Examining the influence of service additions on manufacturing firms' bankruptcy likelihood

TLDR: In this article, the authors investigated the relationship of manufacturers' service offerings to their survival by evaluating secondary data from 74 bankrupt manufacturers and 199 matched non-bankrupt competitors, and found that the number of services offered is not significantly associated with bankruptcy likelihood, but a greater number of product-related and product-unrelated service offerings do reduce bankruptcy likelihood when properly complemented by firm-level contextual factors.

About: This article is published in Industrial Marketing Management.The article was published on 2017-01-01 and is currently open access. It has received 92 citations till now. The article focuses on the topics: Bankruptcy & Service (business).

Figures

Table 2 – Descriptive statistics of the study variables

Table 1 – Distribution of bankrupt firms by bankruptcy year and number of matched survivors

Figure 1 – Overview of the theoretical model

Table 5 – R-square change F-Test

Table 6 – Correlations among independent variables in the final model

Figure 2 – The moderating effects of product business diversification and resource slack A: Effect of product business diversification B: Effect of resource slack

Frequently asked questions

Q1. What have the authors contributed in "Examining the influence of service additions on manufacturing firms’ bankruptcy likelihood" ?

By evaluating secondary data from 74 bankrupt manufacturers and 199 matched non-bankrupt competitors, this study investigates the relationship of manufacturers ’ service offerings to their survival. In light of these findings, this study challenges the notion from conceptual literature that additional services per se increase the chances of firm survival ; it extends prior empirical studies in uncovering critical firm-level context effects ; and it proposes portfolio theory as a theoretical foundation to examine manufacturers ’ service expansions. While showing that the number of services offered is not significantly associated with bankruptcy likelihood, the results suggest that greater numbers of product-related and productunrelated service offerings do reduce bankruptcy likelihood when properly complemented by firmlevel contextual factors. 

Q2. What are the future works in "Examining the influence of service additions on manufacturing firms’ bankruptcy likelihood" ?

The authors conclude that, despite many potential benefits can accrue from an extended service offering, the company also needs to deal with the attendant risk of resource shortage, loss of focus, complexity of coordination and investor uncertainty in potential future earnings. Further research could investigate this issue and clarify whether product sales can complement focus on product-dependent services to reduce bankruptcy likelihood. A potential explanation for this finding concerns the measurement of the service offering variable. This approach reduces the information provided by the measure, thus potentially lessening the ability to detect significant associations. 

Q3. Why did the authors decide to mean-centre the variables used in interaction terms before the analysis?

Because logistic models are also very sensitive to multicollinearity, the authors decided to mean-centre the variables used in interaction terms before the analysis. 

Q4. How does the study improve the understanding of service extensions?

Viewing service offerings through portfolio theory improves their ability to conceptualise key mechanisms underlying service extensions as well as expand the theoretical understanding of their performance consequences via effects on resource compatibilities and cash flow synergies. 

Q5. What is the effect of past product sales performance on a firm’s bankruptcy likelihood?

Past product sales performance moderates the effect of service offering focus (product-dependent versus product-independent services) on a firm’s bankruptcy likelihood; under high past product sales performance, product-dependent services focus reduces a firm’s bankruptcy likelihood. 

Q6. What test did the authors use to identify variables that might be deleted from Model 0?

The authors next used p-values from the Wald test of the individual coefficients to identify variables that might be deleted from Model 0. 

Q7. What is the effect of adding product-related services to the total offering?

In such an environment, adding product-related services to the total offering should enable not only higher revenues but also lower incidence of fixed costs; hence, it should reduce the risk of financial distress. 

Q8. What is the ultimate measure of organisational performance?

While accounting- and market-based measures may serve as predictors of long term success, survival is arguably the ultimate measure of organisational performance (e.g. Drucker, 1954). 

Q9. What is the effect of a broader offering of product-related services on reducing bankruptcy?

the authors expect that the impact of a broader offering of product-related services on reducing bankruptcy likelihood is a function of the company’s unrelated product diversification. 

Q10. What is the effect of product-related services on the likelihood of bankruptcy?

In turn, in conjunction with sufficient slack resources, additional productunrelated services can lead to lower bankruptcy likelihood. 

Q11. What are some examples of companies that are disengaging from the provision of facility management services?

Examples include Johnson Controls disengaging from the provision of facility management services (Global Workplace Solutions), Voith divesting its Industrial Services (industrial maintenance for automotive and process industries) division, and ABB disposing of its Full Service (maintenance outsourcing) division. 

Q12. What was the significance of the variables in the initial multivariable conditional regression model?

Given that they were not critical to test their hypotheses (they were introduced as potential controls), these variables were deselected from the initial multivariable conditional logistic regression model (Model 0). 

Q13. What is the significance of past performance in categorising failed from nonfailed companies?

According to theory and research on demise (bankruptcy prediction models in particular) (e.g. Altman, 1968), the authors also find that past performance (PASTPERF) is a significant attribute in categorising failed from nonfailed companies (b=-0.0503, p<0.05). 

Q14. What were the variables used to estimate resource slack, product sales performance and the control?

The Compustat Fundamental Annuals and Capital IQ databases were used to estimate resource slack, product sales performance and the control variables for firm size, age, liquidity and leverage. 

Q15. What are the types of services that are coded as being product-related?

Services in seven categories were coded as being product-related (see Appendix); examples include maintenance and support, design and development, and system integration services. 

Q16. What is the common financial performance indicator in studies of bankruptcy?

ROA is also highly correlated with other profitability measures (Hambrick and D’Aveni, 1988) and is a commonfinancial performance indicator in studies of bankruptcy (e.g. Hambrick and D’Aveni, 1988; Daily, 1996).