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

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