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Industry Conditions and Product Firms’ Choice to Offer Services

The October 2015 paper on 'How Do Industry Evolution and Industry Conditions Prompt Product Firms to Offer Services?' by Ivanka Visnjic, Sam Arts & Dimo Ringov.

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Product companies are increasingly offering different types of services. Companies choose this strategy, often called servitization, when they face several challenges in their ‘native’ product industry. We study under which industry conditions product companies offer services and why. Moreover, we distinguishing between services that are performed on products (product-oriented services) and services that go beyond the products to provide more broadly based support for customer needs (customer-oriented services). Statistical tests performed on the sample of 410 public companies from 1990 to 2011 demonstrate that companies are more likely to offer product-oriented services in the early stage of the industry life cycle and/or when their industries are highly R&D intense and competitive. Conversely, product companies tend to offer customer-oriented services in the mature stage of the industry life cycle and/or in highly cyclical industries. We argue that companies are more likely to opt for product-oriented, as opposed to customer-oriented services in young, R&D intense and competitive industries because they focus on deepening the product knowledge through offering those services. For example, offering maintenance and monitoring helps learn about the product functioning and use, enabling companies to improve their product and become more competitive in an attractive product industry. On the other hand, we believe that product companies are more likely to offer customer-oriented services, as opposed to product-oriented services, in mature and turbulent industries because they intend to broaden their knowledge base beyond products and discover other market opportunities that are unrelated to their increasingly unattractive product industry. For example, offering consulting services helps understand better customers’ business model and other unsatisfied needs they may have.

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