Servitization and Competitive Advantage

Manufacturing strategy has traditionally been based on one, or a combination, of three paradigms: vertical integration of supplier-buyer production and delivery of processes for controlling and predicting the flow of inputs and outputs, investment in research to bring to market products that are superior to the competitionu0027s, or the generation of a sustainable market position to strengthen economies of scale ( Wise and Baumgartner 1999 ). As manufacturers move to servicefocused strategies, which require additional and valuable capabilities for firms and reshape value creation channels, those foundations must be revisited.The addition of services, or the reconception of products as services, allows manufacturers to create value across the entire product life cycle and capture it, not just from the firmu0027s current position in the value chain but along the entire value chain, generating new revenue streams ( Vandermerwe and Rada 1988 ). From this perspective, servitization of business can be seen as a strategic alternative that generates superior performance. However, it is not clear how servitization strategies are related to performance. We undertook an extensive quantitative study to explore the mechanisms by which servitization delivers improved performance and sustainable competitive advantage.BackgroundServitization is an organizational change process that generates new revenue streams through the provision of services associated with a firmu0027s traditional goods ( Vandermerwe and Rada 1988 ). Firms are increasingly exploring the value of integrating goods and services ( Baines and Lightfoot 2013 ), motivated by anticipated improvements in profit margins and the prospect of locking competitors out of their customer base ( Bustinza, Parry, and Vendrell-Herrero 2013 ). Servitization offers the opportunity to generate sustainable competitive advantage, since it frees firms from competing on cost alone ( Porter and Ketels 2003 ), allowing for greater differentiation and increased customer satisfaction.As a special issue of International Journal of Production Economics ( Baines, Bustinza, and Vendrell-Herrero, forthcoming ) makes clear, recent studies analyzing the relationship between servitization and performance have shown a complex relationship between various performance measures and developing service innovations. Suarez, Cusumano, and Kahl (2013) , analyzing the performance of 464 US software firms from 1990 to 2006, found a U-shaped relationship between service revenue and profit margin, with initial service sales leading to growth in profit margins followed by a dip in margins as service sales grow and a subsequent return to growth as service offerings mature. Kohtamaki et al. (2013) found a similar U-shaped relationship between industrial service offerings and sales growth. Kastalli and Van Looy (2013) , looking at 44 subsidiaries of a multinational firm for the period 2001-2007, also found a complex relationship between service sales and performance: initial increments of service sales had a positive impact on the subsidiaryu0027s performance, but this effect gradually decreased with the growth of service sales and then increased again once service sales became large. All of these studies reveal a positive, though nonlinear relationship, between an increasing scale of service inclusion and a companyu0027s performance. Overall, researchers generally agree that moving to a services focus can provide long-term advantages for manufacturers.Generally, companies provide services at three broad levels ( Baines and Lightfoot 2013 ): base (product/equipment provision, spare parts provision), intermediate (help desk, training, maintenance, repair, overhaul), and advanced (customer support agreements, outcome-based contracts). Kastalli, Wiengarten, and Neely (forthcoming) argue that coupling servitization with product innovation processes, as advanced service offerings would require, can enhance long-term profitability. …