these are just one part of its new solutions, for which the management imperative is to integrate a number of products and services. CIL'S chief executive officer, Ravi Venkatesan, says that his organization must cross a chasm. Why is it so difficult to make the shift? The trouble is that the very strengths of a good product-focused business can hinder its efforts to become a successful provider. Companies, like IBM, that have succeeded with solutions-and those, like CIL, that are still grappling with them- have taken some profound strategic actions that go against the grain of existing product businesses. Four actions stand out. Build value propositions for customer outcomes When product-based companies develop their value propositions, they generally start with the products they have and match those products to the customers' needs. If a customer wants something new, a product feature is added or a new product developed. At CIL, product managers might redesign an engine part to improve its reliability or add a new engine model with a horsepower rating suited to a certain application. But the nature and range of the needs that can be met are ultimately bound by what can be embedded in the product itself. In developing value propositions for solutions, a different approach is required. Managers start not with a product but with a desired outcome for a customer--an outcome that could encompass a whole range of needs. For CIL's power customers, the desired outcome of uninterruptible power depends on far more than a reliable engine. The manager must understand each customer's operating economics to determine the value of uninterruptible power, pull together all the components of the required generator system, work it into a customer's operating environment, and develop maintenance and testing programs. …