Servitization strategy and financial performance of ... · 2. Servitization strategies: service concept and operational service system 2.1. Service concept and service strategies

Servitization strategy and financial performance of manufacturing SMEs: a necessary alignment

between the service concept and the operational service system

Laure AMBROISEa, Sophie PEILLON

b, Isabelle PRIM-ALLAZ

c1, Christine TEYSSIER

d

aCOACTIS (EA 4161), Université de Lyon/St-Etienne, 6 rue Basses des Rives, 42 023 St Etienne Cx,

FRANCE. [email protected] bCOACTIS (EA 4161), Ecole des Mines de Saint-Etienne, Institut Henri Fayol, 158 cours Fauriel, 42023

Saint-Etienne, France. [email protected] cCOACTIS (EA 4161), Université de Lyon/Lyon 2, ISH, 14-16 avenue Berthelot, 69007 Lyon.

[email protected], dCOACTIS (EA 4161), Université de Lyon/St-Etienne, 6 rue Basses des Rives, 42 023 St Etienne Cx,

FRANCE. [email protected]

1Corresponding author, +33 6 68 96 65 17

Abstract

This paper aims to investigate the relationship between servitization strategies and firms’ financial performances. We postulate that it is the right alignment between the firm’s operational service system and the type of service strategy (viewed as the service concept implemented) that is likely to increase the firm’s overall profitability. We built a research model testing the impact of the type of service concept on the relationship between the firm’s operational service system and its financial performance. Globally, the more developed the service concept, the stronger the positive relationship between the dimensions of the operational service system and the firm’s financial performance indicators. The model is tested on data gathered from a survey conducted in face-to-face interviews with CEOs of 184 French manufacturing SMEs offering services, and it is completed with financial indicators. Results indicate that to perform, firms must focus on different operational service dimensions according to the service concept implemented. While this is not relevant for a company proposing an added services-based strategy to invest in a complex operational service system, firms adopting a reconfiguration-based service strategy should focus on the service delivery system as firms offering PSS must develop a high level of service culture. Keywords: Servitization; Service Concept; Financial Performance; Operational Service System

Acknowledgments

The authors thank the French Research Agency ANR for its grants to the ServInnov project as well as the

research center Coactis and the Rhône Alpes District for accessing the data needed for this study.

mailto:[email protected]




Servitization strategy and financial performance of manufacturing SMEs: a necessary alignment

between the service concept and the operational service system

Abstract

This paper aims to investigate the relationship between servitization strategies and firms’ financial

performances. We postulate that it is the right alignment between the firm’s operational service system and

the type of service strategy (viewed as the service concept implemented) that is likely to increase the firm’s

overall profitability. We built a research model testing the impact of the type of service concept on the

relationship between the firm’s operational service system and its financial performance. Globally, the

more developed the service concept, the stronger the positive relationship between the dimensions of the

operational service system and the firm’s financial performance indicators. The model is tested on data

gathered from a survey conducted in face-to-face interviews with CEOs of 184 French manufacturing

SMEs offering services, and it is completed with financial indicators. Results indicate that to perform, firms

must focus on different operational service dimensions according to the service concept implemented.

While this is not relevant for a company proposing an added services-based strategy to invest in a complex

operational service system, firms adopting a reconfiguration-based service strategy should focus on the

service delivery system as firms offering PSS must develop a high level of service culture.

Keywords: Servitization; Service Concept; Financial Performance; Operational Service System.

1. Introduction

While there is a growing literature on servitization, financial consequences of this strategy

have been little studied and only recent research is beginning to address the question more

systematically (Eggert et al., 2014; Visnjic and Van Looy, 2013; Gebauer et al., 2012b;

Evanschitzky et al., 2011; Cova and Salle, 2007). An implicit positive relationship is often

postulated between servitization and financial performance of the firm, but empirical results

are far from convergent. The “service paradox” concept postulates that substantial

investments in extending the service business lead to increased service offerings and higher

costs but do not generate the expected corresponding higher returns (Gebauer et al., 2005).

The reallocation of financial and managerial resources previously dedicated to the

development of products is not easy, and its consequences are difficult to predict. Neely

(2008) observes that in servitized firms, the cost of employment, the working capital and the

total asset per employee are higher than they are in other types of firms. The author (Neely)

also demonstrates that the failure rate is higher for servitized firms. These mitigated results

call for a better understanding of ways in which manufacturing companies can develop

successful servitization strategies and overcome hidden risks (Ostrom et al. 2015) while

continuing to benefiting from services (Gebauer et al., 2012a).

In this paper, we consider firms’ servitization strategies based on three types of service

concepts - added services, reconfiguration and PSS. We postulate that an adequate alignment

between the firm’s operational service system and the type of servitization strategy will likely

increase the firm’s overall profitability (Evanschitzky et al., 2011; Johansson and Olhager,

2004). A research model aimed to test the relationship among the type of service concepts, the

firm’s operational service dimensions and the firm’s financial performance is developed.

The remainder of this article is as follows. Section 2 defines the conceptual framework we use

to analyze servitization strategies, and section 3 stresses the main results stemming from

current literature on the relationship between servitization and financial performance of the

firm. It also includes the conceptual model. The research methodology is proposed in section

4, and the article continues with the presentation of results in section 5. The paper concludes

with a discussion of the theoretical and managerial implications in section 6.

2. Servitization strategies: service concept and operational service system

2.1. Service concept and service strategies

Through the servitization concept, Vandermerwe and Rada (1989) establish the idea that there

exists a continuum from the manufacturing company – the producer of goods – to the service

company – the producer of pure services. They further posit that this continuum includes

different intermediate forms of product-service bundles. In today’s business environment, this

continuum (Fig. 1) is the basis for most service strategy classifications, and thus, it underpins

the notion of an increased implication of responsibility with respect to the provider within the

customer value chain (Gebauer et al., 2010b).

Figure 1: Service strategies adapted from Gebauer et al. (2010)

Irrespective of the servitization field, the operations management literature has put forward

the “product-service system” (PSS) concept. This concept is clearly in line with sustainability

concerns (Mont, 2002) as the underlying aim is to go beyond integrated product-service

offerings by promoting function-oriented business models where the product itself is no

longer sold, but rather, only the use of the product is sold. In other words, the provider keeps

the product ownership and makes it available to the customer through different strategies or

devices (e.g., leasing, renting, sharing or pooling).

With respect to Baines et al. (2007), the concept of a Product-Service System - PSS - is a

special case of servitization. A PSS can be thought of as a market proposition that extends the

traditional functionality of a product where the emphasis is on the “sale of use” rather than on

the “sale of product”. The customer pays for using an asset rather than paying to purchase the

asset, and thus benefits from a restructuring of the risks, responsibilities and costs traditionally

associated with ownership. Thus, Tukker’s categorization (Tukker, 2004) complements the

product-service continuum, and places emphasis on the transition from a service offer

associated with a core product to an offer where there is no transfer of property rights (Fig. 2).

Figure 2: Service strategies adapted from Tukker (2004)

In this study, we bring together Gebauer and Tukker’s continuum and consider that a

manufacturing company can build its servitization strategy upon three types of service

concepts (Fig. 3). We then distinguish two stages between pure goods and PSS, as suggested

by Evanschitzky et al. (2011).

The added services type corresponds to a product-oriented offer and incorporates Gebauer’s

customer service strategy (Gebauer et al., 2010b), after-sales service and customer support

service provider;

The reconfiguration type includes services related to a product that is sold to the customer,

but it results in a modification within the customer activity chain, i.e., involves an outsourcing

partner and a development partner, as in Gebauer’s categorization (Gebauer et al., 2010b);

The PSS type of service concept requires both a use-oriented PSS and a result-oriented

PSS, as in Tukker’s typology (Tukker, 2004), which includes a non-transfer of underlying

product property rights.

Figure 3: Service concept (SC) strategies

Assume some ofcustomers’ activities

Outsourcing Partner

Development Partner

Sale of supplementServices to enhanceproduct proposals

Customer Service

Provider

After-sales Activitiesproposed to client

After-sales ProvidersCustomer ServiceSupport Provider

Pure service proposalsCombined products-services proposals

Use-oriented PSS

or Result-oriented PSS

No transfer

of property rights

Added services ReconfigurationProduct Service

System

Hence, we suggest distinguishing service strategies depending on the type of service concept

chosen by the manufacturing company. This choice reflects the degree of the provider

involvement within the customer activity chain. Consistent with the continuum proposition,

the service concept also refers to the maturity level of the manufacturing firm regarding the

servitization process.

2.2. The operational service system in a servitization context

According to Baines and Lightfoot (2011, p.107), “servitization is now widely recognized as

the innovation of a manufacturer’s capabilities and processes to move from selling products,

to selling integrated product-service offerings that deliver value in use”. Den Hertog’s widely

recognized model conceptualizes service innovation as a change in at least one of the

following dimensions (Baines and Lightfoot, 2011): service concept, customer interface and

service delivery/realization system. These last two dimensions are at the heart of the

operational service system and involve several elements.

The customer interface is both an interactive process of information and knowledge exchange

and a cooperation process between service provider and customer, and as such, they are a

required aspect of the service delivery (Baines and Lightfoot, 2011; Gadrey and Gallouj,

1998). The customer interface requires a more or less complex organization (Gadrey and

Gallouj, 1998) as well as a transition from a transactional to a relational logic (Grönroos,

1990).

The service delivery/realization system addresses the question of “how” the service concept is

delivered to target customers, and it requires that the design needs be aligned with the service

concept. Roth and Menor’s architecture (2003), which is the most recognized model for the

design of a service delivery system, consists of three elements: These elements include (i)

structural decisions regarding physical aspects of the delivery system; (ii) infrastructural

decisions related to the management of the service delivery system; and (iii) integration

decisions covering all organizational mechanisms needed to perform services and link the

service provider with the customer.

Moreover, servitization influences corporate culture and involves human resource

management issues (Gebauer et al., 2010a; Gebauer et al., 2005; Homburg et al., 2002). Den

Hertog and de Jong (2007) emphasize the need for employee empowerment and for

professional and relational skills enhancement. Gebauer et al. (2010a) contend that the service

orientation of the corporate culture focuses on the service orientation of managers and

employees’ values and behaviors. Managers and employees are motivated to develop a

service business if they understand and perceive the high value of services. Managers should

implement servitization strategies, emphasize entrepreneurial orientation for achieving service

revenue and profit growth, and coach employees in the selling, delivering and billing of

services. Correspondingly, employees should develop a customer orientation based on a

learning relationship and on the willingness to solve customer problems. Hence, corporate

culture and human resource management issues are of particular importance in servitization.

Based on these propositions, we consider an operational service system that is comprised of

three elements - customer interface, service delivery system, and service culture, which

includes human resource management and employee empowerment. By so doing, we are

aligned with the three key organizational challenges proposed by Salonen (2011).

3. Servitization strategy and financial performance

3.1. A positive postulated relationship

Financial objectives and, more precisely, the continuing need for profit growth are postulated

to be the main factors behind companies’ decisions to adopt a servitization strategy (Gebauer

et al., 2012b). Therefore, theoretically, there should be a positive effect of service infusion on

firm sales (Malleret, 2006; Antioco et al., 2008) and profitability (Homburg and Hoyer, 2002;

Malleret, 2006; Wise and Baumgartner, 1999; Gebauer, 2007). This hypothesized positive

relationship suggests at least three effects (Oliva and Kallenberg, 2003), all relying on the

idea that servitization will improve customer relationships (e.g., intensity of interaction and

personal relationships with consumers), customer satisfaction and loyalty (Homburg and

Hoyer, 2002).

First, researchers observe that in industries with a high-installed product base (e.g., aerospace,

locomotive, automotive industries), higher revenue potential often exists as service revenues

can be one or two orders of magnitude greater than new product sales (Gebauer et al., 2005;

Wise and Baumgartner, 1999; Slack, 2005).

Second, as services seem to be a steadier source of revenue (Sawhney et al., 2004), increasing

service revenues can serve as compensation for declining revenues in equipment sales

(Sharma and Iyer, 2011; Reinartz and Ulaga, 2008), and because services are often counter-

cyclical or more resistant to economic cycles, they can support steadier cash flows in periods

of economic turbulence (Wise and Baumgartner, 1999; Oliva and Kallenberg, 2003; Gebauer

and Fleich, 2007). Furthermore, service offerings tend to be less sensitive to price competition

and tend to promote customer loyalty (Malleret, 2006).

Third, services are globally more profitable. Due to their lower sensitivity to price

competition, service offerings are likely to provide higher margins and rates of return

compared to pure product offerings (Frambach et al., 1998; Neu and Brown, 2005; Oliva and

Kallenberg, 2003).

3.2. Mitigated results of empirical studies

As specific empirical studies on the relationship between servitization and firm financial

performance are still in their early stages (Gebauer et al, 2010b; Eggert et al., 2014, Visnjic

and Van Looy, 2013), their results are not convergent and do not definitively prove any

positive relationship between services and financial performance (Neely, 2008).

Empirical studies yield mixed results, and the possible positive relationships are far from

being always linear (Suarez et al., 2013). Indeed, many authors observe a curvilinear

relationship between services and financial performance. For example, Fang et al. (2008)

show that the impact of servitization on firm value is insignificant or slightly negative until

service sales reach 20 or 30% of total sales, and the impact becomes positive only beyond this

threshold. Cusumano (2008) finds that services contribute positively to profits until they are

approximately 20% of the total revenues, and that beyond that point and until they reach

approximately 60% of the total revenues, services result in a decrease in profitability. Suarez

et al. (2013) find that the inflection point where the contribution to performance of additional

services changes from negative to positive is approximately 56 % of the total revenue,

whereas Visnjic and Van Looy (2013) explain that the high profitability level reached when

levels of service activities are low results from attractive margins that can be achieved without

substantial investments in staff and organization. The intensification of service activity results

in a decrease in profit margins due to the need to invest substantially in a service-oriented

organization. A long-term profitability re-emerges only once a critical mass of service activity

is achieved and once economies of scale compensate the investment costs.

Eggert et al. (2011) observe that industrial service offerings do not automatically improve

firm profits as moderating variables, such as industry or service business characteristics,

influence the relationship between servitization and financial performance. These variables

concern the extent to which services are related to the firm’s core business or the availability

of slack resources (Fang et al., 2008), to the service orientation of human resource

management and corporate culture (Gebauer, 2007), to the level of product innovation activity

(Eggert et al., 2011) and to the decentralization of the decision-making authority (Eggert et

al., 2014). Consequently, the relationship between servitization and financial performance

should be indirectly addressed. As stated by Suarez et al. (2013), managers must focus

sufficient attention on service development, but they must devote even more attention to the

balance between short-term negative effects and long-term benefits, especially by adopting

measures that will help them reach the inflection point more quickly.

3.3. Model specification and hypothesis

Manufacturing firms must invest in a specific business model to provide profitable services

and to overcome the service paradox (Eggert et al., 2014; Wise and Baumgartner, 1999;

Eggert et al., 2011). Companies that financially succeed are those that are able to adopt an

integrated product-service business strategy, able to apply various managerial practices

designed to acquire service sales skills and information systems and tools, able to develop

dynamic capabilities that enable service deployment and able to generate and/or reinforce

customer proximity. The success of a service strategy requires not only managerial motivation

but also supporting organizational arrangements (Gebauer et al., 2012b; Gebauer et al., 2005;

Malleret, 2006) that entail, on the one hand, the customer relationship (market-oriented and

clearly defined service development, service offers focused on value proposition, and

relationship marketing), and on the other hand, the firm’s internal organization (clear service

strategy, separate service organization with profit and loss responsibility, decentralization of

decision-making, service culture).

In this study, we suggest that for the firm to gain financial benefits from servitization, it must

align its operational service system with its service strategy. The service strategy can be more

or less complex, depending on the service concept on which it is based, and the operational

service system should be consistent with this service concept. Hence, we assume that the

relationship between the firm’s operational service system and its financial performance is

influenced by the type of service concept the firm adopts.

Consistent with previous developments, we focus on three areas -customer interface (CI),

service delivery system (SDS) and service culture (SC). The underlying assumption is that to

succeed, from a financial perspective, managers must focus on the customer relationship and

reinforce their personal knowledge about their customers, implement an appropriately aligned

service delivery system and create a service culture within the firm.

4. Research methodology

4.1. Data collection

Data were gathered from a survey administered in face-to-face interviews with CEOs of 690

French SMEs from the Rhône-Alpes region. These are rather small companies as 39% have

less than 10 employees and 49% have between 10 and 49 employees. Additionally, 78% have

a turnover lower than €5 million. The survey includes approximately 600 variables in all

management fields, including strategy and business models, customer relationships, finances,

production, innovation, human resources, etc.

We focus here on manufacturing firms, more specifically on 184 companies that offer a

combination of products and services. The service strategy of these firms is studied through

items aimed to measure (1) the type of service concept implemented by the firm and (2) the

firm’s operational service system in terms of customer interface, service delivery system and

service culture (Appendix A).

As mentioned in 2.1, we considered three types of service strategy, depending on the

underlying service concept - a service strategy based on added services (AS), a service

strategy based on “reconfiguration activities (R) and a service strategy based on PSS (PSS).

Firms proposing only added services activities were classified in the AS category and

included 45 firms. Firms proposing added services and/or reconfiguration activities were

classified in the R category and included 98 firms. Finally, firms proposing PSS were

classified in the PSS category, regardless of whether they were also proposing added services

and/or reconfiguration activities. This third group included 41 firms.

For each company, the data were matched with the DIANE-NEO database to obtain financial

indicators. The financial performance of service strategies is generally measured from three

perspectives - growth, profitability and value - through homogeneous indicators (Fang et al.

2008; Neely, 2008). Here, we used two profitability ratios extracted from the DIANE-NEO

database - the operating margin ratio (EBITDA / Sales) and the net profit margin ratio (Net

Profit / Sales).

4.2. Data analysis1

Measurement scales of the operational service dimensions were developed based on the

literature on servitization (Gebauer et al, 2010b; Tukker, 2004). These scales were pre-tested

among selected members of the target population, none of whom participated in the final

study. The individual items used to measure the constructs are presented in Appendix A. An

exploratory component factor analysis was first conducted on the items of the customer

interface (CI), the service delivery system (SDS) and the service culture dimensions (SC). The

three hypothesized dimensions are presented in Table 1. The values of the Cronbach’s alpha

are greater than 0.7 (for the first dimension) or slightly lower than 0.7 (for the second and

third dimensions), indicating that the combination of these items in three dimensions is

statistically consistent (Churchill, 1979).

A confirmatory analysis was then conducted to verify the reliability and internal validity of

the three dimensions (CI, SDS and SC). All indicators confirmed the reliability and the

validity of the scales as all Alpha values are between 0.950 and 0.986 and all Rho’s values are

between 0.982 and 0.991 (Joreskög, 1971; Malhotra et al., 2012) -cf. Table 1-.

Latent Variable Dimensions Cronbach's

Alpha

D.G.

Rho

(PCA)

Conditioning

Number

Critical

Value

Own

Values

Customer Interface 3 0.974 0.985 7.660 12.266 35.152

1.048

0.599

Service Delivery

System 3 0.950 0.982 6.306 11.893 33.859

0.969

0.851

Service Culture 4 0.986 0.991 10.355 14.368 55.395

0.885

0.676

0.517

Table 1 – Reliability and convergent validity of operational service system scales

Considering the relative complexity of the model, we used a structural model (PLS approach

conducted with XLSTAT). This approach bypasses problems of traditional covariance

structure analysis linked to small sample size and the need for multivariate normal distribution

(Bagozzi and Yi, 1989). Moreover, variance analysis at a latent level - using a structural

equations model - not only enables the measuring of the overall effect of variables but also

estimates the breaking down of each modality for the selected explanatory variables.

Furthermore, the methodology used allows a multi-group analysis of variance based on the

1 In this first version, exploratory and confirmatory analysis are conducted on the same databse which is an

important limit to this work. From the time of the conference, the authors will have a new extraction of this on-

going database –actually by the end of January 2016-, allowing them to conduct the exploratory and the

confirmatory analysis on two separate samples. A new version of the paper will then be proposed for the

conference.

service concept implemented by manufacturing firms (Bagozzi et al., 1991) - Appendix C.

For each latent variable and each structural coefficient, the methodology tests for the

difference between the value obtained for a given group and the value obtained for the rest of

the sample (Appendix D). Hence, the influence of the service concept category (AS, R, PSS)

on the specific latent variable can be directly specified.

5. Results

Control variance analysis was conducted to verify that there were no significant differences

among the three groups (AS, R, PSS) regarding the firm turnover, the growth rate of turnover,

the service percentage in the global turnover, and firm number of employees (Appendix B).

Regarding the goodness of fit estimation, all indices confirm the stability of the three models.

Appendix C shows the very close values of absolute Gof and bootstrapped absolute Gof for

each model. The results summarized in Table 2 highlight that, according to the service

concept implemented by the firm, the operational service system dimensions have contrasted

influence on financial performance.

Added Services (AS) Reconfiguration (R) PSS

Operating

Margin

Net Profit

Margin

Operating

Margin

Net

Profit

Margin

Operating

Margin

Net Profit

Margin

R² (Bootstrap) .307 .205 .306 .293 .429 .503

Customer Interface -.166 -.178

.190 .096

Service Delivery

System -.263 -.196 .422 .417

Service Culture -.229 -.147 .184 .173 .431 .585

Only significant values (p<.1)

are presented

Table 2 – Main results – β values (PLS)

With respect to the AS-based strategy, the more developed the operational service system, the

less profitable the firm. This hold true for the three dimensions (Figure 4).

Figure 4 – Added services

With respect to the R-based strategy, results show a strong positive impact of the service

Customer Interface

Service Delivery

System

Service Culture

Operating

Margin

Net Profit

Margin

- 0,166

- 0,263

- 0,229

- 0,178

- 0,196

- 0,147

delivery system on firm profitability as well as a lower positive influence of the service

culture on profitability. Customer interface has no significant impact (Figure 5).

Figure 5 - Reconfiguration

With respect to PSS-based strategy, profitability is related to a high level of service culture.

The influence of customer interface, while positive, is lower. The service delivery system has

no significant impact (Figure 6).

Figure 6 – PSS

These results show that it would be essential to adopt the operational service system and to

focus on singular dimensions according to the firm service strategy because this alignment has

positive impacts on firm profitability. Results and managerial implications are discussed

herein.

6. Discussion

Our results indicate that investing in a complex operational service system is not relevant in

the context of an added services-based strategy. As a consequence, firms that adopt or

implement this type of strategy should maintain a relatively basic operational service system.

Indeed, the implementation of a new service delivery system generates costs, and if these

costs are not totally integrated into invoiced prices, this could penalize profitability.

Therefore, with respect to this strategy, we suggest that financial performance stems mainly

from the core product, a result that is consistent with those of Gebauer et al. (2007), who

recommend that service providers offering only basic services should not develop a specific

service organization but rather should integrate the service activity into the product

organization.

Results indicate that firms adopting a reconfiguration-based service strategy should focus on

the service delivery system. Within this strategy, the service provider performs some of its

NS

0,422

0,184

0,417

0,173

NS

Customer Interface

Service Delivery

System

Service Culture

Operating

Margin

Net Profit

Margin

NS

0,096

0,431

0,190

0,585

NS

Customer Interface

Service Delivery

System

Service Culture

Operating

Margin

Net Profit

Margin

customers’ activities (outsourcing or close partnership). In the early stages, the provider and

the customer must build their partnership, and the provider must develop an in-depth

understanding of the customer’ operational requirements for the process output (Gebauer et al.

2010b). However, once the provider, together with the customer, has defined the processes

and the expected outputs, the operations are performed internally by the provider, who works

autonomously and on his own. This could explain why the service delivery system is

important, especially the performance assessment dimension of the system. This claim is

consistent with Oliva and Kallenberg (2003), who note that challenges at this stage consist of

valorizing, delivering and invoicing services. As the provider also enters into a hard-to-imitate

competency position (Davies, 2004), customers become captive and loyal, which explains

why there is no need for strong customer interactions. Finally, in a reconfiguration-based

service strategy, the value proposition of the provider depends primarily on his savoir faire

(people skills).

When firms offer PSS, profitability is related primarily to a high level of service culture, i.e.,

to the savoir-être (qualities) of the firm and its employees. Offering PSS often implies that the

provider’s employees are present within the company and directly participate in the

company’s activities. As a consequence, the customer interface is also important. The

provider’s employees must be autonomous, qualified, able to communicate with customers,

able to gather information for their firm, and able to engage in a relational mode of

exchanges. Hence, the service culture becomes a key element in the firm’s performance.

Manufacturing firms cannot succeed in PSS-based strategies without moving from their

traditional manufacturing culture to a new service-oriented culture, as suggested by Ostrom et

al. (2015). In a customer-oriented logic, service is fully integrated into the business strategy,

and as such, it becomes a fully recognized source of competitiveness. While price competition

is not a priority, firms must develop an accurate pricing of all of their services (Sharma and

Iyer, 2011). This is consistent with Frambach et al. (1998), who show that due to their lower

sensitivity to price competition, PSS offerings are likely to provide higher rates of return than

pure product offerings.

From a practical point of view, understanding the impact of service strategy on financial

performance can encourage manufacturing companies to better prepare for and effectively

manage their transition. For instance, when managers are willing to go beyond the added

services on the service concept continuum, they must focus on corporate culture issues to

benefit from their strategy. According to the chosen service strategy, managers must

emphasize either the service delivery system (R) or the service culture (PSS), not both

dimensions at the same time.

Our work provides quantitative support that emphasizes the adequate alignment of the firm’s

operational service system and its service concept to increase profitability. As a whole, results

confirm the assumption that the operational service system must be adapted to the service

strategy to attain expected financial benefits (Matthyssens and Vandenbempt, 2008). While

managers of manufacturing firms are skeptical that service could generate potential revenue

and real value compared to product sales (Gebauer et al., 2005; Oliva and Kallenberg, 2003),

our results indicate that potential benefits from developing services do exist, providing the

right operational service system is implemented.

Appendix A: Principal component analysis on operational service system dimensions

Dimensions

Service

culture

Customer

interface

Service

Delivery

System

Service production requires a high

level of autonomy for front line

employees

.985

Our service production requires a

high level of expertise difficult to

imitate by our customers

.752

Our service production requires

good communication with our

customers

.668


great experience in customer

relationships

.570

We have a complex customer

interface due to the division of

responsibility

.910

Our service production requires a

complex customer interface

technical system

.779


frequent contacts with our

customers

.670

We have performance scoreboards

for our service delivery system

dedicated to our service production

.918

We systematically collect and

analyze data through our service

delivery system

.619

Our service delivery system

impacts our customers’ new

products and services development

processes

.608

Explained variance: Total: 63.263 41.304 11.438 10.521

Cronbach's alpha 0.792 0.693 0.651

KMO=0.844; Bartlett's test,

p=0.000

Appendix B: ANOVA tests on control variables among the three categories of firm services concept

Mean

ANOVA

Signification

Growth rate of

turnover 2012/2011

Added services 0.111

Reconfiguration 0.084

PSS 0.273

Total 0.135 .211

Percent of services /

turnover 2012



PSS 0.233

Total 0.246 .971

Percent of services /

turnover 2011



PSS 0.207

Total 0.237 .825

Turnover

kEUR

2012

Added services 4 341.695

Reconfiguration 5 833.087

PSS 4 419.775

Total 5 133.589 .505

Turnover

kEUR

2011

Added services 3 977.725

Reconfiguration 5 936.822

PSS 4 480.804

Total 5 115.128 .366

Total number of

employees



PSS 27.950

Total 30.000 .285

Appendix C: PLS Multigroup analysis

Added services

GoF

GoF

(Bootstrap)

Std.

Deviation

Absolute 0.316 0.372 0.053

Relative 0.706 0.685 0.066

External model 0.988 0.951 0.033

Internal model 0.714 0.721 0.072

Reconfiguration

GoF

GoF

(Bootstrap)

Std.

Deviation

Absolute 0.390 0.392 0.061

Relative 0.753 0.712 0.079



PSS

GoF

GoF

(Bootstrap)

Std.

Deviation

Absolute 0.460 0.479 0.066

Relative 0.849 0.800 0.064



Operating Margin 2012 Net Margin 2012

R²

(Bootstrap) P

R²

(Bootstrap) p

Added Services 0.307 ** Added Services 0.205 **

Latent variable Value

(Bootstrap) P Latent variable

Value

(Bootstrap) P

Customer Interface -0.166 **

Customer

Interface -0.178 **

Service Delivery

System -0.263 **

Service Delivery

System -0.196 **

Service Culture -0.229 *. Service Culture -0.147 *.

R²

(Bootstrap) P

R²

(Bootstrap) p

Reconfiguration 0.306 ** Reconfiguration 0.293 **

Latent variable

Value

(Bootstrap) P Latent variable

Value

(Bootstrap) p

Customer Interface -0.271 n.s. Customer Interface -0.259 n.s.

Service Delivery

System 0.422 *

Service Delivery

System 0.417 **

Service Culture 0.184 ** Service Culture 0.173 *

R²

(Bootstrap) P

R²

(Bootstrap) p

PSS 0.429 * PSS 0.503 *

Latent variable Value

(Bootstrap) P

Latent variable

Value

(Bootstrap) p

Customer Interface 0.190 * Customer Interface 0.096 *

Service Delivery

System -0.316 n.s.

Service Delivery

System -0.318 n.s.

Service Culture 0.431 ** Service Culture 0.585 *

***: p<0,05; **: p<0,10; *: p<0,15

Appendix D: Group comparison

Comparisons: Added Services vs Reconfiguration

Latent variables Diff. P Sign.

Customer Interface -> Operating Margin

2012 0.207 n.s. No

Service Delivery System -> Operating

Margin 2012 0.683 n.s. No

Service Culture -> Operating Margin 2012 0.374 n.s. No

Customer Interface -> Net Margin 2012 0.211 n.s. No

Service Delivery System -> Net Margin 2012 0.605 n.s. No

Service Culture -> Net Margin 2012 0.298 n.s. No

Comparisons: Added Services vs PSS



2012 0.411 ** Yes



Service Culture -> Operating Margin 2012 0.669 *** Yes


Service Delivery System -> Net Margin 2012 0.267 n.s. No

Service Culture -> Net Margin 2012 0.728 *** Yes

Comparisons: Reconfiguration vs PSS



2012 0.618 n.s. No



Service Culture -> Operating Margin 2012 0.295 n.s. No


Service Delivery System -> Net Margin 2012 0.872 ** Yes

Service Culture -> Net Margin 2012 0.430 n.s. No

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