global approaches to the service business in manufacturing ...global approaches to the service...

Global approaches to the service business inmanufacturing companies

Gunther Kucza

School of Management and Law, Zurich University of Applied Sciences, Winterthur, Switzerland, and

Heiko GebauerCIRUS: Center of Innovation in Utility Sectors, Eawag: Swiss Federal Institute of Aquatic Science and Technology,

Dubendorf, Switzerland

AbstractPurpose – The article aims to investigate how product manufacturing firms can configure their global service approach.Design/methodology/approach – A qualitative, multi-case research design was employed.Findings – The following four global service approaches could be identified: integrated and ethnocentric; integrated and polycentric; separated andpolycentric; and separated and geocentric.Research limitations/implications – The research findings are limited in generalizability because of the qualitative research approach.Practical implications – Exploring global forms of and supply chain configurations for services supports the efforts of manufacturing firms indeveloping new service-based and relationship-based value propositions.Originality/value – The study contributes to the debate on integrating versus separating the service organization. It offers a complementaryexplanation on integrating and separating the service business, through a differentiation into central and local (market) organizations.

Keywords Global organizational structures, Service business, Manufacturing companies, Service offerings, Service transition,Internationalization of services, International business, Service industries

Paper type Research paper

Introduction

In the last couple of years, the service business has become an

important growth area in manufacturing industry. Since most

manufacturing companies have already reached a stage of

competitive maturity with respect to their products, they now

focus on their global service operations. This trend has been

intensified by a change in the business model of manufacturing

industries. Manufacturing companies have to cope increasingly

with lower margins in the product business and compensate for

this by extending the service business. In some industries,products are even sold at cost level, thereby increasing their

market share of the installed base, leading in turn to increased

revenue and margins from their service business (Brax, 2005;

Gebauer and Fleisch, 2007; Jacob and Ulaga, 2008).The research evidence on manufacturing firms with service

operations in place indicates that the global organizational

structure plays a fundamental role in whether or not the

service business is successful (Neu and Brown, 2008; Bowenet al., 1989; Mathieu, 2001). In line with this reasoning, Oliva

and Kallenberg (2003) argue that setting up a global service

infrastructure is necessary in order to enter the market for the

installed base. Neu and Brown (2005, 2008) explore the

alignment between service strategy and organizational

approach and argue that the implementation of a service

strategy requires modifications in decision-making processes,

human resources, organizational structures and measurement

and reward systems. Unfortunately, the explored alignment

between service strategy and organizational approach does not

necessarily focus on the global service infrastructure.

Similarly, Galbraith (2002) claims that firms delivering

solutions combining products and services have to change

their organizational concept from product profit centers and

product teams towards customer segments, customer teams

and customer profit and loss responsibility. However,

Galbraith (2002) only partly explains how the organizational

concept of customer segments, teams, and customer profit

and loss responsibility should function within a global

organizational infrastructure.Despite these noteworthy contributions, descriptions of

potential global organizational approaches for the service

business have largely been neglected in the existing literature

and an important research gap remains. This article tries to

close part of the research gap by investigating global

approaches to the service business in manufacturing

companies. The results are expected to contribute to

developing the appropriate organizational forms for global

markets and structures of the service supply chain. Exploring

global forms and supply chain configurations for services will

support the efforts of manufacturing firms to develop new

service-based and relationship-based value propositions.The paper is organized as follows. The next section reviews

the existing literature on global service organizations and

develops a conceptual framework for our research efforts. The

third section introduces the research methodology. The

results are discussed in the fourth section. The final section

contains a discussion of the managerial implications and those

for further research.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing

26/7 (2011) 472–483

q Emerald Group Publishing Limited [ISSN 0885-8624]

[DOI 10.1108/08858621111162271]

472

Literature review

The background to the empirical study combines previous

findings on changing service offerings in manufacturing

companies and on global organizational structures. Both

research fields are discussed in more detail below and form

starting point for the conceptual framework.

Service offerings in manufacturing companies

Driven by strategic and financial opportunities,

manufacturing companies have increasingly extended their

service offerings over the last decade. The substantial

potential revenue, attractive profit margins and fact that

services are a more stable source of revenue than that from

products, constitute financial benefits of an extended service

offering (Cohen et al., 2006; Reinartz and Ulaga, 2008; Wise

and Baumgartner, 1999). Strategic opportunities are closely

linked to the financial benefits. By extending the service

offerings, it becomes more difficult to compare different

supplier offerings, leading to less direct competition on price

and improved profitability (Malleret, 2006). An extended

service business is also valuable for retaining existing

customers or attracting new ones (Homburg et al., 2003).

Thus, an extension of the service offering becomes a prudent

differentiation strategy in order to compensate for the

common lack of technological differentiation (Bowen et al.,1989; Roscitt and Parquet, 1990; Vandermerwe and Rada,

1988).Mathieu (2001) categorizes the service approaches of

manufacturers into customer service, product services, and

service as products. Customer service facilitates a company’s

customer relationship and loyalty at a general level. Product

services facilitate the sale of a product, which is sold by the

company, and support product operation. Purchasing the

product always precedes consuming the product service

(Brax, 2005). Services as products are independent of the

company’s tangible offerings and can be purchased separately

from other transactions (Mathieu, 2001). Similarly, Kotler

(1994) differentiates according to repair, maintenance and

business consulting services. Customers demand repair and

maintenance services while operating the product, whereas

business consulting is relatively independent from product

operations.Oliva and Kallenberg (2003) classify service offerings into

two dimensions:1 the focus of customer interactions; and2 the focus of the value proposition.

The focus of customer interaction can be either transaction-

or relationship-based. The end user’s product efficacy (i.e.

whether the product works as it should) and the product’s

efficiency and effectiveness within the end user’s process

represent the two categories belonging to the focus of the

value proposition. The combination of both dimensions leads

to four service types:1 basic installed base services;2 maintenance services;3 professional services; and4 operational (outsourcing) services.

Davies (2004) suggests some directions for moving towards

offering high-value solutions (integrating systems, providing

operational services and offering business consulting) that are

linked directly to service offerings. Systems integration

includes design services to integrate components into a

functioning system. Operational services include the provisionof and responsibility for operating and maintaining products

(Davies et al., 2007). Business consulting is a service for

advising customers on designing, financing, purchasing,maintaining and operating the capital goods (Davies, 2004).All these service categories require direct interactions

between customers and service employees (Sampson and

Snape, 1985; Bhagwati, 1984). Differences occur in thedegree of interactions among customers and service

employees (Vandermerwe and Chadwick, 1989). Whereasbasic services for the installed base and maintenance services

require relatively low customer interactions, services such asbusiness consulting, R&D-oriented services and outsourcing

services entail strong interactions with customers.Furthermore, within each service category, services differ in

the knowledge intensity required for the service delivery. Forexample, repair services can be divided into basic repair

services and more complex repair services. In businesspractice, differences in the knowledge intensity refer to first,

second and third service levels. As illustrated on the left of

Figure 1, the delivery of first-level services requires only basicservice skill(s), whereas the third service level entails

specialized service skill(s) such as behavioral competencies,technical expertise and customer-focused attitudes (Neu and

Brown, 2005). The specifity of skill(s) required for deliveringsecond-level services is positioned between the basic skill(s)

for first service level and the sophisticated skill(s) for the thirdservice level. The left side of Figure 1 depicts the main service

categories and service levels and depicts various combinationsof service categories and levels.Due to the fact that the depicted services require direct

interactions with customers, manufacturing companies must

either send service employees from their headquarter to thevarious international customer locations or enter the actual

international markets. The market entry can be direct orindirect. Indirect entry means that the service-providing

organization is only partly owned by the manufacturing

company. Direct entry means that a manufacturing firmestablishes its own organizational infrastructure for providing

services in international markets (Gronroos, 1999).

Organizational elements for service business

Entering the service market for the installed base means toattempt maximizing financial potential of providing services

such as spare parts, repair, inspections, hotline, and so on forthe total number of products currently used by local

customers. A global service infrastructure enables firms torespond locally to the requirements of customers. However,

the investment decision to build an infrastructure will not

generate revenue immediately. Managers have to generatesufficient knowledge on how to run a distributed service

network effectively. This includes the capability to diffuseservice-related competencies across the network and to

manage large organizations of service personnel. Throughthe knowledge on local customer needs, managers are able to

make a decision on the degree of standardization of theservice offer, in order to balance the transferability of services

across markets and customization for individual customers(Oliva and Kallenberg, 2003).The organizational approaches include various elements

such as cultural aspects, human resources, measurement and

reward systems, decision-making processes, organizational

Global approaches to the service business in manufacturing companies

Gunther Kucza and Heiko Gebauer


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structure and service development (Martin and Horne, 1992;

Matthyssens and Vandenbempt, 1998; Oliva and Kallenberg,

2003). The service development includes the formality of

service development processes and the associated customer

involvement (Martin and Horne, 1992).Cultural aspects involve corporate values and employee

behavior. Human resource management captures the

personnel recruitment, personnel training and personnel

assessment/compensation (Homburg et al., 2003). The latter

is directly linked to measurement and reward systems.

Decision-making processes reflect the distribution of

decision-making authority across central and other

organizational units.Cultural aspects, human resource management and

decision processes can be classified further into ethnocentric

(home-country oriented), polycentric (host-country oriented)

or geocentric (world-oriented) approach (Perlmutter, 1969).

Ethnocentrism is the tendency to look at global organization

from a home-country perspective and entails the belief that

values and norms from the home-country headquarters are

superior to those of the local organizations. The polycentric

perspective acknowledges that subsidiaries are moving

towards maturity, and are, therefore, permitted to exercise

discretion in certain areas of decision-making, values, and

norms (Kotler and Keller, 2005; Kotabe and Helsen, 2004).

Geocentricity balances integration and differentiation among

cultural and structural dimensions. The geocentric approach

is one in which headquarters and subsidiaries are regarded as

“partners” (Perlmutter, 1969; Maddox, 1993; Scullion,

1994).

Organizational structure includes the (organizational)

distinctiveness and proximity of the service organization to

the customer (Gebauer et al., 2010). Organizational

distinctiveness represents the degree to which the service

business unit is established as a distinct business unit with

corresponding profit-and-loss responsibility (Oliva and

Kallenberg, 2003; Gebauer and Kowalkowski, 2011).

Service organization proximity to customers is the extent to

which external customers are aware of the service

organization and can identify appropriate points of contact.

Furthermore, proximity to customers reflects the geographic

density of the global service infrastructure.With respect to organizational distinctiveness, whereas

Oliva and Kallenberg (2003) argue that the global service

infrastructure should be separated from the product

organization, Neu and Brown’s (2005) recommendation can

be understood as integrating both product and service

organization. Managers should thus integrate the

responsibilities of multiple business units to provide

complex product and service offerings.Galbraith (2002) explores how firms moving into the

solution business adapt their organizational concept. Such

firms change the concept from that of profit centers for

products, reviews and teams for products, towards customer

segments, customer teams, and customer profit and loss

responsibilities. This leads to customer-facing organizational

units, such as those relating to global accounts, professional

services, and different regions. These customer-facing

organizational units have considerable resource flexibility

because they are responsible for assessing products and

service units.

Figure 1 Research framework




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Neu and Brown (2008) summarize the organizational

principles for extending the service business. These principlesinclude fostering a high degree of intra-firm collaboration,

basing management’s financial incentives on criteria that

focus on the performance of an inter-dependent cluster oforganizational subunits, design policies to select, develop, and

retain human resources to cope with market complexity,vertically decentralizing decision-making authority for

strategy formation, and so on.Despite the background of the various studies on

organizational principles for the service business, it remainsdifficult to combine their key findings, because of differences

between the investigated industries and service offerings.Regarding the industries studied, Oliva and Kallenberg’s

(2003) study of machinery manufacturers fits the purpose ofthis current study better than Neu and Brown’s (2005, 2008)

investigation of the IT industry or Galbraith’s (2002)exploration of organizational designs in the

telecommunication industry. Thus, the investigated serviceofferings cover a broad range, starting with local after-sales

service and moving on to major IT and communication

solutions.

Conceptual framework

Despite the existing literature on service offerings andorganizational design factors, very little attention has been

paid to the contingency between service offerings and theorganizational design factors associated with a global

approach to the service business. This means that theresearch to date neglects how an extension of the service

offering interacts with the organizational approach. Servicessuch as spare parts delivery, installations, or basic training

might fit into an ethnocentric centralized global service

approach, in which service activities are concentrated in thehome country. However, maintenance services probably

require a polycentric and decentralized organization. In thelatter case, local service organizations are established to

respond to service adaptation requests.Another difficulty arises because the global service

organization is closely coupled to the product organization.Researchers have contradictory views on how manufacturing

companies should distinguish between product and servicebusiness. As discussed in the last section, Oliva and

Kallenberg (2003) argue that distinguishing between theproduct and service business leads to a separation of business

units for products and for services. Neu and Brown (2005)point out that product and service businesses should be

integrated so as to fulfill complex customer needs.By using the above literature, we develop a conceptual

framework that combines service offerings with design

elements of the global service approaches. As illustrated inFigure 1, potential service offerings include customer service,

basic services for the installed base and maintenance services(Davies, 2004: Gebauer, 2008; Neu and Brown, 2005).Against the background on global organizational design

(Galbraith, 2002; Neu and Brown, 2005), we believe that

decisions about organizational structure entail five highlyinterrelated elements. The first element captures the global

organizational structure. In general, global organizationalstructures consist of domestic and foreign elements. In the

present context, domestic elements refer to the centralheadquarters of the company. Foreign elements include the

market organization at the regional or country level (Fouraker

and Stopford, 1968). We use the notions central organization

and market organization to distinguish into domestic and

local elements in the organization. The second element refersto organizational distinctiveness, namely the degree to which

the service business unit is established as a distinct entity, withthe corresponding profit-and-loss responsibility (Oliva and

Kallenberg, 2003; Gebauer et al., 2009). The third elementincludes the proximity of the service organization to the

customer. The fourth element covers organizationalfunctions, which are activities that companies must

undertake in order to create, deliver and sell services

(Gibson et al., 2006). The fifth element captures thedistinction into ethnocentric, polycentric and geocentric

organizational approaches. Figure 1 summarizes the relevantelements of the conceptual framework.

Research approach

Data sample

The global approach to the service business is a context-bound organizational issue. For this reason, a qualitative,

multi-case research design was employed (Eisenhardt, 1989).All case studies refer to Western European business-to-

business manufacturing companies (capital goods

manufacturing companies). In contrast to Oliva andKallenberg’s (2003) study, which concentrates on

companies entering the service market, our data samplecontains companies, which already have service operations in

place. With respect to data confidentiality, the real names ofthe companies are not revealed. Data were collected through

multiple primary and secondary sources. The main primarydata were based on interviews with managers in specifically

chosen internal projects on re-structuring the global service

approach. Altogether, about 60 managers were interviewed(i.e. three to five in each internal project). Typically, those in

management functions such as global sales manager, globalservice managers, and local sales and service managers,

participated in the interviews. The local sales and servicemanagers were chosen from various regions including Asia,

the Middle East, North America, South Africa and WesternEurope.All 16 companies were attempting to restructure their

global service approach. The selection of was made to reach

diversity rather than statistical representativeness. Therefore,

it was appropriate to conduct a small number of in-depth casestudies. The intention was to cover different company sizes

and degrees of service offering. Altogether, six companiesemployed between 250 and 500 people worldwide, four

companies between 501 and 1000, and six companies withmore than 1,000. According to the degree of service offering,

eight manufacturing firms concentrate mainly on basicservices for the installed base and customer service to

augment the product offering. The other eight companies

offer a variety of basic services for the installed base,maintenance services, R&D-oriented services (design,

construction, and so on) and customer service.

Data collection

In order to reduce the risk of false interpretation and to obtainconstruct validity, a distinctive feature of case study research

is the triangulation of sources of evidence (Miles andHuberman, 1994; Yin, 1994). Besides primary interviewee

data, secondary data, specifically on organizational charts and




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descriptions of service offerings and organizational functions

as well as responsibilities, were obtained. This leads to

multiple and different sources of information, which ensures atriangulation of sources of evidence.The interviews were semi-structured around the previously

explained conceptual framework. The semi-structured

interview guide was designed to collect data on the serviceofferings and global organizational approach to the service

business. Consistent with the “narrative approaches” (Milesand Huberman, 1994), follow-up questions were used to

explore the global organizational approach, as well as keychallenges during implementation. At the end of each

interview, informants were asked for additional comments,which allowed additional organizational factors to emerge

inductively from the fieldwork (Miles and Huberman, 1994).Primary interview data and secondary data provided during

the interviews were transcribed, coded and recoded in NVivo

7.0q (Strauss and Corbin, 1998). In order to strengthenconstruct validity, each respondent reviewed the interview

transcripts (Eisenhardt, 1989). The reviews often ledrespondents to provide more detailed background

information. By allowing all informants to review theirinterviews, we were able to eliminate some of the bias

normally associated with interviews.Based on the interviews transcripts, we wrote a draft

summary on global organizational approaches. Before sending

the summary to the interviewees, the research team ofteninserted follow-up questions to clarify and extend the content.

The interviewee reviewed the case summaries, identified gapsin the analysis and suggested any appropriate additional data

collection. His or her perceptions of the case study werediscussed during a follow-up meeting. The evolving case

reports are typically ten pages long. To further enhancevalidity and reliability, external industry experts and

researchers again reviewed the entire report on all casestudies of the 16 companies.

Data analysis

Traditional inductive research methods were used to analyzethe case studies (Eisenhardt, 1989; Miles and Huberman,

1994). Iterative-grounded theory (Orton, 1997) was applied,

where the research team examines the literature relevant tothe research gaps and employs the empirical data. The case

studies of the 16 companies were systematically and iterativelyanalyzed through within and cross-case analysis, until the data

were saturated and consistent organizational structuresemerged (Strauss and Corbin, 1990). In order to ensure

reliability and validity of the data analysis, manual andcomputer-aided content analysis, based on the mentioned

NVivo 7.0q procedure were applied to the case studies.More specifically, the within-case analysis of the global

service approach forms the starting point of the data analysis.

This procedure enables the research team to become familiarwith each case, which accelerates the cross-case comparison.

The within-case study analysis allowed the unique pattern ofthe global service approach in each case to emerge before the

research team proceeded to transfer the findings during thecross-case analysis (Eisenhardt, 1989).The cross-case analysis is closely coupled with the within-

case analysis. By doing a cross-case search, the research team

used the elements of a global service approach that had beendescribed either in the conceptual framework or which

emerged in the within-case analysis. During the cross-case

analysis, the team looked for similarities and differences in the

global service approach across all case studies. Pairs of global

service approaches were selected, which entailed varioussimilarities and differences. This tactic forced the research

team to look for subtle patterns in the global service

approaches emerging from the case studies.The within and cross-case analysis of the 16 cases was

considered the point where theoretical saturation was

reached. Of course, it is not enough simply to state thatdata collection and analysis are concluded once saturation is

reached. Therefore, the following guideline was employed: the

emerging patterns of global service approaches were

considered saturated if they were reflected in more than 90percent of the case studies and confirmed by interviewee

feedback and if they made in terms of prior research (Bowen,

2008).

Patterns on global service approaches

This section summarizes the findings on how companies

approach their global service business. The following fourglobal service approaches represent recurrent patterns and

entail several commonalities:1 integrated and ethnocentric global service approach;2 integrated and polycentric global service approach;3 separated and polycentric global service approach; and4 separated and geocentric global service approach.

Integrated and ethnocentric global service structure

Figure 2 shows the first pattern. At the central, headquarters

level, the companies have integrated the service department

into the product organization as a cost centre. The centralproduct organization is a relatively autonomous unit

controlling the following functions: marketing, sales,

services, manufacturing, R&D, accounting/finance, andhuman resources. Locally, these companies work with sales

agents or subsidiaries, which sell products and provide

customer service to augment the product during the salesphase of the product. The sales agents or subsidiaries also sell

basic services for the installed base, but the central service

department provides these services. Spare parts, for example,

are delivered directly from the central warehouse, or servicetechnicians from the central service department go the

customer and provide repair services or install spare parts.As one interviewee explained, “we mainly include prices for

our customer service and basic services for the installed base

in the product price. Only in a few cases do we charge ourservices separately to the customers. We use services only to

achieve a price premium for our products”. Thus, services do

not contribute fundamentally to total revenue and profits.

The behavior of the sales agents and subsidiaries is driven bythe central product organization and can be described as

ethnocentric. This means that the structure and competencies

are kept fairly simple in the local market organizations. Onlythe central product organization includes a broad range of

competencies and a decision-making authority that is low in

the structure of market organization. Product prices and basicservices are predefined by the central sales function, and the

market organization has only the authority to decide how

much customer service should be provided to augment theproduct offering. Sales managers in the market organization

are recruited and developed in the home country, so that they

identify themselves with the headquarter (domestic) behavior,




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rather than the local cultures. The communication flow from

central product organization and local market organization

can be described as one-way communication. The central

organization communicates intensively with the local

organization, including commands relating to product prices

and basic services for the installed base.The key drawbacks of integrated and ethnocentric global

service structure were described by an executive in the

following way: “The main disadvantage of our global service

approach is the lack of sensitivity to the service expectations of

local customers, high travel costs for service delivery, and an

insufficient consideration of an extended breadth of service

offering”. Thus, an integrated and ethnocentric global service

structure constrains the financial results that could be

obtained through services. Manufacturing firms should

maintain this organizational form only if their customers

expect basic services and are willing to cover the travel costs.

This organizational form is typical of smaller companies,

because of specialization advantages, scope and scale effects,

and limited resources.

Integrated and polycentric global service approach

The second pattern is interpreted as an integrated and

polycentric global service approach (see Figure 3), capturing a

situation in which the service culture and behavior can be

described as polycentric. The local market organization

achieves medium complexity. As one interviewee put it: “Our

market organizations are relatively independent units, with

the local sales managers having control of product sales, the

provision of customer service, basic services for the installed

base, a few maintenance services, and human resources. This

leads to a situation where most market organizations develop

local sales and service employees for key positions”.The central organization in the integrated and polycentric

global service approach is similar to that in the first approach.

However, the central organization possesses a relatively low

level of authority and decision-making power. The final

product prices and charges for services are decided in the

market organizations. The central organization can only

determine the transfer prices, but does not control how the

market organization sets the price for the end customer. The

central organization simply negotiates goals with the market

organization and defines key performance indicators. The fact

that the central organization is still product-oriented and the

services remain as a cost centre within the product

organization means that the key performance indicators

concentrate on the product business. Typical examples of key

performance indicators are market share of products, overall

profitability, and the number of products sold or product

revenue. The local market organization is empowered to

decide how to achieve the defined goals.The volume of communication and information from the

central to the market organization is low. However, the

different market organizations also share limited information

and experiences on effective sales arguments, customer

expectations, or services. Compared to the first

organizational approach, the second one not only

concentrates on customer service and basic services for the

installed base, but also includes some maintenance services.

Most of the services are still included in the product price and

not charged separately. Services are used to make it more

difficult to compare different product offers from other

Figure 2 Integrated and ethnocentric global service approach




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suppliers, avoiding direct price competition and improving

overall profitability. The extended service offering is valuable

for retaining existing customers, but the financial contribution

is still quite low in terms of share of service revenue to total

revenue, or share of service profit to total profit. The market

organization provides most services directly to customers and

has technical competencies to provide first-level and second-

level service support for the installed base. Local service

employees are recruited to serve as reliable service providers

including repair, inspection, and maintenance services.

Market organizations even set up local warehouses for spare

parts delivery. The third-level support associated with the

high-level and in-depth technical skills remains in the central

organization and typically belongs to the R&D function.Considering the advantage and disadvantages of the

integrated and polycentric global service approach, one

interviewee explained: “Our global service approach offers a

quick and inexpensive way to respond to local needs for

servicing our installed machines. However, it also means

giving up the advantage of a centralized service organization”.

Nevertheless, if the installed base has been served traditionally

from the central headquarters, the companies have

exceptionally rational motives to locate service centers

within the market organizations. Without localizing services,

a company will come under enormous competitive pressure

from both customers and competitors. Competitive pressure

from customers means that customers influence company

efforts to enhance their service capabilities. However, the

success of manufacturing companies shows that an integrated

and polycentric global service approach can be highly

competitive and successful when manufacturing companies

still make attractive product margins and do not necessarily

place much emphasis on achieving high service revenue and

profits.

Separated and polycentric global service approach

The third global service approach includes a polycentric

orientation and is additionally characterized by a separation of

the product and service organization at the central

headquarters level (see Figure 4). Manufacturing companies

set up two independent business units with their own profit-

and-loss responsibility. The business unit for products has

control of the following product-related functions: product

marketing and sales, manufacturing, R&D, accounting/

finance, and human resources. The business unit for

services controls service development, spare parts logistics,

and service support functions.Single market organizations that are still responsible for the

product and service business remain in each individual

country, despite the separation at the central level. However,

cost transparency between product and service business

makes it possible to report profitability and product or service

revenue to the central business units. The service delivery is

organized similarly as the integrated and polycentric global

service approach. As one interviewee expressed it: “Our

market organization provides first-level and second-level

support. The distinct and separated central service

organization takes over the responsibility to provide third-

level support. This third-level support is a collaborative effort

between the central service organization and the R&D

function”.

Figure 3 Integrated and polycentric global service approach




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Furthermore, the interviewee continued, “The enhanced cost

and revenue transparency for products and services within the

market organizations limits the behavioral orientation to

include services in the product price. As a result, services are

mainly charged separately facilitating our service

profitability”. Only customer service is still integrated into

the product price so as to achieve a product price premium.

Basic services for the installed base and maintenance services

are charged separately (Reinartz and Ulaga, 2008).The other components of the behavioral orientation remain

similar to the integrated and polycentric global service

structure. This is characterized by high level of market-

organization independence, with relatively low-decision

making authority that remains in the central service

organization, and minimal communication between the

central business unit for services and local service centers,

and among the local service centers of various market

organizations. Furthermore, the development of service

technicians and managers concentrates on local people.The disadvantage of the separated and polycentric global

service structure lies in the lack of communication and

information flow. One executive described the shortcoming in

the following way: “In our present global service structures,

there are often cases where different market organizations

develop services simultaneously”. This entails considerable

costs, which have to be re-financed by the service

organization. The lack of communication and information

flow also limits the service standardization. The companies

experience difficulties in balancing the transferability of

services across market organizations and the customization

of services for one specific market organization.

The main advantages of the separated and polycentric

global service structure derive from its ability to put more

emphasis on the financial outcomes of an extended service

offering. Thus, the success of manufacturing companies

demonstrates that a separated and polycentric global service

approach can be highly competitive and successful, when both

the product revenues and margins of manufacturing

companies are under pressure and require compensation

through attractive service revenues and margins. However, the

success of this approach may be limited by low synergies and

efficiency.

Separated and geocentric service approach

Compared to the three service approaches discussed above,

the separated and geocentric global service structure is

becoming increasingly complex and inter-dependent. The aim

is to enhance the product and service business and control

service costs through a collaborative approach between both

central business units (products and services) and the market

organizations (see Figure 5).In order to enhance the collaborative approach,

manufacturing companies have installed regional functions.

Instead of having warehouses in each local market, regional

warehouses are established (e.g. North America, Europe, and

Asia). This reduces the working capital costs in the local

markets, but quick delivery times are still achieved by using

express deliveries. The higher logistics costs of express

deliveries do not play an important role for customers,

because of the expected high availability of spare parts in the

regional warehouses. These warehouses belong to service

hubs that support the market organizations directly (Gebauer

Figure 4 Separated and polycentric global service approach




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479

et al., 2011). For medium-sized companies with relatively

small market organizations and few requests for second-level

service support, the service hubs take over the provision of

second-level support. The service hubs are essentially

specialized service centers with advanced technical skills.

The bundling of specific service skills in the service hub

increases the level of capacity utilization.As one interviewee put it, the rationale behind setting up a

service hub can be described as follows: “Setting up service

hubs seem to make the complete separation between product

and service business work. We considered the hub as an

intermediate controlling level for services and parts operations

whereby the distinct service business unit assumes full end-to-

end responsibility for the service and spare parts logistics

supply chain, from the suppliers to the customers. This has

become essential, because our customers increasingly demand

enhanced service levels and because of increasing cost

pressure”. The increasing cost pressure is the result of

regulatory and governmental pressure for open market

competition, in which customer lock-in as a result of

proprietary after-sales models is increasingly being viewed as

monopolistic. Consequently, one interviewee expressed: “our

service and parts operations are focusing increasingly not only

on our own installed-base portfolio, but also on competitor

and supplementary products”.

Within this pattern of a separated and geocentric service

approach, companies have discovered that, by servicing

competitor or supplementary products they can build long-

term customer relationships, with the potential for converting

these customers to their own product portfolio in the future.

The service hub, with its integrated service and parts

operation, seems to be a necessary antecedent to attacking

the installed base of competitors.Nevertheless, our findings do not demonstrate convincingly

that companies following the third pattern of a “separated and

polycentric global service approach” should not operate

regional warehouses, since they are often more efficient than

local warehouses. Setting up regional warehouses seems to be

a potential way to improve cost efficiency, without necessarily

focusing on their services strategically.Furthermore, the market organizations seem to place more

emphasis on selling preventive services and service contracts.

Planned preventive service interventions and service contracts

reduce the variability and unpredictability of demand with

respect to service capacity, leading to higher average capacity

utilization. Because established service organizations typically

have fixed costs, capacity utilization becomes the main driver

of profitability (Oliva and Kallenberg, 2003). Through

bundling advanced service skills in the service hub and

putting more emphasis on preventive services and service

Figure 5 Separated and geocentric global service approach




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480

contracts, the separated and geocentric service approach

improves service profitability. The emphasis on preventiveservices and service contracts changes the core service

offering from basic services for the installed base tomaintenance services.The service hubs facilitate information flows between the

central and market organization and promote the exchange of

experiences between the different market organizations.Consequently, the volume of information and

communication between market organizations and centralservice organization is increasing.By intensifying the information flows and creating an

exchange of experiences, the service hub diffuses knowledgeon communication and behavioral skills across the global

service network. These communication and behavioral skillstrigger the sales of service contracts and preventive

maintenance. Based on the information flows, the servicehubs can make appropriate decisions on the degree of

standardization of the service offer in order to balancebetween the transferability of services across market

organizations and customization for individual clients.Managing directors of the different market organizations

and the heads of the business unit services are typically part ofthe hub management team. Within this service approach, it ispossible to recruit and develop the best employees anywhere

in the world for key positions across the global servicenetwork. The separated and geocentric service approach

enables manufacturing companies to be close to customersand facilitates a global service program. The separated and

geocentric organization overcomes the disadvantages of thepolycentric behavioral orientation, while retaining high

emphasis on the financial benefits of an extended servicebusiness. Additionally, it offers considerable synergy potential

and enhances service profitability through bundling second-level support in the service hub and focusing on maintenanceservices.The separated and geocentric service approach also

reinforces the separation of product and service business at

the level of the market organization. The separation takesplace in considerable large markets and leads to two different

local legal entities. The first is responsible for selling products,whereas the second is responsible for selling services. Such a

separation of the local organization would also have beenpossible in the separated and polycentric global service

approach, but participants argued that splitting the localorganization into two legal entities means two administrative,

controlling and financial functions. This entails considerablecosts, which have to be re-financed by the serviceorganization. The cost efficiency of the separated and

polycentric global service approach was not sufficientenough to finance these additional costs. By contrast, the

intermediate structure of a service hub facilitates cost andresource efficiency and enables companies to set up two

distinct legal entities in the markets.However, according to market size and maturity, one

interviewee argued that “it does not make always sense to setup two legal entities (services and products) and to offer both

first and second level service offerings through the localorganizations. Thus, there might also be combined forms

[“hybrids”], where, in specific markets our service andproduct business still belong to the same legal entity, or wherelocal organizations either offer only first-level services or first

and second-level services”.

Discussion

Theory replication and extension

This study explores the types of global organizationalapproaches to the service business in manufacturingcompanies. The four service approaches are considered toextend the existing theory in the following ways.The study contributes to the discussion of integrating

versus separating the service organization (Gebauer et al.,2005; Neu and Brown, 2005; Oliva and Kallenberg, 2003),because it offers a complementary explanation of integratingand separating the service business, through a differentiationinto central and local (market) organizations. The identifiedseparation of the service business supports Oliva andKallenberg’s (2003) argument that separating the servicebusiness is positively associated with an entry into the servicemarket for the installed base. The integration of product andservice businesses at the level of market organization is in linewith Neu and Brown’s (2005, 2008) argument in favor ofintegrating the various business unit responsibilities.The findings also extend Neu and Brown’s (2008)

propositions on:1 basing management’s financial incentives on criteria that

focus on the performance of an inter-dependent cluster oforganizational subunits;

2 designing policies to select, develop, and retain humanresources, so as to cope with market complexity; and

3 vertically decentralizing decision-making authority forstrategy formation.

The different behavioral orientations confirm the proposal todecentralize decision-making and transfer it to the globalservice structures.Interestingly, the optimal service structure for extending the

service business does not have a complete decentralizeddecision-making authority. A moderate decentralizeddecision-making authority, which is associated with regionalservice hubs responsible for spare logistics, second-levelsupport, and information flows, seems to be most appropriatefor increasing financial service-related performance outcomes,such as share of service revenue and service profitability.The behavioral orientation replicates policies for selecting,

developing, and retaining human resources. It distinguishesclearly between home country, local, and global approachesfor recruiting, staffing, and developing service executives andmanagers and links these different approaches to differenttypes of service offers and service performance. The meansthat the integrated and ethnocentric service structure ismanaged through centralized, and product-related financialperformance outcomes. The integrated and polycentricservice structure is managed by decentralized, product-related objectives, and so on broaden Neu and Brown’s(2008) argument in favor of managerial financial incentiveson criteria that focus on the performance of an inter-dependent cluster of organizational subunits. The four globalservice approaches offer a more comprehensive view of thelink between service offerings and organizational elements.Overall, service researchers now have empirical evidence onhow the global service structure is related to extending theservice business in manufacturing companies.Interestingly, the four global service approaches share few

similarities with Galbraith’s (2002) findings on designingorganizations for the delivering complex solutions. Thereremains little evidence on changing the organizational concept




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from product profit centers and product teams in the

direction of customer segments, customer teams andcustomer profit and loss responsibility. The absence of

strong evidences could result from the data sample itself.Customers of the participating companies were mainly local

and very few had entered into international deals. Thus, thereis no compelling need to move from product teams towards

customer segments, teams and profit and loss responsibility.Future research should therefore apply the present findings to

companies confronted with international customers and theirvarious needs and preferences.

Managerial implications

The findings provide a complementary perspective to themany ideas advocated by managers in the field. The key

managerial implications and recommendations are as follows.The description of the four global service structures offers

guidance for managers seeking to design and adapt theirorganization to the requirements of an extended service

business. The four service approaches yield detaileddescriptions of service offerings, behavioral orientations, and

organizational structures. The descriptions make it relativelyeasy to develop an action list for improving the global service

organization. Most conspicuously, the developed action listsuggests that a global service approach is a complex

managerial task. Managers contemplating a change projectin the global service approach have to consider not only the

organizational structure, but also the service offerings andbehavioral orientation.As demonstrated in Figure 6, managers can enhance the

financial contribution of the service business in terms of shareof service revenue to total revenue through the separation of

product and service business at the central level. Changingthe behavioral orientation from a polycentric to a geocentric

orientation additionally enhances service profitability.

Limitations and future research

As with any research, this study has its limitations. Theinvestigation is based on 16 case studies, but the external

validity (generalizability) of the four global service approaches

could not be assessed accurately. However, in the context of

qualitative research, the number of cases is not relevant as long

as the patterns observed in the data are not incidental. In order

to generalize the four specific patterns, they need to be tested inother areas and would benefit from insights obtained from

quantitative data. This is beyond the scope of the present

research. In addition, the study is limited by the fact that it

concentrates on the behavioral orientation, organizational

structure, and service offerings. There may well be otherfactors such as processes and service strategy, which could yield

additional insights into the global service approach. An

interesting topic for future research would be the

combination of different service strategies (Mathieu, 2001;

Davies, 2004; Gebauer, 2008) and global service approaches.

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Corresponding author

Heiko Gebauer can be contacted at: [email protected]




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