As manufacturing businesses operate in an ever more competitive, global economy where products are easily commoditized, innovating by adding services to the core product offering has become a popular strategy. Contrary to the economic benefits expected, recent findings pinpoint implementation hurdles that lead to a potential performance decline, the so-called 'servitization paradox'. In this paper, we analyze this paradox by disentangling the value creation and value appropriation processes of 44 national subsidiaries of a global manufacturing firm turned product-service provider, in the 2001-07 period. Our findings show 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. Moreover, labor-intensive services such as maintenance, which imply higher levels of customer proximity, further enhance product sales. Empirical results also reveal a positive yet non-linear relationship between the scale of service activities and profitability: while initial levels of servicing result in a steep increase in profitability, a period of relative decline is observed before the positive relationship between the scale of services and profitability re-emerges. These findings suggest the presence of initial short-term gains but also indicate the existence of a 'profitability' hurdle; profitable growth seems feasible only to the extent that investments in service capability are translated into economies of scale. In helping to clarify the performance implications of service innovation, our findings suggest pathways to sustainable growth through servitization for manufacturing firms.
Recent empirical findings concerning the performance effects of service business model innovation (servitization) and its interplay with product innovation are mixed. Using the lenses of the demand-based view on value creation and complementarity, the performance impact of two key service business models is examined: the product-oriented model and the customer-oriented model, implemented jointly with product innovation. Results indicate that the interplay between service business model innovation and product innovation results in long-term performance benefits coupled with a degree of short-term performance sacrifice. Service business model innovation in isolation from product innovation results in short-term profit gains but long-term knowledge loss and, thus, market performance decline. Our study suggests that firms need to look beyond the evidence on short-term effects in order to achieve superior performance in the long run.
Industrial manufacturers are innovating their business models by shifting from selling products to selling outcome‐based services, where the provider (manufacturer) guarantees to deliver the performance outcomes of the products and services. This form of business model innovation requires a profound yet little understood shift in how value is created, delivered, and captured. To address this research gap, our study examines two successful and four unsuccessful cases of this shift. We find that effectiveness in business model innovation hinges on the three process phases that unfold in collaboration with the customers: value proposition definition, value provision design, and value‐in‐use delivery. We also find that that success is determined by the alignment of specific value creation and value capture activities in each phase: identifying value creation opportunities—agreeing on value distribution in value proposition definition, designing the value offering—deciding on the profit formula in the value provision design, and finally refining value creation processes—regulating incentive structures in the value‐in‐use delivery. Our process model contributes to the literature and practice on business model innovation by providing a thorough understanding of how alignment of value creation and value capture processes is ensured, whilst paying special attention to their interdependence and the interactions between provider and customer.
PurposeThe authors seek to understand the process of digital servitization as a shift of manufacturing companies from the provision of standard products and services to smart solutions. Specifically, the authors focus on changes in the business model (i.e. the value proposition, the value delivery system and the value capture mechanism) for digital servitization.Design/methodology/approachThe authors examine a Chinese air conditioner manufacturer, Gree, who became the global leader with their smart solutions. These solutions included performance-based contracts underpinned by artificial intelligence (AI)-powered air conditioners that automatically adjust to environmental changes and are capable of remote monitoring and servicing thanks to its Internet of things (IoT) technology.FindingsTo successfully offer smart solution value propositions, a manufacturer needs an ecosystem value delivery system composed of suppliers, distributors, partners and customers. Once the ecosystem relationships are well aligned, the manufacturer gains value with multiple value capture mechanisms (i.e. efficiency, accountability, shared customer value and novelty). To arrive at this point, a manufacturer has to pass through different stages that are characterized by both discontinuous and continuous interplay between business models and digital technologies. At the beginning of each stage, new value propositions and value delivery systems are first discontinuously created and then enabled with digital technology. As a result, new value capture mechanisms are activated. Meanwhile, the elements of the existing business model are continuously improved.Research limitations/implicationsBy combining process-perspective and business-model lenses, the authors offer nuanced insights into how digital servitization unfolds.Practical implicationsExecutives can obtain insights into the business model elements, they need to change over the course of digital servitization and how to manage the process.Originality/valueA longitudinal case study of a traditional manufacturer that has achieved stellar success through digital servitization business models development.
Firms in a variety of manufacturing sectors as well as the software industry have increasingly embraced services alongside their product portfolios in order to improve financial performance. Yet, the key question "How do service market strategy change and the accompanying business model change interact, and how does their interplay affect value creation?" remains open. Relying on twelve case studies of firms that have shifted towards providing highly advanced services (e.g. outcome-based contracts), theoretical propositions concerning the interplay of market strategy and business model on value creation are derived. The firms studied report two interdependent changes: first, they evolve the market strategy from provision of pure products to provision of services and then outcomes, in order to achieve a better fit with customer needs and to grow their service businesses. Second, they rely increasingly on partners and suppliers to provide new activities that are outside their competence base. This 'open business model' allows them to grow their new service businesses effectively and efficiently. At the same time, however, the shift to a service market strategy requires enhanced accountability to customers and increases the threat of penalties in the case of failure, while reliance on partners and suppliers leads to loss of control over the activity system and increases the threat of failure due to third party dependency. Thus, this paper finds that the success of firms that shift to services and outcomes hinges on their ability to balance the trade-off between increased value (i.e. growth, efficiency and effectiveness) and increased uncertainty associated with service market strategy/open business model interplay.
This article studies the role of industry conditions as determinants of manufacturing and software firms’ decisions to offer services. It draws on the competence perspective on industry evolution and servitization to theorize and provide empirical evidence on how industry conditions affect firms’ choice to offer two distinct types of services—product‐oriented services and customer‐oriented services. It is argued that firms are likely to offer product‐oriented services in Schumpeterian industry environments to address high technological uncertainty by leveraging and reinforcing capabilities in the existing technology. In contrast, firms are likely to offer customer‐oriented services in non‐Schumpeterian industry environments to address value generation uncertainty by building competences in new technological or market areas. Based on longitudinal data on 410 public firms from manufacturing industries and the software industry, empirical evidence suggests that firms are indeed more likely to offer product‐oriented services in Schumpeterian industry environments, such as in the early stage of the industry life cycle and under conditions of high R&D intensity and competition, whereas they are more likely to offer customer‐oriented services in non‐Schumpeterian environments, such as in the later stages of the industry life cycle and in highly cyclical industries.
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