Should everybody be in services? The effect of servitization on manufacturing firm performance

• Date: 01 December 2017
• DOI: http://doi.org/10.1111/jems.12211
• Published date: 01 December 2017

Received: 17 December 2015 Revised: 16 October 2016 Accepted: 2 March 2017

DOI: 10.1111/jems.12211

ORIGINAL ARTICLE

Should everybody be in services? The effect of servitization on

manufacturing firm performance

Matthieu Crozet1Emmanuel Milet2

1RITM, UniversityParis Sud/Par is Saclay,

France (Email: matthieu.crozet@gmail.com)

2Universityof Geneva, Geneva School of

Economics and Management, Switzerland

(Email: emmanuel.milet@unige.ch)

Abstract

The servitization of the manufacturing sector refers to the evolution of manufacturers’

capabilities to offer services as complements to or substitutes for the goods that they

produce. A vast literature has described these strategies and has shown that this phe-

nomenon is widespread and growing in most developed economies. However, very

little systematic evidence of the extent or consequences of servitization based on a

comprehensive data set of firms exists. In this paper, we provide such evidence using

exhaustive data for French manufacturing firms between 1997 and 2007. We find that

the vast majority of French manufacturers sell services in addition to producing goods.

The shift toward services is growing steadily but at a slow pace. We also estimate the

impact of servitization on firm performance. Controlling for various sources of endo-

geneity bias, our most conservative results show that firms that start selling services

increase their profitability by 0.4%, their employment by 2.1%, and their total sales by

0.6%. For small businesses, we also find a positive impact on the production of goods.

We also uncover strong heterogeneity across manufacturing industries.

There are no such thing as service industries. There are only industries whose service components are greater or

less than those of other industries. Everybody is in services.

Theodore Levitt (1972)

1INTRODUCTION

In most developed economies, the contribution of the manufacturing sector to overall production and employment has been

steadily declining for more than a century (Pilat, Cimper, Olsen, & Webb, 2006). Economic analyses based on a representation

of the economy as a collection of independent sectors often view the decline of the manufacturing sector as an ineluctable shift

of resources toward the services sector (Acemoglu & Guerrieri, 2008; Baumol, 1967; Ngai & Pissarides, 2007). However, this

representation as well as the ensuing industrial policies neglect the fact that the boundary between manufacturing and services

is very blurry, a fact underlined decades ago by Stigler (1956): “There exists no authoritative consensus on either the boundaries

or the classification of the service industries.”1One form the deeper integration of the production of goods and services takes is

the increasing offer of services by manufacturing firms. This phenomenon is referred to as servitization. We can trace the term

servitization to Vandermerwe and Rada (1988), who defined it 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.”2

J Econ Manage Strat. 2017;26:820–841. © 2017 WileyPeriodicals, Inc. 820wileyonlinelibrary.com/journal/jems

CROZET AND MILET 821

Servitization is not a recent phenomenon and has been identified and documented since the 1980s; it is also observed in both

developed and developingeconomies (Neely, Benedittini, & Visnjic, 2011). However,little systematic and robust evidence of the

impact of servitization on firm performance exists, and this question remains controversial. Prior research has shown that most

of the expected benefits of servitization (in terms of higher revenues or higher profitability, for instance) does not materialize

in many cases. This is called the “service paradox” (Gebauer, Fleisch, & Friedli, 2005).3Furthermore, most of the available

empirical evidence is based on firm-level case studies or limited samples of relatively large firms. These approaches have the

advantage of allowing in-depth analysis of the business strategies and channels through which servitization operates. However,

they lack the general validity that would allow inferences to be drawn from their results. In this paper, we use an exhaustive

data set of French manufacturing firms over the period 1997–2007 and perform two analyses. First, we document the extentand

evolution of the servitization of the French manufacturing sector. Second, we examine how firm profit margins, employment,

sales of goods, and total sales are affected by the decision by the firm to start selling services. We now describe some of the

empirical literature and outline how our paper contributes to existing research on servitization and firm performance.

Using data from the OSIRIS database, Neely (2008) finds that firms offering services have higher profit rates than pure

manufacturers, although this premium declines with the number of services offered. Using data on 477 publicly listed man-

ufacturing companies, Fang, Palmatier, and Steenkamp (2008) find a U-shaped relationship between services as a share of

total sales and firm market value. Benedettini, Swink, and Neely (2013) analyze the characteristics of approximately 200 large

manufacturing firms and find a negative correlation between the number of services offered by firms and their survival proba-

bility after controlling for firm age and size. Examining 414 firms from the engineering industry in Germany, Eggert, Hogreve,

Ulaga, and Muenkhoff (2011) link product innovation and servitization to firm profitability. Theyfind that when combined wit h

product innovation, offering services that support the product leads to higher profitability. Taking a very different approach,

Bernard, Smeets, and Warzynski (2014) exploit detailed Danish firm-level data and focus on firms that switch industries from

manufacturing to services. They show that these firms are relatively small but highly productive, import intensive, and rapidly

growing. The switching of these firms out of the manufacturing sector accounts for one-half of the decline in Danish man-

ufacturing employment between 1994 and 2007. The work closest to ours in terms of data and methodology is the analysis

provided by Suarez, Cusumano, and Kahl (2013). The authors look at the effect of servitization on operating profits using a

sample of slightly fewer than 400 firms in the prepackaged software products industry and find a convex relationship between

the share of services of total sales and overall operating margins. Their study covers a longer period than ours (1990–2006),

but it is limited to one industry. We depart from several features of their analysis. First, we use a large data set containing

detailed balance sheet information for more than 50,000 servitized and nonservitized French manufacturing firms over the

1997–2007 period. A key feature of our database is that it provides information on sales (to third parties) of goods and ser-

vices separately. It also includes a large proportion of micro and small businesses from all manufacturing industries. This

allows us to assess how the impact of servitization varies by industry and firm size. We are able to quantify the evolution

of the servitization of French manufacturing over the course of a decade and to show how firm performance correlates with

the decision to shift toward services while addressing a number of endogeneity concerns. Second, we focus our analysis on

the shift toward services rather than on the increase in the share of services of total sales. Indeed, our results indicate that firm

performance is mainly affected by the decision to engage in the provision of services rather than by their importance to total

sales. Third, we do not restrict our analysis to the impact of servitization on profitability but consider several measures of firm

performance.

Our contribution is twofold. First, we exploit our comprehensive database to document the extent of servitization in the

French manufacturing sector. We show that in all French manufacturing industries, the share of services of total sales has

increased substantially between 1997 and 2007. This increase is driven by two components: faster growth among servitized

firms and a tendency for each firm to increase the share of services of total sales. Second, we assess the effect of engaging

in services sales on four indicators of firm performance: profit margins, sales of goods, total sales, and employment. The link

between servitization and employment growth or sales of goods has not yet been investigated in the literature. We explicitly

tackle unobserved heterogeneity using a lagged dependent variable model and a fixed effects model. Our most conservative

estimates suggest that compared to firms that produce goods only, the decision to start selling services is associated with an

increase in profitability of 0.4% and an increase in the number of employees of 2.1%. We also find that these results are mostly

driven by firms that employ fewer than 50 employees—firms for which servitization is also correlated with higher sales and

production of goods.

In the next section, we further describe the motives behind the shift toward services among manufacturing firms. We describe

the data in Section 3 and the change in servitization in French manufacturing industries in Section 4. In Section 5, we present

our empirical strategy and our results. We conclude in Section 6.