Journal of Service Management

Service-driven manufacturing: Provision, evolution and financial impact of services in

industrial firms
Heiko Gebauer Guang-Jie Ren Aku Valtakoski Javier Reynoso
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Heiko Gebauer Guang-Jie Ren Aku Valtakoski Javier Reynoso, (2012),"Service-driven manufacturing",
Journal of Service Management, Vol. 23 Iss 1 pp. 120 - 136
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Iss 5 pp. 547-567 http://dx.doi.org/10.1108/17410380910960984
Howard Lightfoot, Tim Baines, Palie Smart, (2013),"The servitization of manufacturing: A systematic
literature review of interdependent trends", International Journal of Operations & Production
Management, Vol. 33 Iss 11/12 pp. 1408-1434 http://dx.doi.org/10.1108/IJOPM-07-2010-0196
Rogelio Oliva, Robert Kallenberg, (2003),"Managing the transition from products to services",
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JOSM
23,1
120
Received 7 June 2011
Revised 4 July 2011,
1 August 2011
Accepted 23 August 2011
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Journal of Service Management
Vol. 23 No. 1, 2012
pp. 120-136
q Emerald Group Publishing Limited
1757-5818
DOI 10.1108/09564231211209005
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-5818.htm
RESEARCH DIRECTION ARTICLE
Service-driven manufacturing
Provision, evolution and financial impact
of services in industrial firms
Heiko Gebauer
Innovation Research in Utility Sectors,
Eawag: Swiss Federal Institute of Aquatic Science and Technology,
Dübendorf, Switzerland
Guang-Jie Ren
Service Business Development, IBM Almaden Research Center,
San Jose, California, USA
Aku Valtakoski
BIT Research Center, Alto University School of Science, Alto, Finland, and
Javier Reynoso
EGADE Business School, Monterrey, Mexico
Abstract
Purpose – The purpose of this paper is to provide a review of key research contributions on the topic
of service strategies in manufacturing by focusing on descriptions of the phenomenon and theoretical
explanations of its evolution and financial consequences.
Design/methodology/approach – A summary analysis of the extant literature is provided.
Valuable contributions and fundamental methodological issues are identified and discussed.
Challenges, limitations and directions for future research avenues are also highlighted.
Findings – As a result of the analysis and discussion presented, the concept of service-driven
manufacturing is integrated through the provision, evolution and impact of services in industrial
settings.
Practical implications – The paper contains guidelines for manufacturing managers interested in
the evolution from products to services in different industries.
Originality/value – The paper is expected to be used as a relevant source of ideas and guidance for
all those interested in doing research in services strategies in manufacturing.
Keywords Manufacturing industries, Competitive advantage, Service climate, Service strategies,
Service evolution, Financial impact, Research work
Paper type Research paper
Introduction
Competing through service is no longer limited to service companies. Manufacturing
companies are also beginning to realize the strategic importance of service in gaining
a competitive advantage. Some authors envisioned early on the important role of
service in manufacturing strategy and management (Vandermerwe and Rada, 1988;
Canton, 1988; Chase and Garvin, 1989; Quinn et al., 1988, 1990; Bowen et al., 1991).
Manufacturing organizations have increasingly begun to adopt service strategies
 as part of their competitive advantage. Recently, many multinational manufacturing Service-driven
companies, such as Xerox, General Motors, Apple, Volkswagen, Caterpillar, and manufacturing
Johnson and Johnson, have shown how service strategies are becoming crucial to their
businesses.
In turn, these service strategy initiatives ignited the interest of management
researchers who, starting in the late 1990s (Wise and Baumgartner, 1999), presented
initial contributions to the service research community at international conferences such 121
as Frontiers in Service and QUIS. Their studies included exploring and understanding
how companies are managing the transition from products to services (Brown and Neu,
1998; Reynoso and Garcia-Calderon, 2000; Reynoso and Sanchez, 2000; Oliva and
Kallenberg, 2002; Beckenbauer et al., 2004) and examining how manufacturers are not
only developing innovative customer support systems (Gebauer et al., 2004) but are also
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becoming versatile service providers (Brax, 2004), creating new and successful business
models for manufacturing organizations in business-to-business environments
(Hildebrand et al., 2004). Later researchers have continued developing multi-phase
projects that have helped to increase awareness on the topic and to advance the existing
limited knowledge on this phenomenon (Reynoso et al., 2008, 2009b; Gebauer, 2008).
This article aims to provide a review of key research contributions on the topic of
service strategies in manufacturing by focusing on three areas in this emerging
research field: descriptions of the phenomenon, theoretical explanations of its evolution,
and the financial impact of services. A summary analysis of the extant literature is
provided, identifying valuable findings and discussing fundamental methodological
issues in this field. Additionally, the challenges, limitations and directions for future
research are highlighted. The purpose of this article is to provide a relevant source of
ideas and guidance for all those interested in doing research in this area. In an attempt
to integrate these three related areas of research, the concept of service-driven
manufacturing is put forth towards the end of the article.

Provision of services in manufacturing: exploring the phenomenon

The past decade has seen more and more manufacturing companies developing their
service businesses, as epitomized for example, by IBM ((The) Economist, 1998, 2002),
General Electric (Slywotzky and Morrison, 1998; Slater, 1999) and Rolls-Royce (IfM,
2004). However, there are also reports (Fang et al., 2008; Neely, 2007) indicating that
manufacturers have encountered challenges in managing the development of services.
Such mixed results call for a better understanding of ways in which manufacturing
companies can develop successful service strategies and even better businesses.
Research on services in manufacturing can be traced back to the 1960s. The concept
of “service” has evolved from just “an element in the marketing mix” to “a management
philosophy” and “a business in its own right.” Despite this long tradition, however, the
literature has examined the phenomenon through the lens of a product-service
dichotomy. This dichotomy overemphasizes the distinction between product and
service and, in doing so, fails to recognize the diversity of manufacturing companies and
the variety of services they offer. As a result, our understanding of services that
manufacturers actually develop, sell, deliver, and manage is still limited.
To address this knowledge gap, one of the co-authors (Ren, 2009) carried out his
doctoral research to identify different types of service offerings in capital equipment
industries, to describe each service offering’s characteristics and to explain their
 JOSM respective implications. It was found that the development of service strategies
23,1 is driven by the changing business landscape faced by manufacturers, notably
constant pressure on product competition, growing demand for customer value, and
the continuing need for profit growth.
These factors have motivated capital equipment manufacturers to create service
offerings that meet customer needs at the equipment, asset, and process levels.
122 Accordingly, services can be classified into product lifecycle services, on-site maintenance
services, managed services, and consulting services/consultancy-led solutions, each of
which can be further categorized. Significant distinctions were observed between the
service categories. Developing each service offering not only involves direct changes to
the capabilities of service sales and delivery, but also has far-reaching consequences for
existing functions, such as research and development (R&D), product design and
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production, finance, and human resource management. Furthermore, to enable capability

development and cross-functional collaboration, manufacturing companies have to
transform their organizational arrangements. The findings of the current research can be
integrated into the conceptual framework as shown in Figure 1. The development of
service strategies in manufacturing is concerned about four dimensions (business drivers,
service offerings, capabilities, and organization).
Central to the framework is the expansion of the value chain. Typically,
manufacturing companies have traditionally focused on core functions such as R&D,
design, production and supplier management for the purpose of creating, making and
selling products. While sales support, delivery and maintenance (shown in the middle
part of the value chain) always exist as required by the nature of capital goods,
manufacturing companies gradually turn to new service offerings to satisfy increasing
customer demand, maintain a competitive advantage and achieve financial growth
(see the business driver level in Figure 1).
The great potential of service business development is materialized through the
initial shift of product support services from a cost to a profit center and then from
break-and-fix services to value-added service contracts (e.g. preventive maintenance,

Business Drivers
• To satisfy the customer's needs over time
Drivers • To achieve competitive advantages
• To enhance financial performance

Front-end services Product sales and operations Back-end services

Consulting services Product R&D/ Supplier Production Installation,

Product Product support services Managed
Offerings Consultancy-led sales Product management and system commissioning
delivery (off-site/on-site) services
solutions support design integration and training

Capabilities Implications for sales and Implications for Product Design, Production
marketing and Supply Management Implications for Service Delivery

Figure 1. Organisation Implications for organizational arrangements

An integrated framework
of service development
in manufacturing
 cost inclusive, performance guarantees). As manufacturing companies identify Service-driven
customer’s other needs, the venture of service development is further expanded to manufacturing
managed services (e.g. maintenance, assets, and operations), consulting services and
consultancy-led solutions (see both ends at the offering level).
To reap the benefits from services, manufacturing companies find themselves in a
challenging process of capability and organizational transformation. They have to
develop new capabilities so that they can better market, sell, deliver, and profit from 123
the services, and meanwhile they must recognize the new requirements on existing
functions such as R&D, design and production (see the capability level). Moreover, to
institutionalize the alignment within and between business groups, new organizational
arrangements have to be set up (see the organization level).
As demonstrated above, the classification approach to studying services in
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manufacturing offers great insights into the inner working of individual service
offerings. It reveals the wide, yet profound impact of service development on the
manufacturer’s capabilities and organization, underlining the importance of a “whole
business” approach. Many manufacturing companies in this research had relied on
their instinct to develop the service component. In future decisions, the service
classification can and should serve as guidance for capital goods manufacturers
to identify business opportunities. Additionally, the anatomy of individual service
offerings can inform managers of more details about service business development,
along with recommendations to avoid or overcome the potential capability and
organizational challenges.

Research directions on services in manufacturing

Looking into the future, there are promising research opportunities for services in
manufacturing. First, extant research on service strategies has concentrated on
traditional manufacturers of heavy industrial goods. While initial inroads have been
made to expand research into other industries, such as aerospace and defense
(Johnstone et al., 2009; Ng and Nudurupati, 2010) and information technology (Ceci and
Prencipe, 2008), more research is needed to study service strategies in an even wider
range of industries, such as consumer electronics, communication technologies, and the
chemical and petroleum industries. Such research would not only benefit the industry
itself but provide a better basis for cross-industry learning.
Second, much of present research has been focused on services in manufacturing
industries of developed economies. Only limited knowledge is available about the
phenomenon in developing countries, such as China and Mexico for instance
(Gebauer et al., 2007). Research on the status of service strategies in these developing
countries would be valuable to the research field. More research is also needed to
understand the globalization of the service businesses in multinational manufacturers.
Third, research is needed to understand how manufacturing companies continue
to profit from their existing services. As the services’ competitive advantages
gradually fade away, more systematic and structured approaches are required. A step
forward, for instance, would be to benchmark service practices within and between
manufacturing companies. In addition, service specialists may emerge in certain
segments of maturing service businesses, where market access is open and economies
of specialization are high. As such, more research is needed to describe, explain and
predict the evolution of industry structure and dynamics.
 JOSM Fourth, as manufacturing companies “optimize” their existing service offerings,
23,1 they must continue to develop new services. Pressures from customers, competitors
and shareholders are only likely to grow, forcing manufacturers to take on more
customer responsibilities and become more innovative in what is offered. While one
may wonder about the limit of service expansion, more opportunities will emerge as
manufacturers continue to innovate and seek to solve grand challenges (e.g. IBM
124 Smarter Planet, Siemens Answers). Further research is needed not only to capture the
latest developments but also to engage manufacturing companies in creating services
with novel business models (e.g. risk-reward sharing) and emerging technologies
(e.g. remote monitoring, social media, advanced analytics).
Finally, but not least, the public attention to climate change and environmental
issues is making sustainability a rising priority in manufacturing companies.
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The service component of the business is no exception. Sustainability has thus already
been the driving force behind the research on the product-service systems approach
to service strategies (Mont, 2002; Mont and Tukker, 2006). More research should
be encouraged in this direction to quantify the impact of service operations on
the environment and explore ways for manufacturers to reduce their impact while
remaining competitive in the marketplace.

Evolution of service strategies in manufacturing: searching for theoretical

explanations
Since Oliva and Kallenberg (2003) and Davies (2004) carried out their seminal work on
the transition from products to services, the topic of services in manufacturing
companies has become the forefront of many research agendas (Reynoso et al., 2009a;
Reynoso, 2010b). Contributions made by one of the co-authors of this article have
attempted to improve theory-building and to offer managerial guidance for extending
the service business in manufacturing companies. As illustrated in Table I, in the
first phase, narratives on the extension of the service business in manufacturing
companies are described and compared. The comparison of such narratives improved
the transferability of qualitative findings. Later, these qualitative findings laid the
foundation of developing hypotheses and testing them empirically (Phase 2).
Qualitative studies in Phase 1 revealed the so-called service paradox (Gebauer et al.,
2005), where manufacturing companies invested in the extension of the service
business, but were not able to earn the corresponding returns. Determinants such as:
.
Managerial motivation.
.
Market-oriented and clearly defined service development processes.
.
Service offers focused on customers’ value propositions.
.
Relationship marketing.
.
Clear service strategies.
.
The establishment of a separate service organization.
.
A service culture overcome the service paradox and improve revenues and
profits.

These determinants were subjected to more detailed qualitative investigations around

service development processes, behavioral and cultural implications, as well as,
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Phase 1 2004-2007 Phase 2 2008-2011 Recommendations for future research

Goals and research Theory-building for understanding the Theory-testing on specific determinants
methodologies observed “service paradox” and exploring and antecedents for increasing service
determinants for increasing service revenues and profits
revenues and profits Quantitative studies using a variety of
Qualitative studies using interviews, focus
surveys, benchmarking approaches, and
groups, and action research different empirical methods such as cluster
Variety of manufacturing industries analysis, factor analysis, and structural
enhance transferability of the findings equation modeling
Variety of manufacturing industries
Theoretical contributions Determinants for overcoming the service Environment-strategy and strategy-
paradox structure configuration
Service development processes for Patterns of service strategy changes
different service categories Impact of service orientation of corporate
Behavioral and cultural elements and culture on business performance
organizational structures supporting the Measurement validation for service
extension of the service business orientation of corporate culture (values
Types of organizational structures and behaviors of managers and
supporting the service business extension employees)
Interactions among service differentiation,
innovativeness, and customer centricity
for driving competitive advantages
Role of dynamic capabilities (sensing,
seizing, and reconfiguring) in extending
the service business
Practical implications Guidelines, process models, and Description of potential service strategies
procedures for moving from products to in terms of value propositions and service
services offerings
Description of alignments between service
strategies and organizational design
elements
Description of how dynamic capabilities
contribute to exploitation or exploration
approach for the service business
Theory-building of services in
manufacturing companies for newly
industrialized countries
Theory-building and testing of suppliers
extending their service business
Enhanced theory-building through
consideration of general management
theories
Theoretical contributions to services and
manufacturing in newly industrialized
countries
Theoretical contributions management
theories such as resource-based view,
capability-driven competitive advantages,
strategy processes, organizational change,
or boundary of the firm
Managerial guidelines for achieving
capability-driven competitive advantages
Recommendations for necessary strategy
and organizational change processes
underlying the service business extension

manufacturing –
Service-driven
manufacturing

research
overview and future
strategies in
Evolution of service
125

Table I.
 JOSM organizational structures. For example, companies seem to acknowledge that there is
23,1 no generally applicable service development process or organizational structure and
that each type of services and/or service strategies requires specific considerations
(Gebauer et al., 2008).
In Phase 2, the development and testing of the hypotheses revealed specific patterns
of service strategy changes; namely, from after-sales service strategy
126 to customer-support service strategy and from customer-support service strategy to
development partner or outsourcing partner strategy (Gebauer et al., 2010c). These
service strategies need to be aligned with organizational design elements (Venkatraman,
1989) such as service orientation in corporate culture (values and behavior), human
resources (recruitment, development, and compensation), and organizational structures
(distinction between products and services, and proximity to the customers).
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An after-sales service strategy focuses only on service orientation in corporate values.

On the contrary, a customer-support service strategy should be conscientious about the
service orientation of personal recruitment, training, and assessment, and should drive a
considerable organizational distinction of products and service business in terms of a
separate business unit for services. An outsourcing partner drives the organizational
distinction even further towards two separate companies for products and services;
whereas a development partner moves back towards a higher integration of product and
service competencies (Gebauer et al., 2010b).
At the cultural level, a positive association between the service orientation of corporate
culture and business performance was corroborated empirically. However, service
orientation was not assumed to be single construct. Rather, service orientation was
conceptualized and operationalized through service value and behavior at the managerial
and employee levels (Gebauer et al., 2010a). At the strategic level, the positive role of service
differentiation in achieving a competitive advantage was corroborated. In addition, service
differentiation was embedded in existing concepts such as innovativeness and customer
centricity. Service differentiation strengthens the positive impact of innovativeness and
customer centricity on business performance (Gebauer et al., 2011).
All these contributions enhance theory-building on operational capabilities,
which overcome the service paradox and ensure service revenues and profits.
Supplementary to the insights into operational capabilities, dynamic capabilities
(e.g. sensing service opportunities, seizing the sensed opportunities, and reconfiguring
operational capabilities) play a key role in whether service business extension follows
the exploitation or exploration approach. Exploitation uses services to enhance
incrementally the existing value constellations. Exploration uses services for defining
new value constellations, which allows companies to radically jump towards a new
strategic stage (Fischer et al., 2010).
All necessary qualitative and quantitative data were obtained in a variety of
manufacturing industries, but the contributions were limited in three different ways.
First, the manufacturing companies were from a few Western European countries such
as Germany, Sweden, and Switzerland, which have a strong bias due to their high-labor
costs and strong technical experience. Second, the manufacturing companies
were mostly positioned as original equipment manufacturers with direct access to
their customers. Third, the companies offered mostly capital goods, which require
high-customer investments, and are positioned in the business-to-business context.
 Further research on the evolution from products to services Service-driven
The above shortcomings are the starting point for future research. Conducting research manufacturing
in newly industrializing countries such as Brazil, China, India, Mexico, Russia is
recommended (Reynoso and Sanchez, 2007; Trigos and Maranto, 2010; Reynoso, 2010a).
These countries experience strong growth in manufacturing industries, but their
idiosyncrasies around labor costs, cultural characteristics, and manufacturing
capabilities would provide a fertile ground to deepen the theory-building rather than 127
testing existing theories on services in manufacturing companies. Thus, qualitative
research methods based on narrative, longitudinal, and case study approaches would be
most suitable. Once a more elaborate theory has been built for manufacturing companies
in newly industrializing countries moving towards services, researchers should
formulate and test hypotheses empirically. Furthermore, research should also
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investigate how suppliers or companies positioned in both business-to-business and

business-to-consumer contexts (e.g. electricity or energy providers) can extend their
service business.
In line with recent calls for more interdisciplinary perspectives on service research
(Maglio and Spohrer, 2008), a major concern for future research is that the previous
contributions often neglect more general management theories (e.g. resource-based
view, capability-driven competitive advantages, strategy processes, organizational
change, or boundary of the firm). For example, the shift from pure products to
combinations of products and services in the offering can be considered from the
perspective of the boundary of the firm (Santos and Eisenhardt, 2005). More detailed
insights of the operational and dynamic capabilities necessary for moving from
products to services could contribute to understanding capability-driven competitive
advantages (Barney, 1991; Bowen et al., 1989; Teece, 2007), whereas traditional
literature on strategy processes and organizational change might offer insights into
successive hurdles and barriers for extending the service business (Brax, 2005;
Kowalkowski et al., 2011). By using such management theories, future research can
broaden the contributions beyond the service and marketing research community.

Impact of services on manufacturing: assessing financial consequences

One obviously important aspect of research on service strategies in manufacturing is
understanding the impact of such strategies on firm performance. However, until recently
most authors in the field have implicitly assumed that this transition to services is always
beneficial for manufacturing firm performance. Yet, only a limited number of empirical
studies have actually considered the relationship between service provision and firm
performance (Fang et al., 2008; Gebauer, 2008; Gebauer et al., 2010c; Neely, 2008).
Furthermore, there is evidence for both a positive (Davies, 2004; Gerstner, 2004) and a
negative (Neu and Brown, 2005) impact of transition to service provisions. This suggests
that our understanding of the performance impact of service strategies in manufacturing
is still limited. This part of the article reviews extant evidence on the impact of services on
firm performance and points out potential directions for future research.

Research progress on the impact of services on firm performance

The impact of service strategies on manufacturing firm performance has been studied
since the early research on service provision. For example, Quinn et al. (1990) argued that
successful management of service activities is a source of competitive advantage
 JOSM in contemporary business. Fry et al. (1994) studied how service-based strategies can lead
23,1 to success in manufacturing. Donaldson (1995) provided contrasting evidence by
analyzing the impact of customer service in the UK manufacturing firms. However, as
noted by Jacob and Ulaga (2008), most of this early research has been largely descriptive
or normative in nature.
Since then, research on service provision in manufacturing firms has extensively
128 studied the challenges related to the process of transition from a product firm to a
service firm (Brax, 2005; Davies, 2004; Gebauer et al., 2005; Mathieu, 2001; Oliva and
Kallenberg, 2003). For various reasons, the impact of service provision has received
much less attention. One potential reason for this development may be that research on
service strategies has been mostly conducted from the perspective of service and
industrial marketing, in which firm performance may be of only secondary interest.
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Nevertheless, recent research has begun to address the question of the financial impact
of service provision more systematically.
Extant studies have explored the impact of service strategies on several different
concepts of performance, such as solution effectiveness, in creating value for customers
(Tuli et al., 2007); service sales volume (Antioco et al., 2008); and service quality (Homburg
and Garbe, 1999). However, relatively few authors have studied firm performance as an
outcome of service provision. Table II provides an overview of the identified evidence on
the impact of service provision on manufacturing firm performance.
To summarize these research findings, we first note that firm profitability is by far
the most commonly used measure of performance. This is not surprising, given that
this measure is commonly used to measure manufacturing firm performance. However,
profitability is not the only measure used in the literature. The study by Fang et al.
(2008) uses Tobin’s q to measure the impact of service strategies on firm shareholder
value. This measure has also been considered in conceptual research (Matthyssens and
Vandenbempt, 1998). Finally, revenue growth is an important measure for smaller,
entrepreneurial firms; yet it has been very rarely used as a measure of firm
performance (Visnjic, 2010; Valtakoski, 2011).
The second conclusion is that the impact of service provision appears to be
contingent on both external and internal factors. As indicated by the extant evidence,
potential moderating internal factors include firm size (Neely, 2008) and organizational
design (Gebauer et al., 2010b). External moderating factors include various
characteristics of the competitive environment (Gebauer, 2008; Valtakoski, 2011).
Moreover, the type of services provided will also affect the impact on performance
(Fang et al., 2008; Visnjic, 2010; Valtakoski, 2011). The idea of contingency is also
supported by research on the transition to service provision, which has suggested that
service strategies should be matched with organizational structures, processes, and
resources of the manufacturing firm (Galbraith, 2002; Neu and Brown, 2005).
The third conclusion from extant empirical evidence is that the impact of service
provision is not limited to linear relationships with firm performance. Empirical
evidence shows that the ratio of services to overall revenue can have a quadratic
relationship with firm performance (Fang et al., 2008). In addition, research also suggests
that there may be several points of high performance along the product-service
continuum (Cusumano, 2008; Suarez et al., 2008). These findings indicate that the
relationship between service provision and firm performance is likely to be complex.
 Service-driven
Explaining Performance
Article variable measure Context Main conclusions manufacturing
Homburg Service Market Retailing Service orientation has a positive
et al. (2002) orientation performance impact on firm performance and
Profitability profitability
Neely (2008) Extent of Profitability Manufacturing The impact of the extent of 129
servitization servitization depends on firm size and
prior servitization
Fang et al. Services-to- Tobin’s q Manufacturing Service ratio has a nonlinear
(2008) total revenue relationship with performance;
ratio moderated by service relatedness
Cusumano Services-to- Profitability Software Several “sweet spots” along the
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(2008) total revenue service-product continuum

ratio
Suarez et al. Services-to- Profitability Software The importance of services increases
(2008) total revenue as function of time; services have a
ratio non-linear impact on performance
Gebauer Service Profitability Manufacturing A fit between service strategy and
(2008) strategy competitive environment is required
for above average performance
Visnjic (2010) Service Revenue Manufacturing Manufacturing firm performance is
characteristics growth affected by both the extent of service
Service Profitability provision and service characteristics
revenue Tobin’s q
Gebauer et al. Service Profitability Manufacturing A fit between service strategy and
(2010b) strategy organizational design is required for
above average performance Table II.
Valtakoski Services-to- Revenue Software The impact of the extent of service Impact of services on
(2011) total revenue growth provision depends on service type; manufacturing firm
ratio Profitability performance is moderated by performance – overview
competitive environment of extant research

Finally, it is also noted that there is great variance in the way service provision has been
operationalized. Gebauer (2008), following Homburg et al. (2002), uses a
multidimensional concept of service strategy, which also includes measures of service
differentiation and various aspects of service offerings. Obviously, such a multifaceted
concept is not easy to directly relate to firm performance. Neely (2008) takes a more direct
approach by measuring different services offered by manufacturing firms and relating
them to the extent of their level service development. The simplest operationalization of
service provision is used by Cusumano (2008), Suarez et al. (2008), and Valtakoski (2011),
who simply equate service provision with the share of revenue generated by services.
However, as demonstrated by Fang et al. (2008), Visnjic (2010), and Valtakoski (2011), it
is important to differentiate between different types of services. Hence, simplifying the
measurement of service provision may lead to erroneous conclusions.

Research and managerial implications on the impact of services on firm performance

The limitations of the extant evidence on the impact of service provision indicate three
main avenues for future research. First, the extant empirical evidence, and in particular
quantitative evidence, is relatively limited in scope. More evidence, both quantitative
 JOSM and qualitative, is still needed on the impact of service strategies. Additional research
23,1 is also needed to identify what contingent factors affect the relationship between
service provision and firm performance. Moreover, research into why manufacturing
firms fail to achieve higher performance through service provision would also be very
valuable as it would provide contrasting negative evidence on what does not work.
Second, given the mixed evidence, there is a clear need for more detailed theoretical
130 development to explain the impact of service provision at the firm level (Jacob and
Ulaga, 2008). In particular, future research should try to identify the detailed
mechanisms through which service provision has an impact on firm performance. This
is likely to require qualitative research methods, as well as theoretical reasoning.
Third, there is still confusion about what is the appropriate explanatory variable to
describe service provision. While this is likely to depend on the chosen theoretical
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perspective and empirical context, future research could discuss how to conceptualize
and operationalize the main construct of the research field of service provision.
Related to the problem of explanatory variables, much of the research on service
provision in manufacturing firms has been based on qualitative or anecdotal rather
than quantitative evidence (Jacob and Ulaga, 2008). One important reason for the
relatively rare use of quantitative methods is likely to be the difficulty in collecting
data on service provision. Because most manufacturing firms do not report services
separately in their financial reports, secondary databases cannot be used to develop or
test hypotheses regarding service provision. The extant studies reported above have
employed different strategies to overcome this restriction.
The first and obvious choice is to conduct a survey of manufacturing firms to collect
the required primary data. This method has been used by Gebauer (2008), Gebauer et al.
(2010b), and Valtakoski (2011). The main benefit from survey data is that it potentially
allows the collection of any kind of data in a rigorous way, and thus allows the testing of
any hypotheses. Of course, the main challenge is how to overcome low-response rates.
The survey approach requires a large enough initial population to generate enough data.
A further problem with this type of data is that it is quite difficult to collect longitudinal
data, which is required to provide more robust empirical support for causal hypotheses.
Second, some authors have used whatever secondary data are available to infer the
extent of service provision in manufacturing firms. Neely (2008) used manufacturing
firms’ business descriptions available in commercial databases to infer the level of service
development of firms through content analysis. A variant of this approach was also used
by Cusumano (2008), Suarez et al. (2008), and Visnjic (2010) who determined the level of
service provision from yearly reports and the US Security and Exchange Commission
filings. Another option, used by Fang et al. (2008) is to simply use the manufacturing
firms’ Standard Industrial Classification (SIC) codes to infer the revenue from each
business in which the firm is involved. The revenue from service businesses, determined
using SIC codes, is then used to determine the firm’s service-to-total-revenue ratio. Both
these approaches potentially offer access to vast longitudinal data, but the level of data
available is quite coarse. Furthermore, this approach depends solely on the reporting
practices of manufacturing firms, which are likely to be heterogeneous across firms and
industries. Hypothetically, manufacturing firms’ web sites could also be used to
determine the extent of their service provision activities.
A third option, not actually yet used in the extant research, is a variant of the survey
alternative. In this approach, data would be collected on a business unit
 or project/customer case level within one or a small number of manufacturing firms. Service-driven
This approach relies on data available from firms’ internal accounting and customer manufacturing
relationship management (CRM) systems, and would potentially provide detailed
longitudinal data which could be aggregated to provide firm-level data. This approach
would also effectively control for firm- and industry-level effects. However, this
approach is limited by the firms’ own cost accounting and CRM practices, and not all
firms are likely to collect data on the delivered services, for example. Moreover, the 131
practices are likely to vary between firms, making comparisons difficult and
unreliable. Additionally, gaining access to such data is likely to require a high level of
trust from the studied firms, making the approach difficult to employ on a large-scale.
Research on the impact on firm performance obviously has important implications
for business practices. Without tangible evidence on the impact of service provision,
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reliable advice cannot be provided on what service strategies lead to improvements in

manufacturing firm performance. In this respect as well, a more detailed
understanding is needed of how and why service provision affects manufacturing
firm performance. It cannot yet be told reliably what kind of service provision will lead
to improved performance under which circumstances. Moreover, the extant evidence
suggests a complex relationship between service provision and firm performance;
therefore, the simple advice “to add services” is not likely to always produce
satisfactory performance outcomes.

Conclusions
Together, with globalization and sustainability, service-driven manufacturing will
continue to be among the most significant developments in modern industrial business
management. While the idea has been around for quite a long time, our understanding
of the phenomenon is still relatively limited. The purpose of this paper was to review
the current state of research on service strategies in manufacturing by concentrating
on three significant areas in the research field: descriptions of the phenomenon,
explanation building, and financial consequences. Table III summarizes the findings of
this review in terms of current knowledge on service strategies, significant knowledge
gaps and potential avenues for future research in the area.
This review indicates that while we already have a relatively good understanding of
service strategies in manufacturing, there are still significant gaps in our knowledge.
In particular, future research should try to be more contextual, i.e. to address specific
industrial and geographical contexts to help us understand what are the contingencies in
achieving success with service strategies. More research is also needed on the theoretical
explanations of the phenomenon, as well as the financial consequences of services in
manufacturing. In addition to these, we have also listed a number of research directions
at different levels of analysis, expecting more in-depth investigation into the field and,
ultimately, more useful guidance for managerial practice in the future.
As a result of the analysis and discussion of the contributions presented throughout
the article, the concept of service-driven manufacturing is integrated throughout the
provision, evolution, and impact of services in industrial settings. The evolutionary
process whereby manufacturing companies respond to customers, competition and
growth pressures by developing a variety of relevant and pertinent service offerings
at the equipment, asset and process levels requires a wide-range of organizational
transformation – capabilities to create a positive impact on firm performance.
 JOSM
Research area Current knowledge
23,1
Provision of Customer needs, search for
service competitive advantage and
strategies improved performance
drive the adoption of
132 service strategies
Service strategies require
enhanced service offerings
along value chains
Service strategies require
changes in firm
capabilities and
Downloaded by University of New South Wales At 08:20 06 February 2016 (PT)
Knowledge gaps
How do manufacturing
firms maintain and
develop their service
offerings?
How can manufacturers
sustain the competitive
advantage from service
strategies?
Are there differences in
service strategies used in
developing countries and
Future research directions
Service strategies in
specific industries
Service strategies in
developing countries
Novel services and
solutions and their
development
Impact of sustainability
on service strategies

organization in specific industries?

Evolution of Overcoming the service
service paradox requires suitable
strategies firm capabilities,
organizational structure,
service differentiation and
cultural factors
Service strategies evolve
along specific patterns of
service strategy changes
Evolution of service
strategies needs different
organizational design
alignments
Financial Service strategies have
Table III. consequences impact on firm
Provision, evolution and performance
impact of services in External and internal
manufacturing: a factors affect this impact
summary of current The relationship between
knowledge, knowledge service strategies and
gaps and future performance can be non-
directions linear
How can existing
management theories help
to explain service
strategies and their
evolution?
How can research on
service strategies and their
evolution contribute to
general management
research?
What exactly is the
relationship between
service strategies and
performance?
What factors affect this
relationship?
What are the mechanisms
that explain this
relationship?
Explanations of service
strategies and their
evolution in developing
countries
Application of existing
general management
theories to research on
service strategies and
their evolution
Extension of explanations
to new geographical and
industrial contexts
Quantitative studies of
impact on performance
Evidence on negative
consequences of service
strategies
Theoretical explanation
for financial impact
Finding appropriate
explanatory construct

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About the authors

Heiko Gebauer is an Associate Professor of Service Management at the Center for Innovation
Research in Utility Sectors (Cirus). Cirus is part of the Eawag (Swiss Federal Institute of Aquatic
Science and Technology). He has conducted research on service business development in
manufacturing companies. Since 2010, he has been conducting research on innovation in utility
sectors. He is also an Adjunct Professor at the Service Research Center (www.ctf.kau.se) at Karlstad
University in Sweden. He has published academic articles, books, book chapters, and articles.
Guang-Jie Ren obtained his PhD from Cambridge University. He now works for the IBM
Almaden Research Center.
Dr Aku Valtakoski is a post-doc Researcher at the BIT Research Center of Aalto University
School of Science. His research interests include understanding the impact of servitization on
organizational learning, firm performance and industry evolution. He has presented his work at
international management conferences, including Academy of Management meetings and
European Academy of Management conferences. Dr Valtakoski gained his PhD degree from
Aalto University, and also holds MSc. and MSoc.Sc degrees from University of Helsinki.
Javier Reynoso is a member of the faculty of EGADE Business School at The Monterrey
Institute of Technology (ITESM), Monterrey, Mexico, where he designed and coordinated both
the Bachelors and Graduate Certificates on Service Management at ITESM. His main interest is
to promote and develop research and teaching activities on Services Management in Mexico and
Latin America. In 1996 he launched the initiative for the Latin American Academy of Services
Management. In 1997 Professor Reynoso became the first Latin American member of the
International Academy of Services. On two occasions, 1999 and 2005, he received the ITESM’s
Teaching and Research Faculty Award for his contributions to the service sector. Javier Reynoso
is the corresponding author and can be contacted at: jreynoso@itesm.mx

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