Servitization: Its preferred organization and impact on firm performance

Abstract

This article addresses the performance implication of servitization and the configuration of servitization and organizational characteristics. We propose hypotheses regarding the relation between two types of servitization (basic services vs. advanced services) and firm performance, and how organizations’ decision-making features moderate these relations. Hypotheses are tested based on a survey of 931 plants from 22 countries. The results show that the advanced services (ADS) improve market, financial, and operational performance, while the basic services (BAS) only improve market performance. In addition, the positive relation between the ADS and firm performance is stronger in organizations with a participative and decentralized decision-making process.

Keywords

Servitization organizational characteristics basic services advanced services

Huashan Li, PhD student at School of Management, Harbin Institute of Technology. His research interest includes servitization and supply chain management.

Guyang Tian, Master student at Harbin Normal University. Her research interest is organization behavior.

Yezhuang Tian, Professor of management at School of Management, Harbin Institute of Technology. His research interest includes operations management and organization theory.

1 Introduction

To avoid the fierce competition in the product segment, many manufacturing companies are increasingly placing more emphasis on service as a way to differentiate themselves from their competitors [1 –3]. Defined as adding services to products, servitization has been hypothesized to help manufacturing companies to gain satisfied customers [4], stable cash flow, and sustainable competitive advantages [5, 6]. However, servitization also brings risks and challenges [7]. For example, servitization requires the change of organizational culture and the iteration of operation process and business model [8]. In practice, many firms have invested a lot of money on servitization, but failed to get the expected returns [9]. Consequently, manufacturing firms should choose right approaches to manage service design and delivery to maximize the benefits of servitization [10].

Among all the approaches, the characteristics of organizations have been most frequently mentioned as a critical factor of servitization success [11]. Adding service to the offering portfolio might induce organizational culture change, increase information load, and require more service expertise and intra-organizational collaboration [12]. Consequently, organizations for servitized companies should be different from that of manufacturing companies that solely sell products [13]. As suggested by Zhang et al. [12], servitized firms require an organization that facilitates information exchange, intra-organizational collaboration, and empowerment to maximize the benefit of servitization. However, current studies examining the role of organizational culture are mostly conceptual and qualitative, the empirical evidence regarding the impact of the decision-making process in servitization remains clouded.

In this article, we empirically examine how an organization’s characteristic moderates the relation between servitization and firm performance. Specifically, we examine two types of services (BAS vs. ADS) provided by manufacturing companies and explore the configuration between servitization and an organization’s characteristics. This article contributes to the current literature in two ways. First, it examines the relation between two types of servitization and firm performance, adding empirical evidence to the currently debated relation between servitization and firm performance [14]. Our results show that the ADS improves all performance indicators, while BAS only improves market performance. Second, it examines how organizational characteristics moderate the relation between servitization and firm performance, adding empirical evidence to the configuration between servitization and organization characteristics.

This article is organized as follows. In the following section, we review the literature on servitization and organizational c, followed by the hypotheses. Then, the method and results are presented. After the results, the theoretical implication and practical implications are discussed.

2 Literature review

2.1 Servitization

The concept of servitization was proposed by Vandermerwe et al. [1] and was defined as “the increased offering of fuller market packages or ‘bundles’ of customer-focused combinations of goods, services, support, self-service, and knowledge in order to add value to core product offerings”. Similar concepts are service orientation [15] and service infusion [16], which all capture the trend that manufacturing companies increasingly adding value to the customers by adding service to the traditional products. Manufacturing companies could offer a series of services that range from after-sales services that guarantee the proper function of products to rental or “power-by-hour” services that substitute the products [8, 17]. The servitization literature has categorized two types of servitization, namely, basic services (BAS) and advanced services (ADS). The BAS refers to services that intend to ensure the proper function of the products. Examples of BAS are maintenance, installation, transportation services. As indicated by Sousa et al. [18], the BAS is product-centered, and value added to customers is minimal. In contrast, the ADS refers to services that oriented at customer needs. Examples of ADS are customer training, process redesign, and facility rental services. Different from the BAS, the ADS deeply involved in customers’ value creation. In addition, the BAS is not differentiated, with no deliberate service choice, while the ADS is differentiated to offer more value to customers.

Servitization could benefit manufacturing companies in three ways. First, servitization could create marketing opportunities [4]. Product-related services could make the products easier to use. For example, installation and transportation services could save customers time and efforts spent on using the products. Kastalli et al. [2] validated that services sales could enhance the product sales. Hence, adding services to products could enhance the core competence of the products and enhance customer satisfaction. Second, servitization could create financial opportunities. As suggested by Wise et al. [19], services are more profitable than products – the profit margin of service might be more than three times that of products. In addition, services could create stable cash flow that balances the seasonal cash flow of revenues from products [20]. For example, financial services could help firms to get access to more cash flow and more profits. Third, servitization also has strategic importance. As indicated by Eggert et al. [5] in contrast to products that are tangible and easy to imitate, services are intangible and rely on human-development resources. Hence, services could fit the valuable, rare, inimitable, and non-substitutable (VRIN) criteria that could create sustainable competitive advantages. In terms of these three types of benefits, empirical research has found a positive relation between servitization and servitization [4 , 20].

The positive relation between servitization and firm performance, however, has been challenged by recent research. For example, Neely [21] found that although servitized firms have a higher revenue, they are more likely to bankrupt than firms that do not servitize. In addition, services have lower profit margin than products. Some research found a non-linear relation between servitization and firm performance. For example, by adopting the economics of scope, Kastalli et al. [2] found a cubic relation between servitization and firm performance, suggesting that the benefits of servitization can achieve only after a given that the economies of scale and scope can achieve. Similarly, Suarez et al. [22] also found a U-shaped relation between servitization and firm performance, suggesting that when products are the main source of revenue, providing service could reduce profit margin. However, when services are the main resources of revenue, providing services could enhance profit margin.

Aside from the benefits, recent servitization research also pointed out the challenges and risks faced by servitized manufacturing companies. Zhang and Banerji (2017) summarized five types of challenges faced by servitized firms based on a meta-analysis, including organizational characteristics, business model, development process, customer management and risk management. In this article, we focus on the configuration of the organizational characteristics and servitization to maximize the benefits of servitization.

2.2 Organization characteristics and servitization

Organization characteristics also determine the success of servitization. the service design and delivery are significantly different from that of product manufacturing, and therefore, require different organization characteristics. Zhang et al. (2017) [12] take organizations as the main challenge for firms to servitize, as adding service to the offering portfolio might induce organizational culture change, increase information load, require more service expertise, and need more intra-organizational collaboration. Bustinza et al. [13] suggested that firms should choose right approaches to manage service design and delivery. For servitization that intends to improve customer satisfaction, services should be designed and delivered by the business function. By contrast, for servitization that intends to differentiate, firms should establish an independent unit or outsource services from external specialists. However, prior studies examining the role of organizational characteristics in servitization are mostly conceptual or qualitative case studies. Empirical evidence of how organization characteristics affect servitization remains lacking. In this article, we adopt the BAS and ADS categorization to examine the configuration of organizational characteristics and servitization.

3 Hypotheses

3.1 Servitization and firm performance

In addressing the debate between servitization and firm performance, we propose hypotheses regarding two types of servitization (BAS and ADS) and multiple indicators of firm performance, including market performance, financial performance, and operational performance. The research model is presented in Fig. 1.

Fig.1

Research Model.

The BAS affects firm performance by creating marketing opportunities. First, BAS could improve customer satisfaction [4]. The main purpose of BAS is to ensure the proper function of the products; this could improve customer satisfaction. For example, furniture installation and transportation services could make furniture products more approachable and reduce customers’ efforts of purchasing, transportation, and installation, improving their satisfaction. Satisfied customers are more likely to purchase products from the same brand and recommend satisfied products to the others [2]. Also, maintenance services could prevent unsatisfied customers from turning to the competitors. Thus, BAS could improve market performance. Second, manufacturing companies could lock customers by providing product related services. For example, the unique product software services provided by the Apple Company could prevent customers from switching to their competitors. Kastalli et al. [2] have validated that an increase in service sales in manufacturing companies could lead to the increase in product sales. Third, manufacturing companies could also collect product feedback information through BAS [20]. Through providing after-sale services, companies frequently interact with their customers. Customer complains provide information for companies to improve their product design, which could improve operational performance. Therefore, we propose the following hypotheses:

Hypothesis 1: Basic services will be positively related to a) market performance, b) financial performance, c) operational performance.

The ADS affects firm performance through financial and strategic mechanisms. First, services have a higher profit margin than products. As suggested by Wise et al. [19], the profit margin of services is three to five times that of products. In addition, in contrast to product revenues that are subjected to seasonal fluctuations, service revenues are more stable; this could reduce financial costs [20]. Second, in contrast to products, services rely on intangible knowledge embedded in human-development resources, and are not easy to be imitated by competitors. Based on the resource-based view (RBV), Eggert et al. [5] suggest that services that oriented to customers’ needs fit the valuable, rare, inimitable, and non-substitutable (VRIN) criteria of sustainable competitive advantages that improve firm performance. Thus, we propose the following hypotheses:

Hypothesis 2: Advanced services will be positively related to a) market performance, b) financial performance, c) operational performance.

3.2 Servitization and organization characteristics

The servitization literature has pointed out the importance of coping organization characteristics with service types. For example, Gebauer et al. [23] suggested that in separated organizations, service orientation in manufacturing companies have s stronger impact on employee value and behavior as well as overall performance. In addition, Raddats et al. [24] suggest that servitization should be coped with the change of organization design. For manufacturing companies providing BAS, the core product is the focus of the operations, as value and revenues are mainly generated by products. Consequently, for BAS firms, organizations should be designed to maximize the efficiency of product manufacturing. In this regard, a hierarchical organization might be more beneficial, as in product manufacturing, a hierarchical organization with centralized decision making could improve the efficiency of product manufacturing [25]. Consequently, we propose the following hypotheses:

Hypothesis 3: Organization characteristics moderate the relation between basic services and firm performance such that the relation between basic services and a) market performance, b) financial performance, c) operational performance will be stronger in hierarchical organizations rather than participative organizations.

In ADS, firms generate revenue mainly from services. Thus, the value creation process is changed, and companies should transform from product-centric culture to service-centric culture [18]. In ADS firms, the design of the organization should be oriented toward the design and delivery of service. In contrast to product manufacturing, the service delivery requires more communication and collaboration between organization members [7]. Consequently, a participative organization could facilitate knowledge sharing, which is critical for service delivery as it requires more customer interaction and requires employees to know more about the product and services. In contrast to product manufacturing, the service delivery creates more uncertainties for manufacturing companies, and therefore, require higher levels of information processing capability [26]. Therefore, we propose the following hypotheses:

Hypothesis 4: Organization characteristics moderate the relation between basic services and firm performance such that the relation between advanced services and a) market performance, b) financial performance, c) operational performance will be weaker in hierarchical organizations rather than participative organizations.

4 Methodology

4.1 Sample

This study uses the data from the sixth round of the International Manufacturing Strategy Survey (IMSS-VI). The IMSS is organized by a group of operations management researchers who are interested in manufacturing practices and performance of manufacturing companies. The survey is a global survey that covers both developed and developing countries. In order to ensure the equivalence in different countries, the questionnaires were designed in English by a group of operations management researchers. Questions are related to the external environment, competitive priorities, manufacturing practices adopted by manufacturing plants, and their performance. In different rounds of the survey, the main questions of the questionnaires were similar. However, in each round, some popular research topics were included. For example, the IMSS-V and IMSS-VI included the servitization section that asked the services provided by the plants and different practices that organizations adopted to cope with the servitization. The first round of IMSS was conducted in 1992, and it was conducted every four years afterward. The latest version IMSS is the IMSS-VI, which was conducted in 2013. The IMSS-VI covers 22 countries and 5 industries based on the ISIC codes. The level of the analysis is manufacturing plants. The respondents are operational / manufacturing managers or equivalent, who have worked in the plants for an average of 13.2 years. The sample distribution is listed in Table 1.

Table 1
Sample distribution

Country and Region Frequency Percent

Belgium 29 3.1

Brazil 31 3.3

Canada 30 3.2

China 128 13.7

Denmark 39 4.2

Finland 34 3.7

Germany 15 1.6

Hungary 57 6.1

India 91 9.8

Italy 48 5.2

Japan 82 8.8

Malaysia 14 1.5

Netherlands 49 5.3

Norway 26 2.8

Portugal 34 3.7

Romania 40 4.3

Slovenia 17 1.8

Spain 29 3.1

Sweden 32 3.4

Switzerland 30 3.2

Taiwan 28 3

USA 48 5.2

Total 931 100

Country and Region	Frequency	Percent
Belgium	29	3.1
Brazil	31	3.3
Canada	30	3.2
China	128	13.7
Denmark	39	4.2
Finland	34	3.7
Germany	15	1.6
Hungary	57	6.1
India	91	9.8
Italy	48	5.2
Japan	82	8.8
Malaysia	14	1.5
Netherlands	49	5.3
Norway	26	2.8
Portugal	34	3.7
Romania	40	4.3
Slovenia	17	1.8
Spain	29	3.1
Sweden	32	3.4
Switzerland	30	3.2
Taiwan	28	3
USA	48	5.2
Total	931	100

4.2 Measurements

4.2.1 Servitization

Our measurement of servitization is based on Sousa et al. [18]. Consistent with its definition, the BAS is measured by three items, including “maintenance and repair of products sold to customers (BAS1)”, “installation / implementation services (BAS2)”, and “spare-parts / consumables provision for customers (BAS3)”. By contrast, the ADS is measured by five items, including “rental/lease of products (with responsibility for maintenance, repair and operation) (ADS1)”, “product upgrades (software, product modifications) (ADS2)”, “help desk/customer support center (ADS3)”, “training in using the products (ADS4)”, and “consultancy services (ADS5)”. Respondents are asked to rate their levels of implementation of these services based on a five-point Likert scale, where 1 represent “none” and 5 represent “high”.

4.2.2 Firm performance

In this article, we measure firm performance from three perspectives: market performance, financial performance, and operational performance. Market performance is measured by sales growth, and financial performance is measured by Return on Sales (ROS) growth. Operational performance is measured based on the four widely accepted dimensions, including cost efficiency, quality, delivery, and flexibility. We averaged these dimensions to get a composite operational performance score as the dependent variable. Respondents are asked to rate the growth rate in the past three years based on a five-point Likert scale, where 1 represent “much lower” and 5 represent “much higher”.

4.2.3 Organizational characteristics

In this article, we measure OS by the degree of implementation of a series human-development resource management practices. Specifically, four items are included: “Open communication between workers and managers (information sharing, encouraging bottom-up open communication, two-way communication flows)”, “Autonomous teams (e.g. team responsible for planning, execution and control, workers sharing experience, knowledge and skills, formalization of team composition and responsibilities, work group incentives)”, “Workers flexibility (e.g. multi-tasking, multi-skilling, job rotation)”, and “Use of flexible forms of work (e.g. temporary workers, part time, job sharing, variable working hours)”. Respondents are asked to rate the level of implementation in their plants during the past three years based on a five-point Likert scale, where 1 represent “none” and 5 represent “high”. The higher the rating, the more participative the organization.

4.3 Reliability and validity

4.3.1 Content validity

We adopt several practices to ensure the content validity of the measurement. First, all the items are originated from prior servitization and organization theory. In addition, the manuscripts of questionnaires are reviewed by practitioners; this could ensure the relevance of the questions asked in the questionnaires.

4.3.2 Reliability

We assess the reliability of the scales based on Cronbach’s alpha and composite reliability coefficients. The Cronbach’s alpha and composite reliability coefficients are listed in the Appendix A. The results show that the Cronbach’s alpha and composite reliability coefficients are all larger than 0.6, indicating the reliability of the measurement is acceptable.

4.3.3 Convergent validity

We estimate the convergent validity of the measurement through a confirmatory factor analysis (CFA). A CFA model, containing BAS, ADS, and OS, was constructed. The CFA model show a good fit with the data (RMSEA = 0.07, CMIN/df = 4.47, GFI = 0.96, AGFI = 0.93, CFI = 0.94). In addition, all the factor loadings are higher than 0.5, indicating the convergent validity of the measurement is acceptable.

4.3.4 Discriminant validity

We assess the discriminant validity of the measurement by comparing the squared roots of average variance extracted (AVE) with the correlation with other variables. The square roots of AVE of each variable are presented in the diagonal of the correlation matrix. The results show that all squared roots of AVEs are higher than its correlation coefficients with other variables. The results ensured the discriminant validity of the measurements.

4.3.5 Common method bias

Following the advice offered by methodology articles [27], this research adopts two approaches to reduce common method bias. First, when conducting the survey, we ensured the anonymity of the respondents to motivate them to provide accurate information. In addition, questions related to servitization, organization characteristics, and firm performance are in different sections in the questionnaire. Second, we conducted several tests to examine whether the common method bias has biased the results. On the one hand, we conducted Harmon’s single factor test through an exploratory factor analysis. Our results show that the first factor only accounts for 36.58% of the total variance. On the other hand, we constructed a second-order confirmatory factor analysis model to test whether common method bias is present. The second order CFA model shows a lack of fit, indicating there is no single factor that explains the relation between the independent and dependent variables. Therefore, although the independent variables and dependent variables are filled by the same respondents, we believe common method bias will not seriously affect the results.

5 Results

The descriptive statistics and correlation matrix are presented in Table 2. The results indicate that variables are moderately correlated. The correlation coefficients between the independent variables are lower than 0.5, indicating multicollinearity is not a major concern in OLS regressions.

Table 2
Descriptive statistics and correlation matrix

Variables Mean Std. Dev. 1 2 3 4 5 6 7 8 9 10 11 12 13

1. CRI 3.85 0.93 N.A.

2. ME 2.97 1.09 0.09** N.A.

3. ST 2.95 1.10 0.21 0.15 N.A.

4. BPS 3.08 0.89 0.12 0.10 0.13** N.A.

5. BSC 3.67 0.94 0.28 0.05 0.13 0.18** N.A.

6. Firm Size 6.02 1.72 0.14 – 0.09 0.04 0.01 0.03 N.A.

7. Firm Age 3.43 0.78 0.01 – 0.04 – 0.04 – 0.08* 0.01 0.14** N.A.

8. BAS 0.00 1.00 0.09** – 0.04 – 0.02 0.01 0.01 0.04 0.04 0.74

9. ADS 0.00 1.00 0.03 0.08* 0.14 0.13 – 0.05 0.07* – 0.09** 0.00 0.68

10. Sales 3.22 0.99 0.04 – 0.01 – 0.00 – 0.02 0.04 0.11 – 0.13 0.12 0.10 N.A.

11. ROS 2.97 0.97 0.02 0.02 0.04 – 0.01 – 0.02 0.09* – 0.08* 0.04 0.20 0.52 N.A.

12. OP 3.04 0.65 0.19** 0.06⁺ 0.08* 0.09 0.15 0.05 – 0.18** 0.08* 0.19 0.23 0.24** N.A.

13. OC 3.08 0.83 0.07* 0.04 0.06⁺ 0.07* 0.03 0.10 – 0.10 0.10 0.28 0.01 0.12 0.32 0.61

Variables	Mean	Std. Dev.	1	2	3	4	5	6	7	8	9	10	11	12	13
1. CRI	3.85	0.93	N.A.
2. ME	2.97	1.09	0.09**	N.A.
3. ST	2.95	1.10	0.21**	0.15**	N.A.
4. BPS	3.08	0.89	0.12**	0.10**	0.13**	N.A.
5. BSC	3.67	0.94	0.28**	0.05	0.13**	0.18**	N.A.
6. Firm Size	6.02	1.72	0.14**	– 0.09**	0.04	0.01	0.03	N.A.
7. Firm Age	3.43	0.78	0.01	– 0.04	– 0.04	– 0.08*	0.01	0.14**	N.A.
8. BAS	0.00	1.00	0.09**	– 0.04	– 0.02	0.01	0.01	0.04	0.04	0.74
9. ADS	0.00	1.00	0.03	0.08*	0.14**	0.13**	– 0.05	0.07*	– 0.09**	0.00	0.68
10. Sales	3.22	0.99	0.04	– 0.01	– 0.00	– 0.02	0.04	0.11**	– 0.13**	0.12**	0.10**	N.A.
11. ROS	2.97	0.97	0.02	0.02	0.04	– 0.01	– 0.02	0.09*	– 0.08*	0.04	0.20**	0.52**	N.A.
12. OP	3.04	0.65	0.19**	0.06⁺	0.08*	0.09**	0.15**	0.05	– 0.18**	0.08*	0.19**	0.23**	0.24**	N.A.
13. OC	3.08	0.83	0.07*	0.04	0.06⁺	0.07*	0.03	0.10**	– 0.10**	0.10**	0.28**	0.01	0.12**	0.32**	0.61

Note: ID = industry dummies, CD = country dummies, CRI = competitive rivalry within the industry, ME = market entry, ST = substitution threat, BPS = bargaining power of suppliers, BPC = bargaining power of customers, CI = customer integration, OC = organizational characteristics; 2. ***p < 0.001; **p < 0.01; *P < 0.05;⁺p < 0.1.

In the first step, we examine how servitization affects sales growth and how organization characteristics moderates this relation. The regression coefficients are presented in Table 3. In model 1, the control variables are added. In terms of the control variables, firm size is positively related to sales growth (β= 0.05; p < 0.05). In addition, firm age is negatively related to sales growth (β= – 0.19; p < 0.01). These results are consistent with conventional wisdom that firms could benefit from economies-of-scale and economies-of-scope. In model 2, the independent variables, BAS and ADS, are added to the model. The results indicate that both BAS (β= 0.12; p < 0.01) and ADS (β= 0.13; p < 0.01) are positively related to sales growth. The results supported both Hypothesis 1a and Hypothesis 2a. In the full model, organization characteristics positively moderate the relation between ADS and sales growth (β= 0.11; p < 0.01). However, the relation between BAS and sales is not moderated by organization characteristics (β= 0.06; p > 0.1). The results support H4a, while failing to support H3a.

Table 3

OLS regression results (Sales growth)

Models	Hypotheses	Model 1	Model 2	Model 3	Model 4	Model 5
		DV: Sales growth
Constant		3.67**	3.71**	3.88**	3.89**	3.78**
		(10.45)	(10.66)	(10.38)	(10.42)	(10.11)
ID included		Yes	Yes	Yes	Yes	Yes
CD included		Yes	Yes	Yes	Yes	Yes
CRI		0.02	0.01	0.02	0.02	0.02
		(0.42)	(0.28)	(0.51)	(0.45)	(0.53)
ME		– 0.01	0.00	– 0.00	– 0.00	– 0.01
		(– 0.18)	(0.06)	(– 0.08)	(– 0.03)	(– 0.19)
ST		0.00	– 0.00	– 0.00	– 0.00	0.00
		(0.10)	(– 0.06)	(– 0.12)	(– 0.11)	(0.05)
BPS		– 0.02	– 0.05	– 0.06	– 0.06	– 0.06
		(– 0.58)	(– 1.24)	(– 1.51)	(– 1.51)	(– 1.51)
BPC		0.03	0.05	0.05	0.06	0.06
		(0.72)	(1.18)	(1.31)	(1.38)	(1.42)
Firm Size		0.05*	0.04⁺	0.04⁺	0.04	0.04⁺
		(2.33)	(1.79)	(1.67)	(1.59)	(1.69)
Firm Age		– 0.19**	– 0.18**	– 0.18**	– 0.18**	– 0.18**
		(– 3.93)	(– 3.56)	(– 3.50)	(– 3.52)	(– 3.59)
BAS	H1a		0.12**	0.13**	0.13**	0.13**
			(3.29)	(3.51)	(3.65)	(3.56)
ADS	H2a		0.13**	0.14**	0.14**	0.12**
			(3.65)	(3.75)	(3.75)	(3.21)
OC				– 0.07	– 0.07	– 0.05
				(– 1.51)	(– 1.60)	(– 1.04)
BAS×OC	H3a				0.05	0.06
					(1.24)	(1.46)
ADS×OC	H4a					0.11**
						(2.83)
R2		0.10	0.13	0.13	0.13	0.14
Adj-R2		0.06	0.09	0.09	0.09	0.10
F		2.69	3.25	3.05	3.01	3.17

Table 4 presents the regression results when ROS growth is the dependent variable. In model 2, BAS does not show a significant impact on ROS growth (β= 0.05; p > 0.1), marginally supporting H1b. By contrast, ADS is positively related to ROS growth (β= 0.21; p < 0.01), supporting H2b. In terms of the moderating effect, organization characteristics do not significantly moderate the relation between servitization and ROS growth. Thus, Both H3b and H4b are not supported.

Table 4

OLS regression results (ROS growth)

Models	Hypotheses	Model 1	Model 2	Model 3	Model 4	Model 5
		DV: ROS growth
Constant		3.33**	3.48**	3.38**	3.37**	3.33**
		(9.37)	(9.97)	(8.97)	(8.94)	(8.76)
ID included		Yes	Yes	Yes	Yes	Yes
CD included		Yes	Yes	Yes	Yes	Yes
CRI		0.01	0.00	0.00	0.00	0.01
		(0.13)	(0.03)	(0.08)	(0.11)	(0.15)
ME		– 0.01	– 0.00	– 0.00	– 0.01	– 0.01
		(– 0.17)	(– 0.03)	(– 0.15)	(– 0.17)	(– 0.22)
ST		0.04	0.02	0.02	0.02	0.02
		(1.14)	(0.60)	(0.53)	(0.51)	(0.56)
BPS		– 0.01	– 0.04	– 0.05	– 0.05	– 0.05
		(– 0.13)	(– 0.91)	(– 1.17)	(– 1.16)	(– 1.15)
BPC		– 0.01	– 0.00	0.01	0.01	0.01
		(– 0.22)	(– 0.00)	(0.16)	(0.12)	(0.14)
Firm Size		0.05*	0.04⁺	0.03	0.03	0.03
		(2.34)	(1.80)	(1.40)	(1.44)	(1.47)
Firm Age		– 0.18**	– 0.16**	– 0.15**	– 0.15**	– 0.15**
		(– 3.57)	(– 3.17)	(– 3.02)	(– 3.01)	(– 3.03)
BAS	H1b		0.05	0.04	0.04	0.04
			(1.29)	(1.20)	(1.08)	(1.04)
ADS	H2b		0.21**	0.21**	0.21**	0.20**
			(5.83)	(5.44)	(5.45)	(5.16)
OC				0.05	0.05	0.06
				(1.00)	(1.06)	(1.23)
BAS×OC	H3b				– 0.03	– 0.03
					(– 0.87)	(– 0.80)
ADS×OC	H4b					0.04
						(0.98)
R2		0.07	0.12	0.12	0.12	0.12
Adj-R2		0.03	0.08	0.08	0.08	0.08
F		1.74	2.76	2.70	2.65	2.60

The relations between servitization, organization characteristics, and operational performance are presented in Table 5. As indicated in model 2, BAS only show a marginal impact on ROS growth (β= 0.04; p < 0.1), while ADS show a significant positive impact on operational performance (β= 0.12; p < 0.01), supporting H2c. In terms of the moderating effects, organization characteristics positively moderate the relation between ADS and operational performance (β= 0.05; p < 0.05), supporting H4c. By contrast, the relation between BAS and operational performance is not moderated by organization characteristics. H3c is not supported.

Table 5

OLS regression results (Operational performance)

Models	Hypotheses	Model 1	Model 2	Model 3	Model 4	Model 5
		DV: Operational performance
Constant	2.56**	2.63**	2.02**	2.02**	1.97**
		(11.71)	(12.07)	(9.05)	(9.08)	(8.81)
ID included		Yes	Yes	Yes	Yes	Yes
CD included		Yes	Yes	Yes	Yes	Yes
CRI		0.06*	0.05*	0.04⁺	0.04⁺	0.04⁺
		(2.32)	(2.18)	(1.83)	(1.79)	(1.83)
ME		– 0.00	– 0.00	– 0.00	– 0.00	– 0.01
		(– 0.14)	(– 0.11)	(– 0.17)	(– 0.15)	(– 0.27)
ST		– 0.01	– 0.02	– 0.01	– 0.01	– 0.01
		(– 0.25)	(– 0.80)	(– 0.62)	(– 0.61)	(– 0.49)
BPS		– 0.00	– 0.01	– 0.01	– 0.01	– 0.01
		(– 0.00)	(– 0.23)	(– 0.35)	(– 0.36)	(– 0.36)
BPC		– 0.01	– 0.01	– 0.02	– 0.02	– 0.02
		(– 0.52)	(– 0.45)	(– 1.02)	(– 0.97)	(– 0.95)
Firm Size		0.03*	0.02	0.01	0.01	0.01
		(2.01)	(1.26)	(0.55)	(0.49)	(0.58)
Firm Age		– 0.10**	– 0.10**	– 0.08**	– 0.08**	– 0.08**
		(– 3.32)	(– 3.10)	(– 2.64)	(– 2.65)	(– 2.69)
BAS	H1c		0.04⁺	0.02	0.02	0.02
			(1.82)	(0.76)	(0.88)	(0.79)
ADS	H2c		0.12**	0.08**	0.07**	0.07**
			(5.23)	(3.33)	(3.33)	(2.88)
OC				0.23**	0.23**	0.24**
				(8.35)	(8.28)	(8.59)
BAS×OC	H3c				0.02	0.02
					(0.88)	(1.06)
ADS×OC	H4c					0.05*
						(2.30)
R2		0.19	0.23	0.30	0.30	0.31
Adj-R2		0.16	0.20	0.27	0.27	0.27
F		5.79	6.59	8.88	8.66	8.62

6 Discussion

In this article, we examine the performance implication of two types of servitization and how organization characteristics moderate the relation between servitization and performance. In summary, our results indicate that BAS only improves marketing performance, while ADS improves all performance indicators. In addition, organization characteristics positively moderate the relation between ADS and marketing and operational performance.

6.1 Theoretical implications

In addressing the performance implication of servitization debate, our results validated that whether servitization improves the firm performance depends on the types of service offered by the manufacturing company. In this study, BAS is only positively related to market performance, while its impact on operational performance and financial performance is insignificant. By contrast, ADS is positively related to all performance indicators. The results are consistent with Suarez et al. [22], who suggested that when products are the main sources of revenue, adding services to products might induce additional costs and might reduce performance. The BAS, such as after-sale services, is frequently provided by manufacturing companies. Thus, these types of services have become order qualifiers rather than order winners. As indicated in its definition, the value of BAS is achieved through enhancing the competitiveness of products. Thus, BAS could enhance the market performance of products. However, as BAS also require investment on human-development resource and facilities, it will add cost to the products; this explains the reason why BAS may not necessarily improve financial and operational performance.

The ADS is a more profitable option for manufacturing companies to servitize. This study shows that ADS can improve market performance, financial performance, and operational performance simultaneously. The results support Eggert et al. [5], who suggest that servitization could be a source of sustainable competitive advantage. ADS is a service-centered service that requires service emphasis and the adjustment of OS and culture. For providing ADS, manufacturing companies frequently involve in customers’ value-creation process and even redesign their process; this could create more value for their customers. For example, Rolls-Royce Aerospace, used to sell aircraft engines to their customers, developed a “power-by-hour” program to offer power service rather than products to their customers; this offers its customers more flexibility in allocating their resources. The ADS is also highly differentiated, as Rolls-Royce’s whole lifecycle engine monitor and maintenance helped it to lock their customers. Thus, the ADS create a win-win situation that creates both market, financial, and operational benefits.

Organization characteristics positively moderate the relation between ADS and performance, while the relation between BAS and performance is not moderated by organization characteristics. Our results show that a participative organization could benefit more from ADS. The results are consistent with the servitization literature that constantly appeal for the configuration between servitization and organization characteristics [13, 28]. For low-level servitization, such as the BAS, a hierarchical organization might be beneficial, as this could create a consensus within the organization and improve the efficiency of service design and delivery. However, for high levels of servitization, such as the ADS, an organization transfer might be necessary as these service transitions require the change of organizational emphasis from product manufacturing to service design and delivery [12]. As service is more dependent on human-development resource and requires more customer real-time interaction, a decentralized organizational with flexible workload allocation might be more beneficial.

6.2 Practical implications

The results of this study offer two suggestions for managers in manufacturing companies who plan to service. First, managers should be noticed that ADS is a more profitable servitization option in contrast to BAS, as BAS only improves market performance, while ADS improves all performance indicators. However, research has shown that ADS is more challenging as ADS requires more organizational change [5]. Therefore, managers should evaluate their service capacity and purpose of servitization and decide what types of service to add to their products. Second, managers should choose appropriate organization characteristics to maximize the benefit of servitization. Our results indicate that ADS has a stronger impact on firm performance in participative organizations. Therefore, managers who choose ADS should also facilitate intra-organizational communication, empowerment, joint decision-making, and flexible workgroup to maximize the benefit of ADS.

7 Conclusion

This article examines what types of organization is best for manufacturing companies to benefit from servitization. Our results suggest that in a participative organization that is characterized as open communication, high levels of empowerment, and flexible workers, ADS has a stronger impact on firm performance. However, the relation between BAS and firm performance does not significantly differ in participative and hierarchical organizations.

This study has two limitations that call for future research. First, this research relies on single-respondent reported data to test the hypotheses, which might induce common method bias. Although we adopted multiple approaches to minimize the impact of common method bias, it couldn’t be eliminated. Therefore, future research should use data from multiple sources to test the proposed hypotheses. Second, in the IMSS-VI questionnaire, only eight types of service are provided. Although these services are the most frequently provided by manufacturing companies, they are not complete. In recent years, manufacturing companies also provide other types of services, such as financial services. Consequently, future research should cope with the latest servitization trend to capture the nuance of servitization.

Footnotes

Appendices

Acknowledgments

This research is partially supported by grants from the National Natural Science Foundation of China (Project Numbers: 71372090). We thank the Editor-in-Chief, Nicholas C. Georgantzas, for his thoughtful comments concerning this manuscript.

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