Servitization: Disentangling the Impact of Service Business Model Innovation on the Performance of Manufacturing Firms

44 Pages Posted: 25 Jul 2012 Last revised: 18 Feb 2014

See all articles by Ivanka Visnjic

Ivanka Visnjic

ESADE Business School; University of Cambridge

Bart Van Looy

KU Leuven - Department of Economics

Date Written: July 4, 2012

Abstract

As manufacturing businesses compete in an ever more competitive and global economy where products get easily commoditized, innovating by adding services to the core product offering has become a highly popular strategy. Contrary to the expected strategic and economic benefits, recent findings warn of implementation hurdles that lead to a potential performance decline, the so-called 'service paradox'. In this paper, we analyze this paradox by disentangling the value creation and value appropriation processes of 44 subsidiaries of a multinational manufacturing firm that has been successfully developing an after-sales service business. Empirical analysis reveals that products and services act as revenue complements, thereby managing to transcend the inherent substitution of products by services. In addition, more labor-intensive services, which imply higher levels of customer proximity, further enhance product sales. Finally, our findings reveal a positive yet non-linear relationship between profitability and the scale of service activities: while initial levels of servicing result in an increase in profitability, a period of relative decline is observed before the positive relationship between the scale of service activities and profitability unfolds again. While these findings suggest the presence of initial short-term gains, they also indicate the presence of a 'profitability' hurdle; sustainable (profitable) growth seems feasible only to the extent that investments in service capabilities are translated into economies of scale. In helping to clarify the performance implications of service innovations, our findings suggest pathways to sustainable growth for manufacturing firms.

Keywords: servitization, open service innovation, business model, service paradox

JEL Classification: M00, M11

Suggested Citation

Visnjic, Ivanka and Van Looy, Bart, Servitization: Disentangling the Impact of Service Business Model Innovation on the Performance of Manufacturing Firms (July 4, 2012). ESADE Business School Research Paper No. 230, Available at SSRN: https://ssrn.com/abstract=2117038 or http://dx.doi.org/10.2139/ssrn.2117038

Ivanka Visnjic (Contact Author)

ESADE Business School ( email )

Avda. de Pedralbes 60-62
Barcelona, 08034
Spain

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Bart Van Looy

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

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