SOURCES OF VALUE CREATION IN SERVITIZATION

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SOURCES OF VALUE CREATION IN SERVITIZATION

• Ivanka Visnjic, Bart Van Looy
• Department of Managerial Economics, Strategy and
  Innovation (MSI)
• K.U. Leuven, Belgium

 Cambridge Service Alliance Forum 20th October
2009
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INTRODUCTION

• Growing trend of manufacturing companies to
  diversify into services related to their product
  business

• Operations, marketing and service management
• Conceptual roots in and recent empirical
  evidence
• Strategic management Relevant broad foundations,
  no dedicated research
• Knowledge on expected benefits implementation
  hurdles
• Uncertainty regarding performance effects of
  servitization
• What about economics and value dynamics of
  servitization?

• Develop (strategic) framework of value creation
  in servitization
• Empirically test core relationships outlined by
  the framework

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SERVITIZATION FROM MARKETING OPERATION
MANAGEMENT LENS

• Incentives to servitize (Neely 2008, Cusumano
  2004, Anderson et al. 1997, etc)
• Strategic (customer satisfaction, customer
  lock-in competitor lock-out)
• Economic/financial (growth, profitability
  stability)
• Ecological (Mont 2004)
• Marketing oriented concept of servitization
• Services as a layer of augmented product serve to
  enrich product marketing strategy (Lele 1986,
  Kotler 1984, Levitt)
• Servitization defined as a bundles of customer
  focused combination of products services
  (Vandermerwe et al.1988)
• Transition from products to services intensive
  offering (Martin 1992, Oliva 2003, Gebauer 2005)
• Operational/organizational implications
• Differences of product and services and
  implications on managing (Bowen 1989, 2002)
• Case studies showing implementation challenges on
  the level of cultures, organization, supply chain
  management, sales operations (Brax, 2005
  Gebrauer et al., 2005 Mathieu, 2001 Oliva,
  2003 Mathieu, 2001 Johnson et al., 2008
  Gebrauer et al., 2008 Neu et al., 2008 Sheth et
  al., 2008)
• Finally mixed evidence of performance
  implications (Fang 2008, Neely 2008)!

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RELEVANT CONCEPTS FROM STRATEGIC MANAGEMENT
(RELATED) PHENOMENON - Business model innovation
(Amit 2001, Zott 2007 2008) Business model
represents content, structure and governance of
transactions designed so as to create value
through the exploitation of business
opportunities Organizational boundary choice
vertical architecture, (Related) horizontal
diversification, etc (Jacobides, Chesbrough,
Santos, Teece, Tanrivedi, Cotrell, etc)
RELEVANT CONSTRUCTS Strategic complementarity
(Milgrom Roberts 1995) - Increase in activity
A positively influences performance outcome of
activity B Economies of scope in use or in
production (Teece 1982, Cotrell 2004) - Cost
synergies that arise when two activities share
common resource(s ) THEORETICAL PERSPECTIVES -
Transaction cost economics (Williamson 1975,
Milgrom Roberts 1990) - Theory of a
multiproduct firm (Rumelt 1974, Panzaar 1979,
Teece 1981, 1982) - Knowledge based theory of the
firm (Kogut 1992, Poppo 1998) - Resource based
view (Barney 1991, Peteraf 1993 etc)
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SERVITIZATION REPRESENTS- A shift in value
proposition from products to product-service
systems- An innovation in the
manufacturer-customer exchange transaction
architecture, and hence - A business model
innovation in services, where content of
transaction changes from products to
product-service systems and subsequent changes
are made to the structure and governance of
transactions.VALUE CREATION - More efficient
effective distribution of activities division
of labour- Locus of value creation
customer-manufacturer dyadVALUE APPROPRIATION
- investments in (re)structuring of transactions
and (re)organizing of the governance of
transaction- Service-specific capabilities and
dynamic servitization capabilities
GROUNDING SERVITIZATION IN STRATEGIC MANAGEMENT
THEORY
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VALUE CREATION PROCESS
PRODUCTS MANUFAC-TURING
CUSTOMERS CORE ACTIVITIES
SERVICES
SERVICES
PRODUCTS MANUFAC-TURING
CUSTOMERS CORE ACTIVITIES
PRODUCT RELATED SERVICES
CUSTOMER PERSPECTIVE Make or buy dilemma -
decides to buy services , when he realizes the
efficiency gains by a) minimizing production
costs b) spreading transaction costs over
products services Theory transaction cost
economics (Williamson 1975)
MANUFACTURER PERSPECTIVE strategic
complementarities - (Transaction-related)
complementarities - Knowledge innovation
complementarities Theory knowledge-based theory
of the firm and resource-based view

• Revenue-generating loop

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VALUE APPROPRIATION PROCESS
REVENUES
Strategic complementarities - Transaction
complementarities - Knowledge innovation
complementarities
CUSTOMERS CORE ACTIVITIES
GOVERN
STRUCTURE
SERVICES
PRODUCTS
COSTS
Invest in service and servitization capabilities

- (Re)structuring transactions (pricing, sales
operations)
- Internal reorganization (to implement
servitization)
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HYPOTHESES

• H1
• Service activities in a manufacturing firm are
  positively influenced by the (scale) product
  activities
• H2
• Product sales in manufacturing firm are
  positively influenced by the (scale) of service
  activities
• H2a
• Product sales are positively influenced by the
  sophistication /customer proximity of the service
  offering
• H3
• Servitization is an efficient choice for
  manufacturer once the positive complementarities
  outweigh the investments in capabilities and
  resources that are necessary for successful
  implementation.
• H3a
• Efficiency gains of servitization will be also
  mediated by the scale of service activities

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DATA RESEARCH CONTEXT

• Close collaboration with a multinational
  industrial equipment manufacturer (gt33.000
  employees, 7 bil EUR revenues)
• Strong corporate focus on servitization
• Data for 44 individual subsidiaries over
  2001-2007 period
• Subsidiaries operate in the related
  product/service business model
• Relative homogeneity on the industrial and
  product portfolio level
• Wide variation of business practices and
  approaches with respect to the implementation of
  servitization strategy by subsidiary

For analysis of the profit performance data on
5 customer centers had to be merged, reducing the
number of observation units to 39
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VARIABLES METHODS
Dependent variables

• Service sales (H1), Product sales (H2), Net
  profit margin (H3)

Independent variables

• ( H1)Product sales
• (H2) Service sales, service sophistication
  index
• (H3) Service coverage , service sophistication
  index

Methods

• H1 H2 panel data regression with fixed
  effects and instrumental variables (system
  equation model)
• H3 panel data regression with fixed effects

Service sophistication index service package
sales/ service sales, where Service sales spare
parts sales service package sales Service
coverage Service sales/(Equipment units sold in
(t-1)(t-2)(t-3)(t-4))
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EMPIRICAL MODEL

• service_sales,i,t a1 b1 x product_sales,i,t-1
  c1 x gdp,i,t v1i, e1i, t (1)
• where product_sales,i,t-1 f(product-volume,i,t-1)
  
• product_sales,i,t a2 b2 x service_sales,i,t
  c3 x gdp,i,t v2i, e2i, t (2)
• where service_sales,i,t f(product_sales,i,t-1,
  service_sales,i,t-1)
• product_sales,i,t a3 b3 x service_sales,i,t
  c3 x service_sophistication,i,t d3 x gdp,i,t
  v3i, e3i, t (2a)
• where service_sales,i,t f(product_sales,i,t-1,
  service_sales,i,t-1),
• and service_sophistication_index,i,t
  f(service_sophistication_index,i,t-1)
• net_profiti,t a4 b4 x service_coveragei,t c4 x
  service_sophisticationi,t, d4 x employeesi,t
  e4 gnp_percapitai,t v4i, e4i,t t
  (3)
• net_profiti,t a4 b4 x service_coveragei,t c4 x
  service_sophisticationi,t, d4 x employeesi,t
  e4 service_sales,i,t f4 gnp_percapitai,t v4i,
  e4i,t t (3a)

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DESCRIPTIVE STATISTICS
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EMPIRICAL FINDINGS (H1)
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EMPIRICAL FINDINGS (H2 H2a)
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EMPIRICAL FINDINGS (H3)
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IMPACT OF SERVICE SCALE ON THE PROFITABILITY
Profit margin
Investment period?
Reaping low-hanging fruits?
Service sales
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CONCLUSION, MANAGERIAL IMPLICATIONS AND FOR
FUTURE RESEARCH

• Servitized manufacturer creates and appropriate
  value

• Servitization requires proper managerial
  attention and investments
• Lack of understanding of mutual relationship may
  cause service paradox

• Different approaches and steps of servitization
  process
• Competitive landscape of servitization
• Implementation and organizational implications
• Relevant indicators and measures of
  servitization strategy