Effect of service integration strategy on industrial firm performance

Abstract

Purpose – The purpose of this paper is to examine the relationship between service integration and manufacturing firms’ profitability and to identify profitable services. Design/methodology/approach – The study examines the service integration data of 202 firms in the machinery and equipment sector in Korea. Firm profitability comes from secondary data to eliminate common method bias. Findings – The relationship between service integration, measured as the service-revenue ratio, and profitability has an inverted U-shape, likely stemming from political costs, a loss of opportunity in manufacturing improvements arising from resource constraints, and an increase in transaction costs. In addition, process operation outsourcing and technical consulting significantly contribute to profitability. Research limitations/implications – The authors show that the effect of service integration on profitability diminishes when firms experience both resource constraints and an increase in transaction costs from implementing the strategy. Furthermore, the profitability of services is heterogeneous across different offerings. Further research in other countries and sectors is necessary to refine the relationships suggested herein. Practical implications – Managers should strive to minimize the costs and problems stemming from resource constraints and transaction costs. It is also important to utilize external resources to achieve profitability from service integration. Managers also need to realize the different cost-revenue structure of each service. Originality/value – The authors find that the relationship between profitability and service integration depends on the degree of resource constraints and transaction costs. The authors also identify which service offerings are highly profitable, which has not been done in previous research.