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Journal ArticleDOI

Servitization: Disentangling the impact of service business model innovation on manufacturing firm performance

TL;DR: In this paper, the authors analyzed the value creation and value appropriation processes of 44 national subsidiaries of a global manufacturing firm turned product-service provider, in the 2001-2007 period, and found that the firm under study is able to successfully transcend the inherent substitution of products by services and to enact complementary sales dynamics between the two activities.
About: This article is published in Journal of Operations Management.The article was published on 2013-05-01 and is currently open access. It has received 584 citations till now. The article focuses on the topics: Service (business) & Profitability index.

Summary (3 min read)

1. Introduction

  • Increasingly, durable goods manufacturers choose to innovate their offerings by providing services to accompany their existing products throughout the life cycle.
  • The firm under study, Atlas Copco Compressor Technique (referred to in the remainder of the text as Atlas Copco), is a global manufacturer of durable industrial equipment with a worldwide network of country sales-and-service subsidiaries.
  • With more than 130 years of experience in product innovation, Atlas Copco has, in recent decades, extended its innovation trajectory into services.
  • In revealing the nature of value creation and appropriation, their study not only yields one of the first theoretical underpinnings of servitization but also demonstrates how product firms can achieve revenue growth and profitability by engaging in services.

2. Literature review

  • Service research has been a growing area of operations management research (Chase and Apte, 2007; Heineke and Davis, 2007).
  • While the evidence regarding a manufacturer’s ability to appropriate value from servitization is inconclusive, the evidence on the ability of servitization to create value on the level of the product and the customer is more positive.
  • The addition of services such as maintenance, upgrading and remanufacturing prolongs product life and so reduces product turnover (Mont, 2004b).
  • This set of arguments points to high potential for services to act as a complement to products, offsetting the substitution effect; subsequently, higher service revenues will result in higher product revenues.
  • Interplay between the arguments presented above is likely to result in a curvilinear relationship between service scale and profitability where investments paired with a low scale of services initially result in a decrease in margin but then convert to a positive impact as the investment is internalized and higher scale is reached (Fang et al., 2008; Suarez et al., 2011).

4.1 Research design

  • To test the hypotheses, the authors collected data from the national sales-and-service subsidiaries of a large multinational equipment manufacturer, Atlas Copco.
  • Over time, a given country subsidiary may have sold tens of thousands of equipment units to thousands of clients.
  • In recent years, Atlas Copco has concentrated on promoting a service offering that covers related machinery, aiming to improve reliability and reduce energy costs for the entire functional group of products.
  • Regarding the level of decentralization and subsequent diversity of subsidiaries, subsidiaries offer homogeneity with respect to the product and service portfolio, brands and pricing, on the one hand, while each subsidiary differs significantly in terms of its organizational structure, local practices, management style, and deployment of its business model, on the other.
  • “The ability to get closer to theoretical constructs is particularly important in the context of longitudinal research that tries to unravel the underlying dynamics of phenomena that play out over time” (Siggelkow, 2007).

4.2. Dependent, Independent and Instrumental variables

  • As per H1a, the installed product base enables the sale of services in the following year, after expiry of the obligatory warranty.
  • In turn, services imply greater interaction with customers, which may result in additional sales of products, almost simultaneously with the provision of services (H1b).
  • The instrumental variables approach has been used as a popular resolution of the endogeneity problem in operations and strategic management, particularly when coupled with estimators such as GMM and two-stage least square (Guajardo et al., 2011; Novak and Stern, 2009; Suarez et al., 2011).
  • As Atlas Copco allows cross-border sales of products but not services (e.g. the German subsidiary can sell products in France despite the presence of a French subsidiary), the authors identified the macroeconomic indicator of country exports as an adequate product sales instrument (H1a).
  • Firstly, the authors complemented the existing instruments for service sales (country imports, service coverage, lagged product installed base and manufacturing capex) with country population density, given that labor-intensive services thrive in densely populated areas.

4.3 Control variables

  • Due to the scarcity of data and complex nature of interdependencies between products and services, the choice of control variables represented a particularly important part of the model design.
  • As all subsidiaries have been operating for 15 years or more prior to the observation period, the subsidiary age was deemed irrelevant.
  • Subsidiaries have also exhibited homogeneity with respect to the product portfolio, brand and high-level pricing strategy (allowing a modest degree of discretion for individual client negotiations).
  • Furthermore, the authors capture differences in market development by GNP per capita (e.g. subsidiaries operate in countries ranging from China to Switzerland), while a year dummy variable is used to capture the expected yearly effects of price increases.
  • Table 1 contains further information on the variables, while Models M1 (H1a), M2 (H1b & H1c) and M3 (H2) are formally represented below.

4.4. Estimators, model corrections and diagnostic checks

  • In all econometric models, the authors use panel data analysis with fixed effects.
  • The authors introduce fixed effects to control for time-invariant, unobserved heterogeneity among subsidiaries, given their expectation that time-constant differences may determine the effectiveness of the service strategy (Greene, 2003).
  • For service staff and consequently non-service staff, data was missing for nine subsidiaries, and on four years in the case of one additional subsidiary.
  • This choice was also in line with Suarez et al.’s (2012) choice of GMM to test the impact of servitization on performance.
  • In addition, instruments are jointly exogenous for each of the models, given that the P-value of Hansen’s J statistic exceeds 10%, thereby rejecting endogeneity in instruments (Hansen, 1982).

5. Results

  • Table 3 below summarizes the results obtained in relation to the testing of the hypotheses.
  • Interestingly, service sales has a greater impact on product sales too.
  • Further to the relationships hypothesized, their models demonstrate a strong and significant influence of country development, as measured by the GNP/capita.

6.1. Study results and the contribution to theory and practice

  • The results of Model 1 (H1a) and Model 2 (H1b and H1c) indicate that product sales and service sales complement each other and that the customer proximity of service offerings reinforces the positive feedback from services to product sales.
  • While positive effects are anticipated in progressing from products to related service activities, the reverse relationship – whereby service sales positively influence product sales – is far less obvious, since the impact of servicing may be negative when services act as substitutes for products.
  • In practice, this phase is marked by a high proportion of spare-parts activity and a handful of service contracts for high-paying customers, where attractive margins can be achieved without substantial investment in staff and organization.
  • The authors study also contributes to the literature on servitization by disentangling the complex relationship between servitization and profitability.

6.2 Limitations and future research

  • The authors are fully aware of the limitations of the research reported in this paper.
  • Firstly, the authors have focused only on one mother firm with one business model – the integrated product-service business model – whereas servitization can equally imply the deployment of less related service offerings.
  • This research should be complemented by similar efforts in different industries to assess the broader validity of the findings obtained.
  • Furthermore, it should be noted that, while this study focuses on sales complementarities, engaging in servicing can also yield spillovers by generating insights that have a considerable impact on product development activities.
  • Assessing the presence of complementarities and substitution effects over longer time periods would add significant value to the results reported in this paper.

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Citations
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Journal ArticleDOI
TL;DR: In this paper, the emerging business model innovation literature addresses an importa-tation of business models to management research and among practitioners, and the emerging BMI literature addresses the importa...

1,201 citations


Additional excerpts

  • ...BMI and organizational implications/ performance Survey data Zott and Amit (2007), Giesen et al....

    [...]

Journal ArticleDOI
TL;DR: In this article, the authors engaged in an international and interdisciplinary research effort to identify research priorities that have the potential to advance the service field and benefit customers, organizations, and society.
Abstract: The context in which service is delivered and experienced has, in many respects, fundamentally changed. For instance, advances in technology, especially information technology, are leading to a proliferation of revolutionary services and changing how customers serve themselves before, during, and after purchase. To understand this changing landscape, the authors engaged in an international and interdisciplinary research effort to identify research priorities that have the potential to advance the service field and benefit customers, organizations, and society. The priority-setting process was informed by roundtable discussions with researchers affiliated with service research centers and networks located around the world and resulted in the following 12 service research priorities: • stimulating service innovation, • facilitating servitization, service infusion, and solutions, • understanding organization and employee issues relevant to successful service, • developing service networks and systems, • leveraging service design, • using big data to advance service, • understanding value creation, • enhancing the service experience, • improving well-being through transformative service, • measuring and optimizing service performance and impact, • understanding service in a global context, and • leveraging technology to advance service. For each priority, the authors identified important specific service topics and related research questions. Then, through an online survey, service researchers assessed the subtopics’ perceived importance and the service field’s extant knowledge about them. Although all the priorities and related topics were deemed important, the results show that topics related to transformative service and measuring and optimizing service performance are particularly important for advancing the service field along with big data, which had the largest gap between importance and current knowledge of the field. The authors present key challenges that should be addressed to move the field forward and conclude with a discussion of the need for additional interdisciplinary research.

1,168 citations

Journal ArticleDOI
TL;DR: In this article, the authors analyze how Industry 4.0 triggers changes in the business models of manufacturing SMEs (small and medium-sized enterprises), by conducting a qualitative research with a sample of 68 German SMEs from three industries (automotive suppliers, mechanical and plant engineering, as well as electrical engineering and ICT).

688 citations

Journal ArticleDOI
TL;DR: This work develops a conceptual framework that connects Servitization and Industry 4.0 concepts from a business model innovation (BMI) perspective and discusses different levels of complexity for the implementation of these configurations.

490 citations

Journal ArticleDOI
TL;DR: In this article, the authors consolidate the servitization knowledge base from an organizational change perspective, identifying developed, developing and undeveloped topics to provide a platform that directs future research.
Abstract: Purpose: The purpose of this paper is to consolidate the servitization knowledge base from an organizational change perspective, identifying developed, developing and undeveloped topics to provide a platform that directs future research. Design/methodology/approach: This paper addresses three objectives: it comprehensively examines organizational change management literature for selection of a theoretical framework; it classifies extant studies within the framework through a systemic literature review; and it analyses 232 selected papers and proposes a research agenda. Findings: Analysis suggests increasing global awareness of the importance of services to manufacturers. However, some topics, especially related to servitization transformation, remain undeveloped. Research limitations/implications: Although the authors tried to include all publications relevant to servitization, some might not have been captured. Evaluation and interpretation relied on the research team and subsequent research workshops. Practical implications: One of the most significant challenges for practitioners of servitization is how to transform a manufacturing organization to exploit the opportunity. This paper consolidates literature regarding servitization, identifying progress concerning key research topics and contributing a platform for future research. The goal is to inform research to result eventually in a roadmap for practitioners seeking to servitize. Originality/value: Although extant reviews of servitization identify themes that are examined well, they struggle to identify unanswered questions. This paper addresses this gap by focusing on servitization as a process of organizational change.

479 citations

References
More filters
Book ChapterDOI
TL;DR: In this article, the authors examined the link between firm resources and sustained competitive advantage and analyzed the potential of several firm resources for generating sustained competitive advantages, including value, rareness, imitability, and substitutability.

46,648 citations


"Servitization: Disentangling the im..." refers background in this paper

  • ...The necessary investments range from ‘operational’ service capabilities and resources such as service delivery, service sales skills (Barney, 1991; Peteraf, 1993), and service information systems and tools (Penttinen and Palmer, 2007), to more dynamic capabilities enabling service deployment (Teece…...

    [...]

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TL;DR: This is the essential companion to Jeffrey Wooldridge's widely-used graduate text Econometric Analysis of Cross Section and Panel Data (MIT Press, 2001).
Abstract: The second edition of this acclaimed graduate text provides a unified treatment of two methods used in contemporary econometric research, cross section and data panel methods. By focusing on assumptions that can be given behavioral content, the book maintains an appropriate level of rigor while emphasizing intuitive thinking. The analysis covers both linear and nonlinear models, including models with dynamics and/or individual heterogeneity. In addition to general estimation frameworks (particular methods of moments and maximum likelihood), specific linear and nonlinear methods are covered in detail, including probit and logit models and their multivariate, Tobit models, models for count data, censored and missing data schemes, causal (or treatment) effects, and duration analysis. Econometric Analysis of Cross Section and Panel Data was the first graduate econometrics text to focus on microeconomic data structures, allowing assumptions to be separated into population and sampling assumptions. This second edition has been substantially updated and revised. Improvements include a broader class of models for missing data problems; more detailed treatment of cluster problems, an important topic for empirical researchers; expanded discussion of "generalized instrumental variables" (GIV) estimation; new coverage (based on the author's own recent research) of inverse probability weighting; a more complete framework for estimating treatment effects with panel data, and a firmly established link between econometric approaches to nonlinear panel data and the "generalized estimating equation" literature popular in statistics and other fields. New attention is given to explaining when particular econometric methods can be applied; the goal is not only to tell readers what does work, but why certain "obvious" procedures do not. The numerous included exercises, both theoretical and computer-based, allow the reader to extend methods covered in the text and discover new insights.

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TL;DR: The dynamic capabilities framework as mentioned in this paper analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change, and suggests that private wealth creation in regimes of rapid technology change depends in large measure on honing intemal technological, organizational, and managerial processes inside the firm.
Abstract: The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difftcult-to- trade knowledge assets and complementary assets), and the evolution path(s) it has aflopted or inherited. The importance of path dependencies is amplified where conditions of increasing retums exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding intemally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing intemal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants. © 1997 by John Wiley & Sons, Ltd.

27,902 citations


"Servitization: Disentangling the im..." refers background in this paper

  • ...…Peteraf, 1993), and service information systems and tools (Penttinen and Palmer, 2007), to more dynamic capabilities enabling service deployment (Teece et al., 1997) such as service management and top management capabilities to reorganize a manufacturing firm from pure product provider to…...

    [...]

  • ...The ecessary investments range from ‘operational’ service capabilties and resources such as service delivery, service sales skills Barney, 1991; Peteraf, 1993), and service information systems nd tools (Penttinen and Palmer, 2007), to more dynamic capailities enabling service deployment (Teece et al., 1997) such as ervice management and top management capabilities to reoranize a manufacturing firm from pure product provider to roduct-service provider....

    [...]

Journal ArticleDOI
TL;DR: In this article, the generalized method of moments (GMM) estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
Abstract: This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.

26,580 citations


"Servitization: Disentangling the im..." refers background or methods in this paper

  • ...In the model specification, we also use ‘heteroskedasticity andautocorrelation-consistent’ (HEC) standard errors (Bascle, 2008) to avoid concern over invalid inferences caused by these two violations of standard OLS assumptions (Arellano and Bond, 1991)....

    [...]

  • ...In the model specification, we also use ‘heteroskedasticity and-autocorrelationconsistent’ (HEC) standard errors (Bascle, 2008) to avoid concern over invalid inferences caused by these two violations of standard OLS assumptions (Arellano and Bond, 1991)....

    [...]

  • ...A number of contributions have examined effective ways of (commercially) engaging in extended warranty and after-sales service (Balachander, 2001; Balachandran and Radhakrishnan, 2005; Jack and Murthy, 2001, 2007; Patankar and Mitra, 1995). For example, Cohen et al. (2006) developed a product life-cycle model that studies a set of strategic choices manufacturers face as they design their joint product/service bundle – requiring, in all likelihood, after-sales maintenance and repair support....

    [...]