Reversed servitization paths: A case analysis of

two manufacturers

Max Finne, Saara Brax, Jan Holmström

Finne, M., Brax, S., Holmström, J., 2013. “Reversed servitization paths: A case analysis of two manufacturers”. Service Business: An International Journal, Vol. 7 Iss. 4, pp. 513-537.

http://link.springer.com/article/10.1007/s11628-013-0182-1

Max Finne, Department of Industrial Engineering and Management, Aalto School of Science, Espoo, Finland, email: max.finne@aalto.fi Saara Brax, Department of Industrial Engineering and Management, Aalto School of Science, Espoo, Finland, email: saara.brax@aalto.fi Jan Holmström, Department of Industrial Engineering and Management, Aalto School of Science, Espoo, Finland, email: jan.holmstrom@aalto.fi

Reversed servitization paths: A case analysis of

two manufacturers

The literature on service business in manufacturing companies posits

that manufacturers “servitize” by increasing the proportion of services

offered. This study presents two paths that are contrary to such

forward-unidirectional servitization, indicating “reversed servitization.”

In the first case, a capital goods manufacturer lost visibility to its

installed base due to evolving product technology. We use the case of

photocopier manufacturer Xerox to support our findings; a regulation

change forced Xerox to move from a service-based toward a product-

based business model. We thus propose that influencing

environmental factors need to be researched and that the literature of

organizational ecology may serve as a complementary perspective.

Keywords: Servitization, service infusion, industrial service, case study,

organizational ecology

1. Introduction

An increasing amount of research has focused on the service strategies of

manufacturing firms. In particular, manufacturers of capital goods (i.e., original

equipment manufacturers or OEMs) have broadened their total offering by

adding pure services and integrating advanced services with their physical

products to provide integrated solutions (Brax and Jonsson 2009) and product–

service systems (Baines et al. 2009b). This phenomenon has been termed

servitization (Vandermerwe and Rada 1988; Baines et al. 2009a) or service

infusion/business in the manufacturing industries; we use servitization for its

brevity. The prevalent assumption in servitization literature posits that

manufacturers move from offering physical products and some assisting services

toward service dominance (e.g., Vandermerwe and Rada 1988; Wise and

Baumgartner 1999; Baines et al. 2009a), neglecting the possibility of a trend in

the opposite direction of cutting services and strengthening the physical goods-

based business.

Our case study demonstrates that the model of servitization as a forward-

unidirectional process across the continuum from goods-focused to service-

focused is simplistic; rather, servitization needs to be seen as involving other

possibilities too. Companies can move also in a reversed direction, move

possibly back and forth, or extend and restrict their position along the

servitization continuum. For example, environmental factors can force highly

servitized companies to withdraw from service-focused strategy. Accordingly, this

study has three purposes: First, we show that the current view focuses on

forward-unidirectional transition in the servitization continuum; second, our in-

depth case study of CapgoodCo (pseudonym) documents a transition toward the

opposite direction, and we further analyze how the literature-based Xerox case

supports this; and third, we draw attention to environmental factors that, in

addition to creating opportunities, may prevent a service-based business strategy

and even coerce manufacturers toward the traditional product-based business

model.

The paper presents two company cases. The first original empirical case was

conducted following a single case research design: It focuses on the

development path of the service operations of CapgoodCo, a leading global

capital goods manufacturer. Then, building on a secondary analysis of publicly

available material, our findings are supported through a comparison with the

company case of Xerox, the photocopier manufacturer that was forced to

unbundle its service package and start selling hardware and services separately.

In the early 1970s, CapgoodCo started to manufacture capital goods, introducing

a new and innovative technology. From the very beginning, CapgoodCo provided

integrated offerings consisting of the technology products and various advanced

services that enabled the installation of the products into end users’ processes

and optimal operation of the installed base (IB). The company rapidly developed

advanced service operations, enabling its end users to reap all the potential

benefits of the new products. The service portion of CapgoodCo’s offering has

thereafter decreased significantly. Our research shows that the influence of

technological development on servitization can be sometimes contradictory to the

current view that technological development facilitates servitization by increasing

service requirements of the ever more complex products (cf. Neely 2009;

Schmenner 2008; Geum et al. 2011).

The study is organized as follows. We start by analyzing the prevalent

understanding of the servitization phenomenon in the current literature and

include challenges that servitizing manufacturers typically face. To lay the

groundwork for the empirical analysis, we look into alternative perspectives on

servitization and acknowledge the role of the organizational environment in the

transition to services. We then explain the research method for the empirical

case. We present the case study of CapgoodCo, identifying environmental

reasons for its reversed servitization path, followed by the secondary case of

Xerox with supporting findings. We conclude that servitization might include

extensions or transitions forward and backward, and is critically influenced by

environmental factors. Finally, we discuss the implications of our findings.

2. Literature review

In this review section we first describe the main characteristics of servitization in

manufacturing. Through a systematic review of literature of the transition

process, we conclude that this literature does not explain our empirical findings.

We present challenges identified in servitization and then explore alternative

views and extend our scope to literature considering organizational

environments, particularly to the theoretical stream of organizational ecology.

2.1. Servitization as manufacturers’ strategy

In servitization, industrial companies adopt new approaches in order to extend

their offering and bundle goods, services, support, self-service, and knowledge

into customer-focused offerings (Vandermerwe and Rada 1988; Davies 2004;

Brax and Jonsson 2009). There are arguably a number of drivers behind this

transition. Services are offered for different marketing purposes, such as

relationship building, and for facilitating sales of goods (Cohen and Lee 1990;

Cohen et al. 2000; Brax 2005; Akehurst 2008). Sales margins for services are

assumed to be higher and/or revenue streams more stable than for products

(Oliva and Kallenberg 2003; Auramo and Ala-Risku 2005). Services may require

fewer assets than physical products, and increasing sales by adding services

should be considerably cheaper than finding new customers for existing

products, yielding another cost advantage (Wise and Baumgartner 1999; Cohen

et al. 2006). Maintaining a competitive advantage solely based on product

innovation is argued to be difficult due to increasing commoditization and fierce

competitive pressures (Vandermerwe and Rada 1988; Sawhney et al. 2004;

Auguste et al. 2006; Glueck et al. 2006).

As solution providers or product–service system providers, manufacturers have

unique advantages over their competitors in offering services for their installed

base (IB); that is, their products in customers’ possession (Goedkoop et al. 1999;

Mont 2000; Baines et al. 2007). Their cost advantage in customer and knowledge

acquisition, as well as in delivering maintenance, is significant over other service

providers due to their existing customer base, thorough technical product

knowledge, and their equipment and resources for servicing their IB (Oliva and

Kallenberg 2003). Certainly, many authors have pointed out that companies may

not be able to maximize these benefits (e.g., Gebauer et al. 2010b; Laine et al.

2010).

Servitization influences the industry supply chains (Davies 2004; Holmström et

al. 2010; Laine et al. 2010). Some authors interpret the meaning of servitization

as the manufacturer’s change of focus from distributors and integrators to end

users (Vandermerwe and Rada 1988; Wise and Baumgartner 1999; Schmenner

2008). In studying manufacturers’ downstream transition toward customers,

Davies (2003) recognized that some services firms in these integrator positions

are moving upstream toward the product supply.

Manufacturers of high technology products are viewed as being most active in

their servitization efforts (Schmenner 2008), and technological development is

seen as facilitating servitization because it enables new ways to access, store,

and share information needed in service operations (Neely 2009; Geum et al.

2011). The survey by Antioco et al. (2008) confirms that technological

development supports both product-centric and customer-centric service

strategies.

2.2. Transition: the dominant view in literature

In order to reach an explicit understanding of views in the literature on the

direction and nature of the transition in servitization, we carried out a systematic

literature review. The literature search was conducted using the Thomson

Reuters ISI database, which is the broadest database covering indexed articles.

Multiple keyword combinations were tried out, but the search string chosen

provided the best selection1 of articles; the largest focused selection of papers.

This yielded 39 articles.

The researchers first examined the abstracts, ruling out papers that did not

describe a servitization topic. Ten papers were omitted because of alternative

reasons: a) they did not feature servitization-related content; or b) discussed

services outside the industrial context; or c) were technical papers without

organizational level analysis, or d) were editorials. This left 29 papers to sample.

Next, six articles, considered as seminal pieces2 regarding this research were

added to the sample.

1 We tested multiple combinations of keywords in ABI/INFORM (ProQuest), Academic Search Elite and Business Source Complete (EBSCO), Emerald Journals, IEEE/IEE, JSTOR, SAGE, Science Direct (Elsevier), and SpringerLink databases. In comparing different databases, we recognized that results varied greatly. Aiming at both good coverage and a manageable number of good quality articles, we chose to use ISI because citation indexing is generally considered as a way to measure academic quality, and ISI lists all indexed journals from other databases. The chosen search string provided us with the most condensed set of relevant articles (N=39):

Topic=(servitization) OR Topic=(servitisation) OR Topic=("service infusion") OR Topic=(service strateg*) AND Topic=(manufact*) Refined by: Topic=(transition) AND Web of Science Categories=( MANAGEMENT OR BUSINESS ) AND Document Types=( ARTICLE ) Timespan=All Years. Databases=SCI-EXPANDED, SSCI, CPCI-SSH Date of retrieval = September 2012

2 We noted the absence of six highly relevant articles and tried broader keywords; the results were less focused but still lacked these studies, which we

Each paper was read through, and researchers examined whether the study

addressed a transition in the product-service continuum, whether the direction of

the transition was indicated, if this was done explicitly or implicitly, whether the

transition was observed through transition in one direction (unidirectional) or if

back and forth movements were acknowledged. The findings are organized into

Table 1, from which the researchers omitted papers studying already servitized

companies and therefore not focusing on transition (Lay et al. 2010; Löfberg et

al. 2010; Gebauer et al. 2011; Kucza and Gebauer 2011). Accordingly, the final

sample totaled 31 papers.

The researchers analyzed whether the papers in the sample addressed risks and

obstacles associated with servitization moves. They also identified key factors

explaining the transition in each study and made a brief note about the methods.

Both researchers first made a decision on their own in each step of the analysis;

the decisions were compared and discussed to check that both researchers

agreed. The researchers did not have conflicting views of the papers; indeed

discussions were useful when the positioning of a paper needed clarification.

Next, we will explain our findings from the review and the identified gap related to

reversed transitions.

therefore included in the sample: Vandermerwe and Rada (1988) introduced the term servitization. Mathieu (2001a) made the distinction between product oriented and customer supporting services. Davies (2003) noted that while manufacturers extend downstream, service providers extend upstream. Baines et al. (2009a) provided a systematic literature review of servitization. Geum et al. (2011) developed a road map for the practical execution of servitization. Turunen (2011) described the more versatile ways to achieve servitization.

Table 1. Systematic analysis of the literature concerning transition between goods- and services-based business models.

Study Method and data Transition explored/explained

Studies with a forward-unidirectional transition perspective

Vandermerwe and Rada (1988) Conceptual Pressures to establish and maintain customer relationships and to defend market positions

Mathieu (2001a) Single case study Product oriented or customer supporting service approach

Oliva and Kallenberg (2003) Multi-case study Strategic intent and deliberate development activities

Allmendinger and Lombreglia (2005)

Conceptual with illustrative cases

Search for profitability, differentiation, and locking-in customers drives companies not only to services, but even further to smart services

Baines, Lightfoot, Benedettini, and Kay (2009)

Literature review Higher value business activities and differentiation

Gremyr, Löfberg, and Witell (2010)

Multi-case study Competition is driving companies to seek new ways to create value

Kindström (2010) Multi-case study Business model aspects and innovation activities

Geum, Lee, Kang, and Park (2011)

Conceptual with illustrative cases

Innovative business models and technological developments foster the integration of products and services

Kowalkowski (2011) Comparative case study

Roles of service function entities and their interdependencies

Salonen (2011) Comparative case study

Cultural reorientation of dominant logic, and external and internal efficiency

Paiola, Gebauer and Edvardsson (2012)

Multi-case study Dynamic capabilities and operational capabilities

Studies with a forward-unidirectional transition perspective, identifying also risks/obstacles

Bjurklo, Edvardsson, and Gebauer (2009)

Single case study Competition is driving manufacturers to service provision

Gebauer, Edwardsson, Gustafsson, and Witell (2010a)

Survey Manufacturers are changing mindsets towards customer centricity and value co-creation, which drives servitization

Raja, Green, and Leiringer (2010) Single case study Competition is forcing manufacturers to seek new ways to grow and improve profitability

Raddats and Burton (2011) Multi-case study Organizational alignment of service strategy with structure

Ulaga and Reinartz (2011) Comparative case study

Specific service capabilities and resources associated with hybrid offerings

Gebauer, Ren, Valtakoski and Reynoso (2012)

Literature review Organizational culture and capabilities; organizational arrangements

Studies with a forward-unidirectional extension perspective

Neu and Brown (2008) Single-case study Fit between market complexity and firm strategy, structure, processes, measurement and rewards, and people

Gebauer, Paiola and Edvardsson (2010b)

Multi-case study Position in value chain, component supplier role, and conditions in external environment

Holmström, Brax, and Alarisku (2010)

Conceptual Visibility to customer’s demand chain as critical enabler

Brown, Sichtmann and Musante (2011)

Conceptual Perceived similarity between parent brand and brand extension

Eggert, Hogreve, Ulaga and Muenkhoff (2011)

Survey Product innovation activity explaining performance in different service strategies

Kowalkowski, Kindström and Brehmer (2011a)

Comparative case study

Key service components, management of central and local organizations, balancing exploration and exploitation

Kowalkowski, Kindström and Witell (2011b)

Multi-case study Firm-specific, offering-specific and market-specific factors in channel selection

Lightfoot and Gebauer (2011) Multi-case study Determinants of innovation supporting service strategy

Nordin, Kindström, Kowalkowski and Rehme (2011)

Conceptual Customization, bundling, range of offerings; operational and strategic risk

Studies with a forward- and backward-unidirectional transitions perspective

Davies (2003) Multi-case study Manufacturing firms extend downstream with services; service firms extend upstream to systems integration and product supply

Studies with a forward transition/extension perspective with some empirical findings on regressive turns

Fang, Palmatier and Steenkamp (2008)

Survey Leverage of knowledge and resources, increased customer loyalty, loss of strategic focus, and organizational conflict

Matthyssens and Vandenbempt (2010)

Multi-case study The fit of a chosen strategy, in terms of added customer value and customization, capabilities, and other contingencies

Turunen (2011) Single-case study Increasing user-orientation forces companies to find faster and versatile ways to achieve

servitization

Kowalkowski, Kindström, Alejandro, Brashear, Brege and Biggemann (2012)

Single-case study Disjointed incrementalism, bounded rationality, path-dependencies and exploration

In the systematic review, we recognized the dominant assumption of the

transition process which we labeled forward-unidirectional. By this term, we

mean that companies are assumed to be transitioning or extending their position

on the continuum toward more service-focused positions (e.g., Löfberg et al.

2010); in other words, the moves in the supply chain are directed forward toward

customers. Following Oliva and Kallenberg (2003), this is often described

through the product–service continuum (see Figure 1), in which the company’s

position is determined by the relative contents of the offering. The literature views

companies moving toward increasing service dominance (Vandermerwe and

Rada 1988; Oliva and Kallenberg 2003; Baines et al. 2009a) through a certain

path: The transition is argued to be directed from manufacturing and possible

maintenance services to relationship-related services, in which manufacturers

support clients’ actions with or without a direct link to their physical product

(Mathieu 2001a). The forerunning manufacturers are seen as providing solutions,

thereby blurring the line between goods and services (Davies 2003; Allmendinger

and Lombreglia 2005).

Figure 1: Product–service continuum (modified from Oliva and Kallenberg 2003).

There are two types of assumptions in the prevalent literature on the nature of

the servitization process: to transition on the product–service continuum away

from the original position, or to extend to a wider coverage on the continuum.

Namely, authors considering the continuum as a conceptual tool (e.g. Oliva and

Kallenberg 2003; Gremyr et al. 2010; Kindström 2010), suggest that the

company's position illustrates the aggregate product–service ratio in the level of

total offering and thus represent the transition view. Others (e.g. Neu and Brown

2008; Gebauer et al. 2010b; Kowalkowski et al. 2011b) consider different

positions on the continuum to be associated with servitization strategies,

therefore seeing that the total offering of a company can spread over several

positions on the continuum—representing the extension view. We find that both

views are useful in the analysis of servitization processes. Clearly, studies differ

in how explicitly they address the nature of the transition, and some required

more subjective interpretation in order to be grouped.

Studies in the “forward unidirectional” categories—altogether 26 out of the total

sample of 31—typically discuss the transition either conceptually or through

empirical evidence and in varying levels of detail. These studies typify successful

Relativeimportance of tangible goods

Relative importance of services

Tang

ible

good

sas

“add

-on”

Serv

ices

as “a

dd-o

n”

approaches to implementing service strategy (e.g. Brown et al. 2011; Lightfoot

and Gebauer 2011; Nordin et al. 2011), discuss how to organize service

operations efficiently (e.g. Neu and Brown 2008; Kowalkowski 2011;

Kowalkowski et al. 2011b; Raddats and Burton 2011) or identify essential

capabilities required to pursue servitization successfully, noting that the lack of

capabilities is likely to complicate the transition (e.g. Bjurklo et al. 2009; Paiola et

al. 2012). Also, the financial impact of servitization has been studied (Fang et al.

2008; Eggert et al. 2011). The level of detail through which the transition is

addressed, varies greatly: Sometimes the interest is on enabling factors and the

gradual development of transition is not opened up (e.g. Ulaga & Reinartz 2011),

whereas in some studies the focus is on modeling trajectories (Salonen 2011).

Only five of the empirical studies in our sample demonstrated other types of

views on transitions than forward unidirectional. Fang et al. (2008) identified

circumstances where servitization negatively affects company value: Critical

mass of service sales is not reached, services are not related to manufacturer’s

core business, and available service resources are very few. This study, though,

did not explicitly identify processes of backward transitions. Davies (2003)

acknowledged backward transition by discussing service firms moving upstream

towards systems integration. However, this did not cover manufacturers and was

therefore not a case of reversed servitization. Matthyssens and Vandenbempt

(2010) described a case in which one of the five case manufacturers withdrew its

servitization strategy. The focus of the study was still on forward transition and

this identified step backward was not exploited to build any theory—the paper

reported the company as repositioning for a new servitization attempt. We argue

that Matthyssens and Vandenbempt (2010) actually reported a case of reversed

servitization, as the company moved forward and backward on the continuum.

Kowalkowski et al. (2012) and Turunen (2011) take a more conscious approach

against purely unidirectional perspective. Kowalkowski et al. (2012) argue that

while the transition appears unidirectional in the long-term at the aggregate level

of analysis, their case study reveals incremental, agile, and less straightforward

micro-level processes in implementing the servitization. They report two small

backward steps in the implemented service strategies. We consider these as

interruptions at the macro-level forward transition, not a reversed servitization

process, as after the incremental drawbacks the company continued moving

towards increasing service dominance. Turunen (2011) argues that servitization

process can be versatile, driven by increasing user-orientation. Her empirical

case describes a manufacturer starting the process through a merger with a

knowledge intensive business service provider. Thereby, the manufacturer

introduces more advanced services to its offering before offering product-related

services. However, the direction of the transition is towards services in Turunen’s

(2011) case. To summarize, we perceive a gap in the literature, as the possibility

of servitized manufacturer’s continued transition away from services, i.e.

reversed servitization, is not explicitly addressed.

The absence of well-documented reversed servitization developments in the

literature may be the result of choosing company cases that from the outset

seem successful. Most of the empirical studies on servitization do not explicate

their criteria for purposeful sampling, while some specifically have selected their

cases based on the assumption of an advanced level of servitization (e.g. Davies

2003; Oliva and Kallenberg 2003). Next, we will present the literature’s view on

the challenges in carrying out servitization.

2.3. Challenges in servitizing and their causes

The current literature offers some explanations, mostly related to managerial

decisions and principles, of why a few manufacturers have faced difficulties in

carrying out servitization according to the path presented in the literature. Many

challenges stem from the specific characteristics of services—customer influence

on the production, dispersed production, and inseparability of production and

consumption—which require different structures, processes, and organizational

culture than the traditional manufacturing (Brax 2005; Bjurklo et al. 2009; Auramo

and Ala-Risku 2005). In essence, services are in conflict with the transaction

orientation of manufacturing (Brax 2005), and thus servitization by its very nature

is challenging.

Few researchers have addressed why the transition into services can be slow

and cautious. The explanations relate mostly to managerial issues and are

internal to the provider firm. Manufacturers may doubt the economic potential or

perceive services as going beyond their scope of competencies (Oliva and

Kallenberg 2003); in addition, the companies have to transform their

organizational culture into a service-oriented one (Mathieu 2001b; Brax 2005;

Gebauer et al. 2012), which can become a major barrier. Raja et al. (2010)

emphasize the role of human resource management in explaining the

challenges, while Gebauer et al. (2010a) as well as Raddats and Burton (2011)

argue for the need to align organizational design with service strategy. Service

design represents new activities and definition challenges for manufacturers

(Bjurklo et al. 2009; Reed and Storrud-Barnes 2009; Baines et al. 2009a), and

therefore they are likely to meet internal resistance during their servitization path

(Baines et al. 2009a). Externally, servitization requires motivating the customer

for service co-production and for maintaining the relationship with the provider,

effective information management, and knowledge about the customer’s

business context (Brax 2005). Integrating service and product components is a

further concern (Kim and Yoon 2012).

Moving to offering services changes a company’s risk profile. Additional risks

concern capability, market, and financial risk (Sawhney et al. 2004; Holmström et

al. 2010; Matthyssens and Vandenbempt 2010; Nordin et al. 2011; Reed and

Storrud-Barnes 2009). Neely (2009) reports that achieving the financial benefits

of servitization is more challenging for larger manufacturers: They achieve higher

revenues but lower profits (see also Gebauer and Friedli, 2005, for this “service

paradox in manufacturing”). Also, Ulaga and Reinartz (2011) remark that the

evidence for the business performance of industrial servitization strategies is not

as strong as anticipated (see Fang et al. 2008, for empirical analysis on the

financial effects). More research should be directed to these issues since the

reasons behind the difficulties of achieving the financial benefits have remained

without complete explanation particularly regarding the effects of the possible

realization of the risks related to servitization.

Despite the amount of attention paid to challenges and risks, unsuccessful cases

of servitization are rarely reported in the literature. As three rare examples, Intel

shut down a unit that hosted company websites and refocused on its core

business; Boeing stopped its efforts to offer financial services to industries other

than aviation (Sawhney et al. 2004); and a weaving machines manufacturer

withdrew its strategy of taking ownership of customers’ asset management

because of immature capabilities (Matthyssens and Vandenbempt 2010).

As previously asserted, servitization literature has focused heavily on

manufacturers’ internal aspects when explaining challenges in the transition. We

argue for a need to consider the organizational environment of the manufacturer

as being equally important as managerial actions in determining the success of

servitization strategies. Next, we will move on to literature offering alternative

perspectives on servitization.

2.4. Alternative perspectives on servitization

The emphasis in servitization literature has been on recognizing the difficulties in

manufacturers’ managerial decision making and strategy formation. The

challenges in making the transition have been discussed, but most of these

studies do not properly acknowledge the environmental conditions that affect the

process. Because of the described focus, servitization has been seen as a

forward-unidirectional process (Oliva and Kallenberg 2003). Our empirical

research, however, shows that servitization paths can even be contrary to the

ones discussed in the current servitization literature. Our results indicate that

environmental factors are central in shaping these development paths.

Research on manufacturers designing service strategies for different

environments has been somewhat scarce. Gebauer with his coauthors (Gebauer

2008; Gebauer et al. 2007) researched the service strategy-environment fit and

identified four different strategies: after-sales service providers, customer support

providers, outsourcing partners, and development partners. Gebauer et al.

(2010a) studied the configurations of service strategies, value chain position, and

business environment. They characterized the environment through four

variables: the number of customers, access to customers, the type of customer

service needs, and the source of competitive advantage. In addition, Neu and

Brown (2005) studied how manufacturers design their strategies for complex

markets and the factors enabling service provision success.

In exploring organizational environment, the above-mentioned servitization

studies concentrate on the managerial aspects of strategy formulation and

implementation. During our empirical research, we identified the need to explain

how different environmental factors affect service transition process. This can be

carried out utilizing organizational ecology (Hannan and Freeman 1993) as a

theoretical perspective. Organizational ecology analyzes the entries and exits of

organizational populations and their causes. When applying an organizational

ecology approach to servitization, entries to the servitized population would mean

that a manufacturer starts to offer services in relation to its products, or that a

new manufacturer offering product-related services emerges, whereas the exits

from the servitized population involve a manufacturer of a specific industry

ceasing to offer product-related services. Servitization literature has mainly

discussed the entries of organizations, and even the very existence of exits has

received limited attention.

Organizational ecology aims at understanding the forces shaping organizational

structures over long time periods. According to the perspective, companies are

highly dependent on the environment (e.g., Hannan and Freeman 1993; Pfeffer

and Salancik 1978). Factors shaping the organizational environment determine

what kinds of organizations fit with the environment and thereby shape the focal

population.

Endogenous and exogenous factors form the organizational environment. The

former embody the dynamics caused by other members of the focal population

while the latter include other organizational populations, available resources,

institutions, the applied technology, and political forces (Hannan and Carroll

1992; Carroll and Hannan 2004; Hannan and Freeman 1993). Resources are

used as inputs in production; institutions and political forces place environmental

demands on organizations, whereas technological development drives

organizational activities in general (Klepper and Simons 1997; Carroll and

Hannan 2004). Through determining a servitized population’s entry and exit rates

the organizational environment shapes the servitization of organizations within

that industry.

To summarize, we have identified in the literature review three perspectives on

servitization. First, the dominant perspective views servitization as a

unidirectional transition from manufacturing products to increasing service

operations. Second, challenges in the transition have been identified and argued

to be mostly related to internal aspects such as managerial and strategic

decision making. Third, alternative perspectives exist, of which we emphasize the

view of environmental influences on the transition. Next, we will present the

research methodology of the empirical study.

3. Methodology

This empirical case study focuses on the development of the service operations

(cf. van der Wiele 2007) of CapgoodCo (a pseudonym), a leading global capital

goods manufacturer that has provided industrial services from the early 1970s

until the present. The case methodology was selected as it fosters understanding

the interaction between a phenomenon and its context (Dubois and Gadde 2002;

Yin 2003). In addition, it supports exploration of new phenomena and building of

new theory (Eisenhardt 1989; Yin 2003). We aim to reflect the development path

of CapgoodCo’s service operations in relation to the general direction presented

in the servitization literature and thereby add to existing theories.

The researchers gained access to CapgoodCo when the company participated in

a research project in industrial services, as a manufacturer that had achieved

years of successful provision of advanced industrial services, but was currently

struggling with its service operations due to major changes in the operational

environment. Accordingly, this offered an interesting opportunity to study a

servitization process relatively different from those presented in the literature, and

also allowed good access to the company. The company operates globally and

has service resources—operated by the company itself or through partners—in

over 50 countries.

Research was carried out in two phases. The first (June 2008–November 2009)

examined CapgoodCo’s current challenges concerning its service operations,

and discovered the reasons behind these challenges. The second (May 2010–

August 2010) studied the historical development of CapgoodCo’s business and

service operations in particular.

We followed the abductive case study approach (Dubois and Gadde 2002), with

the aim of generating new concepts and elaborating on existing models of

servitization as opposed to confirming existing theories. In this approach, theory,

empirical data, and case analysis are continuously matched to create insights

coherent with both theory and empirical observations. In practice, this meant

repeated iterations between literature, data collection, and analysis.

Our data consists of a wide range of material: semi-structured interviews with

employees in the centralized product support unit, interviews and meetings with

representatives of four integrator companies, memos of workshops with the

company’s key decision makers, the company’s internal documents and

presentations, data on delivered products, a book about the historical

development of CapgoodCo’s products and business, memos of meetings with

CapgoodCo’s product support unit and four local business units in four European

countries, and participant observation by the first author on the company’s

premises during two four-month on-site research periods in phase one of the

research.

The interviews lasted 30 to 120 minutes. Throughout the study, following each

interview a thematically arranged outline describing the covered issues was

written. There were a total of 25 interviews carried out and 24 interviewees

altogether, since two persons were interviewed twice, one three times, and two of

the interviews were carried out with multiple interviewees (two and three

persons). Sixteen interviews were recorded; outlines of all of the interviews were

sent to the interviewees to allow clarification and possible corrections of the

contents. The interview data was triangulated with written material whenever

possible. Additional interviews were carried out until theoretical saturation was

reached, that is, when no new information emerged (cf. Eisenhardt 1989).

The 23 first phase interviews (21 persons; two persons interviewed twice) chiefly

covered aspects related to the integrator market, market segmentation,

CapgoodCo’s value offering, and information sharing in the service supply chain.

The data gathering began with seven preliminary interviews with CapgoodCo’s

service managers to elicit the problems concerning service operations. After

defining the problem situation, literature on industrial services in indirect channels

(integrator market) was reviewed. Based on the preliminary interviews and the

literature review, an interview guide was developed for subsequent interviews.

Ten more interviews were carried out with the employees who were responsible

for different aspects of the indirect channel that had been identified as the

problem context. To include the integrators’ perspectives, we carried out five

interviews with CapgoodCo’s OEM customers. Based on the gathered data,

mappings and summaries were drawn to describe CapgoodCo's challenges in

indirect channels.

The second research phase started with the formulation of an interview guide.

Three persons who had been working from the early 1970s and had played

critical roles in CapgoodCo’s product development, marketing, and sales were

contacted for interviews. The interviews focused on CapgoodCo’s offering in the

1970s, ’80s, and ’90s, the role of services in it, and the role of different parties in

supporting operations of the installed base. One of the interviewees provided the

researchers with CapgoodCo’s marketing material from the 1970s and 1980s.

Important sources of data were a book and attached CD-ROM about the

historical development of CapgoodCo’s product and business. We do not provide

reference to this book since it would reveal the identity of CapgoodCo. This

written material, independent from the research project, enabled us to validate

some of the interview data.

4. Case CapgoodCo: from a product–service system to

product dominance

We first describe the service business developments of CapgoodCo, a leading

global manufacturer, from the launch of the new high-technology products in the

early 1970s until the end of the century. We then discuss how technology

evolution changed supply chain structures and affected the company’s ability to

continue its effective service provision.

4.1. CapgoodCo’s service business from 1970 to 1985

In the 1960s, CapgoodCo was providing capital goods used in optimizing various

industrial processes. As the markets became saturated, the company started

seeking new sources of revenue.

“As we read the BBC article (12/1964) about the new technology, a new

world of opportunities opened up in front of us” (CapgoodCo’s R&D Manager).

In the early 1970s, CapgoodCo started the production of capital goods based on

new, innovative technology. At that time there were only two or three competitors

globally who could deliver products of similar technology. There was no mass

production and the products were sold as project deliveries containing various

kinds of services to enable the proper functioning of the devices as well as

optimization of the end user’s production efficiency. The biggest customer

segments in the early years were the transportation sector and the paper and

pulp industry.

The necessity of a servitized model and the provision of advanced services for

CapgoodCo’s business are reflected in one of the company’s first projects in the

transportation sector. It took 2.5 years from the time of the customer order to get

the first products operating commercially at the customer site. Following the

deliveries, the company carried out various tests on the products to troubleshoot

problems occurring during operations. The tests were carried out both at the

customer site as well as in the factory, and additional tests were done each time

the products received improved and updated components. CapgoodCo even

designed some new components for the delivered products to meet the

operational requirements that had come up in the tests. The phase of frequent

testing and product improvement lasted a total of five years in the project, and

CapgoodCo was responsible for most of this as the end user tended only to

supervise any activity. The company was simply obliged to provide these kinds of

services in order to integrate the products into customer processes and enable

end users to receive the benefits that the new technology provided.

During the first few years, the production volumes of the new products increased

exponentially. Thus, CapgoodCo moved into mass production by the end of the

1970s, first moving smaller-sized products that were produced in higher volumes,

and gradually the bigger products as well. This decision was considered to be

purely operational, related to production efficiency, but its strategic implications

on service provision would be realized later on. Product family Evo3

(pseudonym), introduced in 1985, represented a major shift in product design.

This product family meant a shift from analog to digital technology and involved a

processor to take care of all of the control functions. From a service operations

point of view, the most significant change was that these products were designed

to include separate modules that could be combined in various ways, depending

on the operational requirements. This new modular structure made it possible to

move many of the previously on-site service tasks to the back office.

CapgoodCo’s service provision was very comprehensive. Its engineers and

technicians carried out all installation and commissioning-related tasks during the

first years in the 1970s. From early on, the company started providing end users

with training on servicing the products, which lasted for several days. As end

users went through this training and got more experience with the operations of

the products, the companies with the most experience and service resources

started to carry out part of the installations by themselves. However, they all still

relied heavily on CapgoodCo for service-related issues. There were no external

service providers, simply because no service company had enough expertise or

knowledge of the technology upon which the products were based. At that time,

the company could be seen as having provided a product-oriented product–

service system (cf. Neely 2009), as it offered design and development,

installation and implementation, and maintenance and support, as well as

consulting services related to the products.

The company was active also in modernizing: It contacted the customers who

were still using its older products to discuss replacing them with products based

on the new technology. The company developed marketing material to make the

new technology understandable and concrete for the potential customers. The

marketing involved the use of various analogies instead of presenting technical

details. One campaign in 1979 compared the product’s role in the industrial

processes to the role of the human brain. Another campaign, in stressing energy

efficiency, made comparisons between energy consumption and Swedish

geography. In general, energy efficiency of the new product was one of the key

arguments in marketing.

”We kept on arguing that if you would apply our product in all of pump

applications in our country, you would save the amount of energy equal to one

nuclear power plant” (CapgoodCo’s Sales Manager).

There was also a marketing bus loaded with different types of products which

traveled around Sweden, enabling potential customers to try out the products

right on the spot. The nature of the marketing reflected the huge gap that existed

between CapgoodCo and its potential customers in understanding the new

technology during the early years. This fact made it possible, and even

mandatory, for the company to servitize rapidly through developing advanced

service operations.

4.2. CapgoodCo’s service operations following a major change

in industry structure

Throughout its history, CapgoodCo has been strong in servicing the installed

base (IB) in situations where it has direct contact with the end user; it is generally

considered as one of the industry benchmarks. However, whereas in the 1970s

the company had direct contact with the end user for all product deliveries,

currently approximately 80% of its product sales go through indirect channels,

where delivering services is very challenging. Here, we discuss this development

and the reasons behind it.

CapgoodCo’s products are currently mostly integrated into the equipment of

integrators, who provide end users with more strategic equipment consisting of

many interrelated sub-units. Therefore, CapgoodCo has been pushed upstream

in the supply chain, causing it to lose both direct contact with its end users and

visibility to the IB of its products (Figure 2). Nowadays, regarding indirect

channels, the company lacks information on the final recipients of specific

individual products and on the location of the IB and end users.

”We might deliver our products to an integrator in Italy, for example, who

then delivers integrated equipment to Russia. In such situation we remain without

clear knowledge of the final destination” (CapgoodCo’s OEM Service Sales

Manager).

This situation ruins CapgoodCo’s ability to effectively manage the services

related to its products and forces the service operations from a proactive to a

reactive mode.

Figure 2: CapgoodCo’s visibility in indirect channels.

To approximate the degree to which CapgoodCo is servicing the products of its

IB, a calculation was carried out based on the spare parts sales in the Finnish

OEM market, in which the company has better availability of information on the

IB compared to other markets. Spare parts sales in the year 2008 were

compared to the calculated revenue potential of the IB. Based on this, the

company was, at that time, servicing approximately 40% of its IB in the Finnish

OEM market. The company’s foothold in this market is among the strongest, if

not the strongest, of all the markets. Thus, in other markets CapgoodCo is

CapgoodCo

IntegratorEnd user

End user

End user

End user

End user

End userIntegrator

Integrator

Installed baseDelivered base

Line of visibility

believed to be serving 40% or less of its IB. According to an interviewee, the

actual average is around 30%. The remaining part of the IB is served by other

service providers or the end users themselves without ordering spare parts from

CapgoodCo, or is left without proper maintenance.

Currently, CapgoodCo’s visibility in indirect channels is usually only at the point

where the products are delivered (Figure 2), which we call delivered base in

respect to the established concept of IB. This situation hinders delivering IB-

related services and has forced CapgoodCo to provide services reactively, that

is, based on requests.

“Our sales guys are not really selling services; I would rather call what

they are doing order handling” (CapgoodCo’s Area Sales Manager).

The new situation has caused severe challenges for different parties in the

service supply chain. Integrators usually perceive CapgoodCo as a competitor in

service operations, as the company is renowned for its advanced service

operations in the end-user segment. Thus, they are often very reluctant to share

IB information with the firm, which makes it practically impossible for the

company to proactively service its IB. However, when competing against each

other in service provision, CapgoodCo and the integrators are striving for sub-

optimization and thereby worsening the functioning of the whole service supply

chain. CapgoodCo has great difficulties in servicing the IB as it does not know

where the IB is located, whereas integrators lack expertise to optimize the

operational efficiency of the IB:

“It would definitely give us added value if CapgoodCo could give us

information on how to maintain the products” (the chief buyer of an integrator).

Finally, end users suffer production losses when the IB is maintained

sub-optimally and the downtimes increase.

4.3. Case conclusions: CapgoodCo’s reversed transition

The new situation with indirect channels, supply chain intermediation, has

pushed CapgoodCo’s offering toward increasing product dominance in the

product–service continuum (Figure 3). Within this product market, the

developments in product technology, in addition to the launch of mass

production, has led to supply chain intermediation. In the early 1970s,

CapgoodCo provided an integrated product–service system and approached its

customers’ service needs proactively. This was due to its superior understanding

of the product technology compared to end users and other service providers.

Currently, the company is struggling even with warranty handling, and its service

provision mostly consists of delivering spare parts according to customer orders.

Hence, the company’s current challenge with service provision is contradictory to

the situation of most manufacturers described in the servitization literature: The

firm is struggling to retain a relevant role downstream, where it previously was

successful.

Figure 3: CapgoodCo's changed position in the product–service continuum.

We conclude that the main reasons for this reversed path (from services toward

products) were not related to the company’s internal capabilities or the chosen

competition strategy. Instead, changes in the market structure stemming from the

evolution of product technology weakened the visibility to the IB and thereby

CapgoodCo’s abilities to provide services. Next, we find support for our findings

of environmental factors causing reversed servitization through a literature case

describing the changes of the offering of Xerox in relation to their product called

model 914.

5. Case Xerox model 914: from full-service solution to

products and services

The second case presents the development of Xerox’s first commercially

successful photocopying machine, model 914. Taking a servitization view, we

Relative importance of tangible goods

Relative importance of services

Tang

ible

good

sas

“add

-on”

Serv

ices

as “a

dd-o

n”

CapgoodCo’s position in the early 1970s

CapgoodCo’s position in 2009

reanalyze literature sources that originally concentrated on business models and

strategy and provided rich descriptions of the developments of model 914. We

start with the introduction of the product in the late 1950s and the company's

offering from then until the year 1972. We then discuss the effects of a major

regulation change on the operations of Xerox from a service viewpoint.

5.1. Xerox’s service business from 1959 to 1972

In the late 1950s, Xerox (or Haloid, as the company was called then) had

developed a new, innovative product called model 914 based on a patent held by

Chester Carlson. It was the first electro-photography photocopying machine

using plain paper. The product was capable of producing high-quality images in a

few seconds on plain paper, something that had never been accomplished.

Competitors of the Xerox model 914 in the early days used wet photographic

methods and low-quality dry thermal processes (Chesbrough and Rosenbloom

2002). The main competitor companies were selling their products for around

$300, a modest markup price (Chesbrough and Rosenbloom 2002). The

business model was so-called “razor and razor blades,” in which supplies for the

machines were sold at much higher margins and the main target of the product

sales was to increase the installed base. The competing machines were

technologically inferior to model 914. They required special expensive paper and

different types of supplies, which created an attractive aftermarket.

The Xerox model 914 was estimated to cost $2,000 to manufacture, but had

several advantages compared to those of its competitors (Chesbrough and

Rosenbloom 2002). The cost of plain paper was just a fraction of the cost of

special papers, the quality of the copies was superior, model 914 was very easy

to use, and the time it took to make one copy was counted in seconds rather than

in minutes; it was capable of producing seven copies per minute (Mort 1994).

Xerox executives felt that they potentially had a very successful product in their

hands and wanted to introduce it to the market. However, the company was

rather small at the time and was experiencing some financial difficulties.

Therefore, a partner was sought; the main candidates were Kodak, General

Electric, and IBM (Chesbrough and Rosenbloom 2002). IBM asked the

consultant company Arthur D. Little & Co. to carry out a market analysis of the

model 914. The conclusion was that it was really difficult to find any specific

application in which the product would fit significantly better than the competitors’

in order to justify its price (Chesbrough and Rosenbloom 2002), which would be

around 10 times higher. Therefore, no market potential was seen and the

recommendation was to withdraw from bringing the product to market. At the

same time, Kodak and General Electric had independently come to the same

conclusion (Chesbrough and Rosenbloom 2002).

Despite being rebuffed by potential partners, Xerox executives were determined

to get model 914 to the market. To overcome the high selling price, they

developed an innovative business model that implied early servitization. Xerox

offered to lease the product to customers at $95 per month, and the lease could

be canceled on a 15-day notice (Chesbrough and Rosenbloom 2002). All the

required services and support were provided by Xerox and included in the lease.

The first 2,000 copies per month were also included in the lease, and thereafter

Xerox would charge only 4¢ per copy—a modest price compared to 15¢ for the

special paper required for the competing products. At the time, the average

number of copies per machine was 3,000–4,000 a month.

The market success of the model 914 was surprising. During the product lifecycle

Xerox manufactured more than 200,000 units of the model 914 (Mort 1994). It

enabled Xerox to build a controlling market position, and the company’s

revenues grew from $30 million in 1959 to $2.5 billion in 1972 (Chesbrough and

Rosenbloom 2002). During this period, no products were sold, as Xerox offered

model 914 only for leasing. As a result, the company had a monopoly in the

aftermarket services of its product, since all services were included in the lease.

After introducing model 914, Xerox was offering its customers an integrated

solution: The users received model 914 and all the services and support needed

to operate and maintain it as well as a certain amount of copies per month by

paying a fixed monthly fee plus a smaller fee according to the output, that is,

produced copies that exceeded 2,000 a month. Thus, in 1959 after the launch of

model 914, Xerox was already highly servitized (cf. Oliva and Kallenberg 2003).

The competitive situation had forced Xerox to develop an innovative business

model, rather than the traditional method of selling products and services

separately. In addition, the need for various supplies and support had created a

very attractive aftermarket in the industry. Therefore, it is logical that Xerox’s

managers decided to include services and support into the lease contract.

Hence, it was the combination of a competitive situation and an attractive

aftermarket that led to the early servitization of Xerox.

5.2. Xerox’s service operations following a major regulation

change

Xerox’s unforeseen success with model 914 had barely witnessed any

challenges from competitors. The company controlled 60% of the copier market

and 95% of the plain paper copier business in 1972 (Kearns and Nadler 1992).

Its position in aftermarket services was equally strong, as it had been able to

continue to prevent competitors from servicing its products by offering the

products only for lease.

In mid-January 1972, the Federal Trade Commission issued an antitrust suit

against Xerox on the grounds of alleged monopolization of the office copiers

market (Tom 2001). The suit involved 19 specific “unfair methods of competition

in commerce” and required the company to open up all of its key patents for

competitors to use royalty free, radically alter its pricing policies, break down the

exclusivity of the provision of maintenance and supplies, and sell off its

controlling interests in foreign affiliates, which contributed nearly half of the

earnings (Tom 2001; Kearns and Nadler 1992).

On July 29, 1975, a settlement was reached with the Federal Trade Commission

(see Tom 2001). Based on the settlement, Xerox had to license its patents to

competitors for a small royalty, offer model 914 also for sale, and allow end users

to buy maintenance services and toners, one of the main supplies, from

competitors (Tom 2001; Chesbrough and Rosenbloom 2002). This enabled new

suppliers, especially Japanese, with lower cost structures to gain considerable

market share (Tom 2001) and in consequence Xerox’s market share dropped

down to 41% in the early 1980s (Wonglimpiyarat 2004). Regarding the service

market, it meant that the company’s monopoly in aftermarket services of its

products was over.

Because of the antitrust settlement, Xerox was also required to start selling

products and services separately in addition to the lease contract. This meant

coming back to the “razor and razor blades” business model of the pre-1959 era.

The customers previously paying for description and output were charged for

each service or product separately. The previous integrated solution was divided

into a core product and value-added services. The role of services in the offering

was still relatively large, but they were additional to the product, whereas

previously products and services had been combined to build an integrated

offering. While in 1959 Xerox dominated the photocopier service market, after the

settlement in 1975, the company became one of the competitive service

providers.

5.3. Case conclusions: Xerox’s reversed transition

Xerox’s innovative full-service business model enabled the company to bring the

model 914 to the market, despite the high manufacturing cost. Hence, the

competitive situation and business model innovation were the reasons behind

Xerox’s early servitization. After the regulation change, namely the settlement

with the Federal Trade Commission, the company was forced to open up the

after sales service market for competition and also broaden their offering toward

selling pure products. Hence, Xerox can be seen as having taken a step

backward in the product–service continuum (Figure 4).

Figure 4: Xerox's changed position in the product–service continuum.

The case of Xerox model 914 supports our findings on environmental factors

causing reversed servitization. Here the changing factor was regulation, whereas

in the case of CapgoodCo the reversed developments were initiated by changing

product technology. Next, we will discuss the implications of our findings on

theory and managerial practice.

Relative importance of tangible goods

Relative importance of services

Tang

ible

good

sas

“add

-on”

Ser

vice

sas

“add

-on”

Xerox’s position in 1959

Xerox’s position in 1976

6. Discussion

Our study shows that changes in technology maturity and regulation can have

unanticipated effects on manufacturers’ servitization paths. The literature almost

unanimously suggests that manufacturers are increasingly moving toward

service provision (e.g., Wise and Baumgartner 1999; Mathieu 2001a; Baines et

al. 2009a), whereas the cases of CapgoodCo and Xerox exhibit reversed

patterns during the analyzed time intervals. In previous examples (Sawhney et al.

2004; Matthyssens and Vandenbempt 2010; Kowalkowski et al. 2012) of

companies taking steps backward in servitizing, the service strategy has been

withdrawn based on management decisions in reaction to the unsuccessful

development of business performance. In both of the cases described in this

research, the situation differs. The production volumes and revenues of

CapgoodCo have soared: From 1986 to 1996, the production volumes

quadrupled and the sales in 2000 were 50 times the number in 1981. Thus, the

market for the core physical product grew while the conditions to provide

associated product services became unfavorable. Xerox, for its part, was able to

increase its revenues from $30 million to $2.5 billion in just 13 years. Accordingly,

the companies have been extremely successful, although environmental factors

have forced them to reverse their servitization paths. Moreover, the previous

literature has emphasized internal aspects as the main challenges for OEMs in

building a service portfolio (Mathieu 2001b; Brax 2005). The cases analyzed

herein indicate that environmental developments may drive manufacturers to

withdraw successful servitization strategies.

The development that pushed CapgoodCo upstream and toward increasing

product dominance was caused by supply chain intermediation induced by

product technology evolution. As CapgoodCo’s current visibility in the indirect

channels is only to its delivered base, its previous service orientation has turned

into more or less traditional manufacturing. Xerox was forced to take a step back

in its servitization because of a major change in the regulation of the industry.

The settlement with the Federal Trade Commission required Xerox to unbundle

its integrated solution and open the service market for competition, which meant

moving toward a more traditional business model of competitively selling

products and additional services separately. Although both cases exhibit

reversed servitization, they differ in that CapgoodCo transitioned backward from

offering a product–service system to product dominance, while Xerox extended

backward its offering from a full-service solution to coverage of both the product

and services.

Our interpretation is that CapgoodCo’s development path does not fit into models

presented in existing servitization literature, because the company’s industry had

been undergoing a major structural change from the time of introduction of the

new technology until its being used widely. Correspondingly, Xerox’s

photocopying industry experienced a major change introduced by a regulatory

authority. In other words, in both cases of CapgoodCo and Xerox, one factor

shaping the organizational environment (cf. Klepper and Simons 1997) changed

gradually, which led to a major change in supply chain structures and competitive

dynamics, respectively. Servitization literature has not been concerned with

industry-level changes; implicitly, all industries are assumed static, at least from

the manufacturers’ point of view. Such an assumption does not fit every industry,

at least not those characterized by high technology or changing regulations.

Our study has two main research implications. First, we argue that servitization

studies need to consider more explicitly the changing environmental factors that

can affect the abilities of manufacturers to provide industrial services. In some

situations, the manufacturer may have little choice between service and goods

orientation; it is pushed into a specific direction by a change in the organizational

environment. Thus, we suggest that the perspective of organizational ecology

(e.g., Hannan and Freeman 1989; Klepper and Simons 1997; Carroll and

Hannan 2004) would enrich the servitization literature.

Our second implication suggests turning the attention back to the fundamental

relationship between the physical product manufactured and the associated

services—this relationship specifies how the servitization strategy can be

implemented. The role of the physical goods as the core in product services

(Mathieu 2001a; 2001b) has not received enough research attention. This may

be because of the emphasis on service logic (Vargo and Lusch 2004) may cause

researchers to shy away. The physical core product might, for example, become

obsolete, draining the market of the service offering, although this was not the

situation in the current cases. The demand for services and also the supply chain

may change significantly along the life cycle of the product technology, as our

study shows. Previous research has mainly considered technological

development as a facilitator of servitization (Neely 2009; Schmenner 2008; Geum

et al. 2011), whereas in our empirical case, technological development itself

induces the commoditization of products and supply chain intermediation, and

eventually moves the manufacturer away from integrated offerings.

This research is based on an in-depth case study at two manufacturers and thus

has certain limitations. The research design, specifically the use of an original

single case supported by a secondary case, allows us to generalize that reversed

servitization as a phenomenon may occur due to environmental pressure.

However, based on such a limited number of cases, the probability and

prevalence of reversed servitization among manufacturing companies cannot be

estimated. For the same reason, it is unlikely that our analysis has covered all

possible factors that drive reversed servitization, and thus more research is

needed. Moreover, technological developments and regulation changes may not

have similar consequences for other firms. Also, we focused on the reversed

servitization developments of Xerox’s model 914 from 1959 to 1975, as our

intention was to highlight the reversed path. The company has since re-servitized

and is currently considered a document management company (Geum et al.

2011) instead of a manufacturer. Accordingly, servitization can involve various

sequences of backward and forward movements on the product–service

continuum. Moreover, we consider such movements specific to distinct business

lines rather than the whole corporation.

Despite these limitations, we see that this study introduces a new perspective to

servitization. We encourage new research on the effects that technology

evolution, changing regulation, or other environmental changes can have on

servitization. Our results are relevant to several manufacturers of high technology

products that are either already in the service business or considering entering it.

Although most texts on the topic present the addition of services as a resolution

for firms struggling with the shrinking margins of matured product markets, we

suggest that managers pay attention to the expected life cycle of the technology

products in which services are integrated. They need to evaluate potential

servitization business models based on how the service offering will be

influenced by the technology of the physical parts of the offering. In addition to

analyzing the internal capabilities of extending the offering into advanced

services, different scenarios for the external business environment must be

envisioned.

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