This presentation is a very comprehensive view on different aspects of service business development in manufacturing companies. It discusses necessary investments into the service business, cognitive limitations for these investments, service strategies, organizational structures, and service business in China.

1. Service Business Development in
Manufacturing Companies
Heiko Gebauer
Department Innovation Research in Utility Sectors - Eawag: Swiss
Federal Institute of Aquatic Science and Technology
University of St.Gallen (Switzerland)
Karlstad University (Sweden)

2. Agenda
1. Attention-based and cognitive perspective
on the service business development
1. Environment-strategy & strategy-structure
configurations
2. Capability perspective on service business
development
3. Service business development in China
Cranfield University

3. Meaning of services in manufacturing
companies
Theoretical perspectives
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Practical illustration
Transition from product
manufacturers to services providers
Outsourcing services for
manufacturing small volume cars
Moving downstream towards
services
Construction and design of
components
Design of small volume cars
Servitisation in the manufacturing
sector
Service business development
Logistic support and
technical advice
Capital equipment manufactures
moving towards high-value solutions
Product-service-systems
Selectedsources: Wise and Baumgartner, 1998; Davies (2004), Vandermerwe and Rada, 1988, Oliva and Kallenberg (2003), Mathyssens and
Vandendempt (1998 and 2008),Neely (2008), Brown, Gustafsson, Witell, 2009

4. Why should companies move into the service
business?
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Anecdotal evidences
"The [service] market is
bigger than we ever
dreamt“, Jack Welch the
former CEO of General
Electric
Siemens announced the
goal to create 50% of the
total revenue through
services
IBM extended the service
business (1993, 35.7%
to. 60.2% of revenue
attributed to services in
2003).
Financial
Strategic
Service opportunities
Marketing
Augmenting the
product offering
More intense customer
relationship
Additional revenue
Higher profitability than
products
More resistant to
economic cycles
Adressing more
comprehensive
customer needs
Co-created
competences as
resource barrier
Sources: Mathieu, 2001, IBM Annual reports, Simon, 1993

5. In business practice, companies face the
“service paradox”
Anecdotal challenges
ThyssenKruppsells its industrial
service business because it could
not create synergies with its other
business units.
Comau increased the share of service
revenue from 14 to 19% (2005-2008),
but the corporate revenuedeclined
about 29%
Dürrprovided outsourcing services,
but the corresponding challenges led
to the decision to sell the service
unit.
Sources: Belz et al. 1997, Gebauer et al. 2005, Neu and Brown 2005
Cranfield University
Industry challenges
Service offerings are mainly
restricted to basic services for
the installed product base
Investments in the service
business do not create the
corresponding returns leading to
the “service paradox”
Service are often given “free”
during the negotiation of the
product
Service approach lack sufficient
professionalization and
systematization
Despite expectations of about 50%
revenues created through service,
most companies still achieve less
than 20%

6. Understanding the complexity of service
business development
Cranfield University
Service business is more complex than the product business
Parameter
Product business
Service business
Nature of demand
More predictable, can
better forecast
Always unpredictable,
sporadic
Required response
Standard, can be
scheduled
as soon as possible
Number of product
generations
Limited
10 to 15 times higher
Sources: Cohen et al. 2006

7. Contributions
Cranfield University
a)
An investigation of the relationship between behavioral
processes, motivation, investments in the service business and
service revenue (together with Elgar Fleisch)
b)
An attention-based view on service orientation in the business
strategy of manufacturing companies

8. Cranfield University
From behavioral processes to overall
profitability (1)
Behavioral
processes
H1
Level of
managerial
motivation
H2
Investments in
the service
business
H3
Share of service
revenue
H4
Overall
profitability

9. Cranfield University
From behavioral processes to overall
profitability (2)
Behavioral
processes
H1
Level of
managerial
motivation
40%
H2
Investments in
the service
business
H3
Share of
servicerevenue
H4
Overall
profitability
38.7%
35%
30%
Fraction of companies
sampled
(n=199)
26.6%
25%
19.1%
20%
15%
11.1%
10%
4.5%
5%
0%
0-10%
10-20%
20-30%
30-40%
Share of service revenue to total revenue
over 40%

10. Cranfield University
From behavioral processes to overall
profitability (3)
Behavioral
processes
H1
Level of
managerial
motivation
H2
Investments in
theservicebusi
ness
H3
Share of
servicerevenue
H4
Overall
profitability
40%
33.9%
35%
Fraction of companies
sampled
(n=199)
30%
25%
27.7%
21.7%
20%
15%
12.2%
10%
5%
4.5%
0%
0-5%
5-10%
10-15%
15-20%
over 20%
Share of investment in the service business on total investments

11. From behavioral processes to overall
profitability (4)
item
Factor (construct) and item description¹
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Factor loading Cronbach Alpha
0.87
Factor 1: Behavioral proceses
1
2
3
4
Our managers have not regnized the financial opportunities of an extended service business
Our managers are highly risk averse on exploiting the strategic oppportunities of services
Our managers tend to set overambitious goals for extending the service business
Our managers have shown to overemphasis obvious causalities
0.78
0.82
0.67
0.86
0.81
Factor 2: Managerial motivation
5
6
Our managers put a high valence on extending the service business
Our managers expect that their effort in extending the service business will succeed in more service
revenue
0.84
0.83
0.95
Factor 3: Investments in the service business
7
8
What is the share of investmenst in service to total investments?
Our managers invest substantially resources in extending the service business
0.92
0.97
0.87
Factor 4: Share of service revenue
9
10
What is the share of service revenue on total revenue?
The services that we offer contribute substantially towards overall enterprise revenue
0.90
0.82
0.78
Factor 5: Overall profitability
11
12
Average return on sales of the business unit over the last three years.
Average return on sales in comparison to industry average.
0.74
0.72
¹ All items were measured on a 5-point scale (1 = lowest score, 5 = highest score). Exept for item 7, 9, 11 and 12 asked on a Likert-type scale
(with the anchors 1 = totally disagree and 5 = totally agree). Item 7 was measured on a Likert-type scale with 1 = 0-5%, 2 = 5-10%. 3 = 10-15%,
4 =15-20% and 5=more than 20%. Item 9 was measured on a Likert-type scale with 1 = 0-10%, 2 = 10-20%. 3 = 20-30%, 4 = 30-40 and
5=more than 40%. Item 11 was measured on a Likert-type scale with 1 = negative, 2 = 0-2.5%. 3 = 2.5-5%, 4 = 5-7.5 and 5=more than 7.5%.
Item 12 was measured on a Likert-type scale with 1 = very much below the industry average and 5 = very much above industry average.

12. Cranfield University
From behavioral processes to overall
profitability (5)
H1: β =.-501, p ≤ .01
H2: β =.352, p ≤ .01
Behavioral
processes
H3: β =.479, p ≤ .05
2
1
Level of
managerial
motivation
H4: β =.493, p ≤.01
3
Investments in
the service
business
4
Share of service
revenue
Overall
profitability

13. Contributions
Cranfield University
a)
An investigation of the relationship between behavioral
processes, motivation, investments in the service business and
service revenue (together with Elgar Fleisch)
b)
An attention-based view on service orientation in the business
strategy of manufacturing companies

14. Attention-based theory of the firm
Model of attention and firm behavior
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Key triggers
• Focus of attention
• Situated attention
• Structural distribution of
attention
Source: Ocasio, 1997

15. Research model
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Focus of attention
Situated attention
H4 (+) and H5 (+)
H6 (+)
Competitive intensity
H1 (+)
Service orientation
of the business
strategy
Customer expectations
H3 (+)
Overall profitability
H2 (+)
H - Hypothesis
Strategy-formulation
perspective
Source: Gebauer (2009)
Strategy-implementation
perspective

16. Research model
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Focus of attention
Situated attention
H4 (+) and H5 (+)
H6 (+)
Competitive intensity
H1 (+)
Service orientation
of the business
strategy
Customer expectations
H3 (+)
Overall profitability
H2 (+)
Strategy-formulation
perspective
Strategy-implementation
perspective
Hypothesis can
not be rejected
H - Hypothesis
Source: Gebauer (2009)

17. Agenda
1. Attention-based and cognitive perspective
on the service business development
1. Environment-strategy & strategy-structure
configurations
2. Capability perspective on service business
development
3. Service business development in China
Cranfield University

18. Contributions
Cranfield University
a)
Identifying service strategies in product manufacturing
companies by exploring environment–strategy
configurations
a)
Match or mismatch: strategy-structure configuration in the
service business in the service business of manufacturing
companies (together with Anders Gustafsson, Bo Edvardsson,
and Lars Witell)

19. Cranfield University
Research framework (1)
Configuration of external environment and strategy
External environment
•Competitive intensity in
the product field
•Competitive intensity in
the service field
•Market growth
•Customer‟s price
sensitivity
•Customer‟s strategic
options for operating the
product
Strategy
•Cost leadership
•Product differentiation
•Service differentiation
•Service marketing
differentiation
•Service offering

20. Results
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The eight cluster emerging from the external environment constructs
and strategy constructs match to four configurations
•After-sales service providers
• Customer support service providers
• Outsourcing partners
• Development partners

21. Contributions
Cranfield University
a)
Identifying service strategies in product manufacturing
companies by exploring environment–strategy
configurations
a)
Match or mismatch: strategy-structure configuration in the
service business in the service business of manufacturing
companies (together with Anders Gustafsson, Bo Edvardsson,
and Lars Witell)

22. Research framework (2)
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Configuration of service strategy and organizational design elements
Service Strategies
•Basic services for the installed
base (after-sales services)
•Advanced services for avoiding
failures on the installed base
•Design & construction services
•Operational services
(outsourcing services
Organizational design elements
Corporate culture
a) Abstract value of services,
b) Role understanding,
Human resources
c) Personnel recruiting
d) Personnel training
e) Personnel compensation
Organizational structure
f) Distinction product and service
organization
g) Proximity to customers

23. Results
Four matching configurations were identified
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24. Organizational design elements for
implementing the service strategies
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Service orientation in organizational design elements¹
A – abstract value of services, B – role understanding, C – personnel recruiting, D –
training, E – compensation, F – distinction product and service organization, G –proximity
to customers
Development partners
A
1
G
B
Customer support
After-sales
0.5
service providers
service providers
0
A
A
F
C
1
1
G
B
G
B
0.5
0.5
E
D
Outsourcing partners
0
0
F
C
F
C
A
1
E
D
E
D
G
B
0.5
F
Legend (0 – low, 1 – high – cluster means)¹
0
E
C
D
Source: Gebauer, Gustafsson, Edvardsson and Witell (forthcoming 2010), Neu and Brown (2005 and 2008)

25. Implement the strategy by adaptating typical
factors on organizational design
Corporate
culture
Service Strategy
Role of employees
After-sales service
provider
Customer support
service provider
Values of providing
services
Human
resource
management
Personnel recruitment
Personnel training
Outsourcing Partner
Integration of business
unitresponsibility
Development partner
Organizational
structure
Intra-& interfirm
collaboration
Global service
infrastructure
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26. Defining different service packages for
customers
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TRUMPF ServicePlus NaSa
The extended night / saturday telephone hotline for support
outside normal office hours.
TRUMPF ServicePlus Tele
The online-connection for efficient services and higher
availability of machinery.
TRUMPF ServicePlus Classic
All preventive maintenance for one flat-rate.
TRUMPF ServicePlus Special
All preventive maintenance and remedy of all ocurring
breakdowns for one flat-rate.
TRUMPF ServicePlus Premium
All-in-one – the extensive service for a TRUMPF machine.
TRUMPF ServicePlus Extra
The special services for more convenience.

27. Triggers for improving the service excellence
Establish a separate service organization
SIG Pack ...
SIG Pack
BU Systems
SIG Pack ...
Service
SIG Pack ...
Service
Cranfield University
BU Stand. Mach.
SIG Pack ...
Service
SIG Pack ...
Service
BU Service
Business CC
Logistics
IT / Prozesse
Prod. Manag.
Sales and
Service-Hubs
BU Systems
BU Stand. Mach.
Profit & Loss Responsibility
Operative Leadership of ServiceHubs
Definition of standardised
Processes / IT Infrastructure
Product-Management
Resonsibility of local
service business
– Service-Sales
– Spare parts Management
– Fieldservice
– Modernization
– Hand over management
Quelle: R. Hänggi, 2003

28. Investing in an international service
infrastructure
Third Level Support
•Document services and database information support
•Extended training support
•Extended trouble shooting with qualified engineers
•Technology and process support
•Project support
•Spare part stock for most used parts
•Repair and Manufacturing of spare parts
•Sales support
Cranfield University
HQ
First Level Support (service base)
•Local contact / language
•Basic helps on phone
•Local engineer support
•Spare part order handling
Second Level Support (subsidiary)
•Hotline support
•Preventive service programs
•Basic training programs
•Trouble shooting on side
•Replacement parts on stock for urgent help
•Spare part order handling
•Commissioning and start up handling

29. ABB and NOKIA
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30. Succeeding through the service strategies
opens-up the potential of providing solutions
Development
partner
After-sales
service provider
Customer support
service provider
Outsourcing
partner
Cranfield University
Solution provider
•Key capabilities:
•Balancing different
business models
•Integration of
different business
models
•Flexibility across
different business
models
•Customer proximity
to understanding
requirements
according to the
business model
Source: Gebauer, Fischer and Fleisch (2010)

31. Agenda
1. Attention-based and cognitive perspective
on the service business development
1. Environment-strategy & strategy-structure
configurations
2. Capability perspective on service business
development
3. Service business development in China
Cranfield University

32. Contributions
Cranfield University
a)
Exploitation or exploration in service business
development?: Insights from a dynamic capabilities
perspective (together with Thomas Fischer Thomas, Ren
Guanjin and Mike Gregory)
a)
Capability perspective on service business development in
small and medium suppliers (together with Marco Paiola and
Bo Edvardsson)

33. Two different approaches for the service
business development
Characteristics
Exploitation
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Exploration
Type of
organizational
change
Incremental
improvements of the
existing strategic stage
Radical, jump towards new
strategic stage
Primary addressed
service opportunity
(customer activity
chain)
Value constellations
Temporal expansion
within the primary
customer activity chain
Spatial reconfiguration
within the adjacent
customer activity chain
Value-adding to existing
value constellations
Defining new value
constellations
Service-oriented
performance
improvements
10% to 27% of share of
service revenue within a
period of 10 to 12 years.
From less than 20% to more
than 40% share of service
revenue within about 5
years

34. Exploitation or exploration: How to
approach the service opportunities?
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Exploration
Reconfiguration
How do service
opportunities
appear?)
• Radical improvement
Pre-Sales
Sales
• New value
constellation
• Dynamic
capabilities
After-sales
Exploitation
Extension
• Incremental improvements
• Value-adding to existing value constellation
• Development of operational capabilities
Primary customer
activities
Supplementary
customer activities
Where do service opportunities appear?
Adapted from Sawhney, 2004, Fischer, Gebauer, Guanjie, Gregory and Fleisch. (forthcoming 2010)

35. Exploitation and the corresponding service
strategies
Cranfield University
Development
partner
After-sales
service provider
Customer support
service provider
Outsourcing
partner
Source: Gebauer, Fischer and Fleisch (forthcoming 2010)

36. Exploration and forming a new value
constellation
Cranfield University
Hilti has formed a new value constellation through its fleet
management
New value constellation
capturing nearly all customer
activities
After-sales service provider
or customer support
service provider
Dynamic capabilities
Sensing opportunities beyond existing
industry barriers
Seizing the business model
Reconfiguring companies assets and
structure

37. Service business development
Cranfield University
Exploration
Phase 1:
Integrating basic
services into the product
price
Phase 2:
Creating a new value
constellation
Phase 3:
Making use of the
service expansion
along the adjacent
customer activity
chain
Exploitation
Phase 1
Integrating basic
services into the
product price
Phase 2:
Separating product and
service business to
extend service profit and
revenue
Phase 3:
Making use of the
service expansion
along the primary
customer activity
chain

38. Service business development
Cranfield University
Exploration and dynamic capabilities
Phase 2:
Creating a new value
constellation
Sensing
• Create markets,new customer value opportunities, and shape market
behavior
• Past competitive behavior function as hurdles for re-shaping the market
structure.
• Opened-up beyond traditional value chain logic and industry borders
Seizing
• Strategic vision of new value opportunities
• Sophisticated approach to decision-making under high uncertainty
• „Umbrella strategies' for the new value constellations
• Risk management routines
Reconfiguring • Reconfigure internal organizational design factors
• Reconfigure business relationships with external
• Integrate or reintegrate service and product
• Customers buy and value is not a product or service but utility

39. Contributions
Cranfield University
a)
Exploitation or exploration in service business
development?: Insights from a dynamic capabilities
perspective (together with Thomas Fischer Thomas, Ren
Guanjin and Mike Gregory)
a)
Capability perspective on service business development in
small and medium suppliers (together with Marco Paiola and
Bo Edvardsson)

40. Existing research concentrates on OEMs
3rd tier
supplier
2nd tier
supplier
• Very few evidences how small
and medium suppliers can
exploit the potential of service
business development
Sources:Matthyssens, Vandenbempt and Weynst,
2009; Gebauer, Paiola, Edvardsson, 2010
1st tier
supplier
OEM
(Original
equipment
manufacturer)
Cranfield University
End
customer
Focus of existing research
• OEMs moving into the aftermarket
• OEMs possessing strong resource
positions
Sources: Matthyssens and Vandendempt, 2008; Fang,
Palmatier, and Steenkamp, 2008; Oliva and Kallenberg, 2003;
Davies, 2004; Neu and Brown, 2005; Raddats and Easingwood,
2010; Windahl and Lakemond, 2010.

41. Following factors motivate research on
SMSs (small and medium suppliers)
Small and medium suppliers
Cranfield University
Research motivation
• Scope of product and service components
necessary to provide solutions might
correspond with the competence-base of
MNEs, but is most probably beyond the
organizational boundaries of SMSs
• SMSsmight not reach the critical mass,
which is needed by the service business to
become profitable
• OEMs are in superior market position to
offer services throughout a long life cycle
Source: Picture is free-licensed by Gettyimages
Sources: Wise and Baumgartner, 1999; Davies, 2004; Oliva and Kallenberg,
2003; Gebauer , Fleisch and Friedli, 2005; Auguste, Harmon and Pandit, 2006;
Gebauer, Paiola, Edvardsson, 2010.

42. Deepening the theoretical concept on
service business development is necessary
Success factors
Cranfield University
Organizational capabilities
• Organizational capabilities, in
general, originate from the resourcebased view
• Organizational capabilities are
twofold, including operational and
dynamic capabilities
• Organizational structures, human
resources, corporate culture,
measurement & rewards, service
business development
Sources: Wise and Baumgartner, 1999; Davies, 2004; Oliva and
Kallenberg, 2003; Gebauer , Fleisch and Friedli, 2005; Auguste,
Harmon and Pandit, 2006; Gebauer, Paiola, Edvardsson, 2010.
Source: Picture is free-licensed by Gettyimages
• Operational capabilities enable a
company to earn a living in a
relatively stable business
environment
• Dynamic capabilities encapsulate
the evolutionary nature
ofresources and capabilities (sense,
seize, reconfigure)
Sources: Penrose, 1959; Barney, 1991; Zollo and Winter, 2002;
Eisenhardt and Martin, 2000; Teece et al., 1997; Zahra and George,
2002; Winter, 2003.

43. Focus is on qualitative research
Research question
Cranfield University
Research methodology
•Interpretative multiple-case study approach relying
on a range of supplier industries in four European
countries (Germany, Italy, Sweden and Switzerland)
How organizational
capabilities of small and
medium suppliers coevolve with the service
business development?
•Setting was chosen on conceptual grounds rather
than for its representativeness
•Qualitative data was obtained between 2001 and
2009 through longitudinal action research with
three of the nine participating SMSs and interviews
with the remaining six SMSs
•Analysis includes within-case analysis and crosscase analysis
•As the capabilities emerged inductively from the
field work, we turned to the previous research
conceptually substantiated the capabilities and their
interrelation with service business development.

44. Dynamic and operational capabilities are
conceptualized in the following way
Dynamic capabilities
Cranfield University
Operational capabilities
Organizational
routines
Crossfunctional
Broadfunctional
Activityrelated
External
Internal
Specialized
SingleTask
Individual cognition
and skills
Based on: Teece2007; Stefano, Peteraf, Verona, 2010.
Individuals‟ specialized
competencies
Based on: Grant, 1996.

45. Our results indicate three different
trajectories of service business development (1)
Cranfield University
Trajectories for the service business development
Key
characteristics
Alpha: Enhancing relational value
to the existing supplier-buyer
relationships
Beta: Financial value-seeking
behavior in existing and new
supplier-buyer relationships
Number of SMSs
6
2
Strategic
intension
• Exploiting service opportunities
insupplier-buyer relationship
Business logic
• Changing incrementally from
transaction- to relationshiporiented business logic
Competitive
advantages
• Co-produced relationalcompetencies
Financial
indicators
• Services create 10% price
premium for products
Gamma: Radical leap
towards a new value
constellation downstream in
the value chain
1
• Exploiting service opportunities for • Exploring untested service
additional service revenues and market
profits
• Changing incrementally from
• Forming radically a new
transaction-orientation for products value network
to transaction-orientation for
products and service
• New customers in adjacent valueadded steps
• Co-produced service• Competencies co-produced
competencies
within the value network
• Services create about 15% of the • Services create additional
total revenue
revenues and create about
• Service achieves margin
25% of revenue
leverage of two compared to
• Service revenue achieves
product revenue
margin leverage of three
compared to product
revenue

46. Dynamic capabilities for the trajectories
Alpha
Beta
Gamma
Sensing
• Timely and reactively
• Breaking with the
• Incremental
preoccupations
improvements
• More counter-cycle
• Marketing opportunities in • Financial opportunities
customer relationships
•
•
•
•
•
Seizing
• Balancing costs for
services and quality of
supplier-buyer
relationship
•
Reconfiguring
• Defining the value
associated with the new
services
• Value-based prices for
each service
• Verifying willingness to
demand and pay for the
services
Cranfield University
•
•
•
•
• Corporate culture, human • Corporate culture,
•
resources and
human resources,
measurement systems
organizational structures,
and innovation process
•
Opening-up to strategic opportunities
Market structure endogenous
Substituting theory-in-use
Emphasizing new value propositions
Driving the structure of the market
and shaping the market behavior
Value propositions as utility, which
product and service does for the
customers
‚Umbrella strategies' with various
scenarios
Anticipating how each scenario
would affect value creation logics
Mobilizing other network player
Visioning a value network, which
forms new value constellations
Corporate culture, human resources,
organizational structures, and
innovation process inside the single
supplier
Orchestrating reconfiguration
activities of other network actors

47. Operational capabilities for the trajectories
Alpha
Beta
Corporate
culture
• Behavioral roles of trusted • Services as potential source of
adviser and “whatever-it- revenue and profits
takes” philosophy
• Behavior roles of a reliable service
providers and "whatever-is-paid
and valued" philosophy
Human
resources
• Learn more quickly the
nature of customer's
service expectations
• Rewarding “whatever-ittakes philosophy
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Gamma
• Openess to re-structure the value chain and
value constellations
• Roles on breaking and critically
reconsidering industry recipe
• Roles on providing reliable solutions
• Convince customer's to pay for
• Partnering competencies to create
services
collaborative learning relationships
• Rewarding outstanding financial • Developing behavioral competencies to learn
performance (rewarding the
quickly to provide integrated solutions
"whatever-is-paid and valued"
through a network of business partners
philosophy)
• Rewarding cooperation's with business
partners and solving customer problems in
collaboration with business partners
Organizational
structure
• Service teams with profit-andloss responsibilities
• Solution teams withprofit-and-loss
responsibilities
• inter-company collaboration with business
partners
Measurement • Erratic re-calculation of
systems
customer profitability
• Set of financial and non-financial • Set of financial and non-financial
indicators for the service teams
indicators for the solution teams
Innovation
process
• Milestones and assessments of
the financial benefits
• Opening-up the innovation process to
business partners
• Integrating product and service innovation
into solution innovation processes

48. Our study offers following insights
Theoretical implications
 By concentrating on SMSs, we could also
depart from the previous focus on
considering the service business
development as a single firm effort.
Cranfield University
Managerial implications
 Described guidelines are managerial
guidance for implementing one of the
three trajectories
 Trajectory Alpha and Beta entail network
insights by describing the reconfiguration of
capabilities between SMSs and their
distributors.
 Gamma shows how cooperating with new
business partners forms a new network.
Limitations
 The dominating trajectory Alpha results from
a familiarity, propinquity and maturity
traps.
 Future research should obtain additional
qualitative data to replicate our findings
 High path dependence for each trajectory
Source: Matthyssen and Vandendempt (2008)
 Analysis of dynamic and operational
capabilities is limited when it comes to
understand the potential path
dependence leading

49. Agenda
1. Attention-based and cognitive perspective
on the service business development
1. Environment-strategy & strategy-structure
configurations
2. Capability perspective on service business
development
3. Service business development in China
Cranfield University

50. Contributions
Cranfield University
a)
Global approach to the service business in manufacturing
companies
a)
Business-to-business marketing as a key factor for
increasing service revenue in China (together with Chunzhi
Wang, Bernold Beckenbauer, Regine Krempl) and Spare parts
logistics in China (together with Gunther Kuzca and Chunzhi
Wang)

51. Global challenges in internationalizing the
service business
Establishing a global
service infrastructure
Cranfield University
Service business
development in China

52. Establishing a global service infrastructure
Cranfield University
Global level
Organizational distinctiveness between product
and service business
Market level
Responsiveness local
requirement
Integration
Low
(1) Integrated and
ethnocentric global
service approach
Medium
High
( 2) Integrated and
polycentric global
service structure
Separation
(4) Separated and
geocentric global
service structure
(3) Separated and
polycentric global
service structure

53. (1) Integrated and ethnocentric global
service approach
Configuration
Central
Cranfield University
Description
Service organization is integrated as a cost
center in the business unit for products
• Central product organization controls
marketing, sales, services, manufacturing,
R&D, accounting/finance, and human
resources
Product organization
Service organization
Service offering:
•Basic services for the installed base
De-central
Market organizations (M) •Advanced technical support
•Part delivery from central warehouse
Customers (C)
C
M1
• Service organization is integrated as a cost
center in the business unit for products
• Market organizations (sales agent or
subsidiaries) sell products and provide
customer service to augment the product
during the sales phase of the product
• The central service organization provides
basic services for the installed base and
advanced technical support
• Services are included in the product price
M2
M3
…
Service offering:
•Customer service
C
C
…
• Market organization has low decision-making
authority
• The central organization communicates
intensively with the local organization

54. (2) Integrated and polycentric global
service structure
Configuration
Central
Description
Service organization is integrated as
a cost center in the business unit for
products
Product organization
Service organization
De-central
Market organizations (M)
M1
M2
M3
…
Cranfield University
Service offering:
•Third level support
Service offering:
First-level and
second- level
support
• Customer service
• Basic services for
the installed base
• Maintenance
services
Parts delivery from
local warehouse
Customers (C)
C
• Service organization is integrated as a cost center
in the business unit for products
• The market organizations are a relatively
independent units and control product sales,
provision of customer service, basic services for the
installed base, few maintenance services, and
human resources.
• Market organizations set-up local warehouses for
spare parts delivery.
• The third level support remains in the central
organization
• Key positions are obtained by local sales and
service employees
C
C
…
• Central service organization has relatively low
authority and decision making competencies
• Volume of communication and information from the
central to the market organization and among
different market organizations is low
• Services are included in the product price

55. (3) Separated and polycentric global service
structure
Configuration
Description
Separate business unit (BU) for
services with own profit-and-loss
responsibility
Central
BU
Product
BU
Services
Service offering:
•Third level support
De-central
Market organizations (M)
M1
M2
M3
…
Cranfield University
Service offering:
First-level and
second- level
support
• Customer service
• Basic services for
the installed base
• Maintenance
services
Parts delivery from
local warehouse
Customers (C)
C
C
C
…
• Service organization is an independent
business unit with its own profit-and-loss
responsibility
• The business unit for services controls the
service development, spare parts logisticss,
and service support functions.
• In each country remains a single market
organizations that is still responsible for the
product and service business, but the cost
and revenue structure clearly distinguish
between product and service business.
• Market organization provides first- and second
level support (customer service, basic
services, maintenance services, whereas the
separated central service organization takes
over the responsibility to provide third level
support.
• Services are charged separately facilitating
service profitability.
• Relatively low decision-making authority
remains in the central service organization.
• Little communication between central
business unit for services and local service
centers and among the local service centers
of different market organization.

56. (4) Separated and geocentric global
service structure
Configuration
Central
Description
Separate business unit (BU) for
services with own profit-and-loss
responsibility
BU
Product
BU
Services
Service offering:
•Third level support
Regional
Service
-Hub
Cranfield University
Service offering:
•Second-level support
•Parts delivery from
regional warehouse
De-central
Market organizations (M)¹
Customers (C)
Large markets
Service offering:
C
M1
M1
First-level support¹
• Customer service
Other markets
• Basic services for
C
M2
the installed base
• Preventive services
C
and service
M3
contracts
• Collaborative approach between both central business
units (products and services) and the market
organizations. To enhance the collaborative approach, the
manufacturing companies reported to install regional
functions.
• Regional warehouses are established
• Service hubs provide second-level support
• Market organizations concentrate on selling preventive
services and service contracts.
• The service hubs facilitate the information flows between
the central and local organization and promotes the
exchange of experiences among the different market
organizations.
• Service hubs decide about the degree of standardization of
the service offer and balance between the transferability of
services across market organizations versus customization
for individual customers.
• Companies recruit and develop the best employees
everywhere in the world for key positions across the global
service network.
• The managing directors of the different market
organizations and the head of the business unit services
are typically part of the management team of the hub.
¹According to market size and maturity, large market
organizations can offer both 1st and 2nd level service
offerings.

57. Contributions
Cranfield University
a) Global approach to the service business in manufacturing
companies
a) Business-to-business marketing as a key factor for
increasing service revenue in China (together with Chunzhi
Wang, BernoldBeckenbauer, RegineKrempl) and Spare parts
logistics in China (together with GuntherKuzca and Chunzhi
Wang)

58. Manufacturing companies achieve lower
shares of service revenue in total revenue in
China
Cranfield University
Service revenue as a percentage of
total revenue, operating margin [in
percent]
25
21.2
20
Percentage of
service revenue on
total revenue
Operating margin
15
8.2
10.3
10
5.1
5
0
European service
organizations of Swiss
equipment
manufacturing
companies
Chinese service
organizations of Swiss
equipment
manufacturing
companies

59. Effects of Chinese cultural characteristics on
service management (1/2)
Cranfield University
Service
strategies
Cultural
characteristics
Effects on service management
After-sales
service
provider
Long-term
orientation
Establishing a binding relationship corresponds with supporting
customer's purchase decision by offering customer service for "free".
Guanxi, renqing
and mianzi
Service managers deliberately use "free" customer services for
establishing a guanxi network and "giving face" to their customers.
Long-term
orientation
Chinese service managers also use the "free-of-charge" approach for
related services.
Guanxi, renqing
and mianzi
Service managers deliberately use "free" product-related services for
establishing a guanxi network and "giving face" to their customers.
Power distance
The high power distance in China limits the empowerment of service
managers and service technicians to offer product-related services
proactively.
Guanxi, renqing
and mianzi
Service managers and service technicians are highly reluctant to
change their mindsets.
Customer
support
service
provider

60. Effects of Chinese cultural characteristics on
service management (2/2)
Service
strategies
Cranfield University
Effects on service management
Uncertainty
avoidance
The preference for personal relationships limits the implementation of
contractual arrangements for pricing equipment availability
Power distance
Customer
support
service
provider
Cultural
characteristics
Establishing a long-term relationship by using a "free-of-charge"
approach for product-related services reduces the risk perceived by
customers when they consider the purchase of equipment availability
Guanxi, renqing
and mianzi
Service managers support customers to improve all processes
associated with a company‟s product. In this case, they “give face” to
their customers by praising customers' reputations
Guanxi, renqing
and mianzi
Service managers deliberately use "free" product-related services for
establishing a guanxi network and "giving face" to their customers.
Guanxi, renqing
and mianzi
The guanxi network supports a reputation and personal relationships
with its customers.
Family as the
base economic
actor
The fact that the base economic actor is the family rather than the firm
leads to a high fluctuation among service staff.

61. Increasing spare parts logistic
performance (1)
Cranfield University
Existing spare parts logistic concepts are insuffficient for the Chinese
market
(1) Direct export of spare
parts from Europe to
customers in China (Asia).
Advantages
-
-
Disadvantages -
-
-
Low inventory and working
capital costs.
Low operating costs for the
central warehouse in
Europe.
High availability of spare
parts at the central
warehouse.
High logistics costs due to
express transport mode.
Long delivery times caused
by customs clearance
delays.
Low customer satisfaction
due to long delivery times.
(2) Provision of spare parts from local
warehouses and warehouses
replenished from Europe to customers
in China (Asia)
- Short delivery times for parts
available locally.
- High customer satisfaction due to
short delivery times.
- Low logistics costs due to
replenishment shipments from
Europe to Asia rather than single
express deliveries.
- High inventory and working capital
costs.
- High costs for operating and
maintaining a network of local
warehouses.
- Limited availability of spare parts at
the local warehouses.

62. Increasing spare parts logistic
performance (2)
Cranfield University
Combination of bonded and non-bonded stock could solve various challenges
Spare parts
center in
Europe
Beijing
Korea
Japan
CSC Asia
Shanghai
Hong Kong
Taiwan
Thailand
India
Singapore*
Hub ( bonded / non-bonded)
Local warehouses
*SEA is in charge of the following countries:
Malaysia
Vietnam
India
Philippines
Pakistan
Myanmar
Indonesia
Australia
New Zeland

63. Detailed processes
Cranfield University
IT-Link
SAP
Virtual
transfer of
part
Delivery
Value1
Customs border
Invoice (USD) Value 2
Value1 + freight + margin
Defective part by log. partner
Credit note (USD)
For defective part
Document / Value transfer
Logistics
partner /
WMS
Bonded
stock
End User in
China
Delivery
Temporary
Borrowing (only China)
Payment
VAT +
duties
Invoice for services
Europe
Customsaut
horities
Invoice (local currency)
Non-bonded
stock
Value3+freight+margin+VAT
Value 3 =
Value 2 + duty + fees
Defective part
Sales Co.
Delivery (physically)
Daily process
Monthly/weekly process process
63