Separate or Integrate? Assessing the Impact of Separation between Product and Service Business on Service Performance in Product Manufacturing Firms

Abstract

Purpose: Investigating how the separation of the product and service business mediates the effect of management’s commitment to the service strategy on service performance in product manufacturing firms. Methodology: We surveyed 216 European manufacturers in the high-value durable equipment industry moving into the service business. After assessing adequacy of measurement scales, we test statistically for mediation. Our results hold when replicating the study using a structural equation modeling approach and while testing for common method biases. Findings: We find evidence that the creation of a separate service organization, organized as a profit center, has a significant positive mediating effect between managerial commitment and the services’ financial performance. While separation also has a positive mediating effect between commitment and non-financial performance, organizing services as a profit center had a negative effect on the service’s non-financial indicators. Research limitations: a) Sample limited to German-speaking firms in the high-value durable equipment industry, b) measurements based on self-reported managerial perceptions of service performance, and c) conceptualization of service as a single strategic response. Practical implications: While the complementarity between products and services is high in the market, our research suggests few synergies to leverage their integration inside the organization. Accordingly, management should, at least in transition efforts similar to the ones included in our sample, look into creating a separate and distinct service organization. Value/Contribution: Research driven by practical concern on how to organize service operations in a manufacturing firm. Initial framing of the research through the creation of the construct of separation of product and service business.