Worth the risk? The profit impact of outcome-based service offerings for manufacturing firms

https://doi.org/10.1016/j.jbusres.2021.03.048Get rights and content
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Abstract

Because research on outcome-based service offerings (OBS) is very case study oriented, we lack empirical knowledge of OBS provider profitability in general. Drawing upon an unbalanced panel dataset (n = 1566, N = 14,756), we found that an average OBS provider manufacturer has a 4.40-percentage-point higher gross margin than an average non-OBS manufacturer. In addition, we found that large OBS providers generate lower profits. Since OBS offerings are complex and highly customized, scaling them is a challenge that requires investments in digital technologies and solution modularity. Thus, we tested the moderating role of R&D investments on the scale-profitability relationship and found that for OBS firms, R&D investments moderate the negative relationship between scale and profitability. For managers, these results highlight the profit potential of OBS but also that large OBS providers in particular must be prepared to invest in digital servitization to ensure profitability.

Keywords

Outcome-based service offerings
Financial consequences of servitization
Digital servitization
Product-service systems (PSS)
Business Model Innovation (BMI)

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Mr. Lauri Korkeamäki is a Doctoral Student (Econ.) at the University of Vaasa, School of Management, majoring in Management and Organizations, and a visiting scholar at the Luleå University of Technology. Korkeamäki’s research focuses on servitization of manufacturers. His research interests include but are not limited to service business models, strategic management, sociology in organizations and the paradox theory. Korkeamäki has presented his research in international forums, such as the annual meeting of Academy of Management and the CIRP conference on industrial product service systems and published his research in the Industrial Marketing Management.

Dr. Marko Kohtamäki is a Professor of Strategy at the University of Vaasa, and a visiting professor at the Luleå University of Technology and University of South-Eastern Norway. Kohtamäki takes special interest in strategic practices, servitization, business models, business intelligence and strategic alliances in technology companies. Kohtamäki has published in distinguished international journals such as Strategic Management Journal, International Journal of Operations and Production Management, Industrial Marketing Management, Long Range Planning, Strategic Entrepreneurship Journal, International Journal of Production Economics, Technovation, Journal of Business Research, amongst others.

Dr. Vinit Parida is a Chaired Professor of Entrepreneurship and Innovation at Luleå University of Technology. His research interests include digitalization transformation, business model innovation, organizational capabilities, servitization, industrial ecosystem formation, and circular economy. His research results have been published in 200+ leading international peer-reviewed journals, conferences, book chapters and industry/popular publications. Such as Strategic Management Journal, Journal of Management Studies, Entrepreneurship Theory and Practice, Journal of Product Innovation Management, California Management Review, Long Range Planning, Industrial Marketing Management, Journal of Business Research, International Journal of Production Economics, Production and Operation Management, International Journal of Operations & Production Management, Strategic Entrepreneurship Journal, Entrepreneurship and Regional Development and others.

© 2021 The Author(s). Published by Elsevier Inc.