Strategy and structure configurations for services within product-centric

businesses

Dr. Chris Raddats and Dr. Jamie Burton

Dr. Chris Raddats

Lecturer in Marketing,

University of Liverpool Management School,

Liverpool.

L69 7ZH.

United Kingdom.

E-mail: C.Raddats@liv.ac.uk

Telephone: +44 151 795 3706

Dr. Jamie Burton

Lecturer in Marketing,

Manchester Business School,

University of Manchester,

Manchester.

M15 6PB.

United Kingdom.

E-mail: Jamie.Burton@mbs.ac.uk

Telephone: +44 161 275 6508

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Autobiographical note

Dr. Chris Raddats

Lecturer in Marketing, University of Liverpool Management School, Liverpool. L69 7ZH. United

Kingdom.

E-mail: c.raddats@liv.ac.uk

Telephone: +44 151 795 3706

Dr. Chris Raddats is a Lecturer in Marketing at the University of Liverpool Management School

(ULMS), having recently joined from the University of Central Lancashire. Chris has worked in

academia since 2005, before which he had a 20-year career as a marketing practitioner with positions

in four major telecommunications companies, latterly Marconi plc (now part of LM Ericsson). At

Marconi, Chris held senior marketing positions in the company’s services business. Chris completed

a PhD at Manchester Business School in 2009 concerned with how traditionally product-centric

businesses can build a services capability to enhance market differentiation and competitive

advantage, with this research representing one of the largest studies of its kind to date. He has

published in this field with articles accepted for Industrial Marketing Management and the Journal of

Business and Industrial Marketing as well as disseminating the research findings at leading

conferences such as IMP, SERVSIG and QUIS.

Dr. Jamie Burton

Lecturer in Marketing, Manchester Business School, University of Manchester, Manchester. M15

6PB. United Kingdom.

E-mail: Jamie.burton@mbs.ac.uk

Telephone: +44 161 275 6508

Dr. Jamie Burton is a lecturer in Marketing and co-director of the MSc. Corporate Communications

and Reputation Management and MSc. Marketing at Manchester Business School. He is director of

research for the Customer Management Leadership Group, an MBS networking group of senior

executives who share a passion for achieving consistent and sustainable value for their organizations

by aligning the needs of customers, stakeholders, partners, employees and suppliers. Jamie’s

research interests include service marketing, relationship marketing, CRM and customer profitability.

Jamie has published in a number of journals including the Journal of Marketing Management and is

co-author of Murphy, J., Burton, J., Gleaves, R & Kitshoff, J (2006), Converting Customer Value: from

Retention to Profit , Chichester: John Wiley and Sons Ltd. He has previously worked in a wide variety

of service roles, including retail management for HMV and the hospitality industry.

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Strategy and structure configurations for services within product-centric businesses

1. Introduction

Services are becoming a key driver of market differentiation and revenue for historically product-

centric businesses or PCBs (Brechbühl, 2004). Many researchers highlight the importance of services

to PCBs, (Grönroos, 2000; Kotler 1999; Michel et al., 2003; Porter, 1998). Neu and Brown (2008)

provide three reasons why PCBs enter the services markets. Firstly, companies see more attractive

market opportunities from services than tangible products, if the latter are approaching commodity

status. Secondly, customers are focusing on core activities, with non-core activities being outsourced

in the form of services that can potentially be provided by their product suppliers. Thirdly, many PCBs

have developed highly valued services which contribute the most customer value within their

portfolios of resources and capabilities. However, this increasing focus on services (or ‘servitization’,

Vandermerwe and Rada, 1998) has created new challenges for PCBs, including how to refine

organizational structure for services (Brechbühl, 2004). Neu and Brown (2005) advocate corporate

structures which manage products with related services to maximise synergies, whilst Gebauer et al.

(2006) advocate independent services organizations in order to facilitate services-led growth. The

ambiguity in the literature on PCB organizational design suggests that this is an area requiring further

investigation.

This study contributes to discussions on PCB organization design by considering PCBs from a wide

range of sectors, compared to previous studies which have been more narrowly focused, e.g. the IT

sector (Neu and Brown, 2008). This approach is valuable because although products differ across

sectors, supplementary services can be very similar (Lovelock, 1994). This research does not

therefore just include PCBs supplying Complex Products and Systems (CoPS) (Acha et al., 2004);

defined as products with high unit costs, low volumes and a high degree of customisation of the

components. It also includes other products such as chemicals and metals (see Appendix 1), in order

to help assess whether product characteristics have an impact on structure decisions. The term

strategic business unit (SBU) is used in this study and means sub-PCB organizational unit that has

profit and loss (P&L) responsibility for an area of business and is responsible for sales. The research

aims of the study were to determine which strategy/structure configurations are appropriate for PCBs

undergoing servitization and to explore how these configurations might evolve in light of changes to

services strategies.

The results suggest that when services are designed to enhance the differentiation of a PCB’s own

products then combined product and services SBUs are most important. For PCBs seeking services–

led growth setting up an independent services SBU is often appropriate, either with full P&L

responsibility or as a virtual business. However, when services become the pre-eminent component

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of a PCB’s business, (i.e. future product sales growth is limited) then customer-focused SBUs

addressing customer or market segments are suitable.

In the remainder of the paper, relevant concepts concerning PCB strategy and structure are identified

from the extant literature and a theoretical framework created; the research’s methodology is set out,

which is followed by the results from this study and discussion in light of previous research.

Managerial implications, research limitations and possible future research are reviewed.

2. Theoretical framework

The need for organizational structures to be linked to corporate strategies has been extensively

covered in the literature. Chandler (1962) notably believes that organizational structure follows

strategy, whilst Porter (1998) emphasises that a company’s generic strategy generally translates into

different organizational structures. These views are echoed by Galbraith (2002) who identifies a link

between a firm’s strategy and organizational model, whilst Gebauer et al. (2010b) conclude that PCBs

need specific strategy-structure configurations to succeed with each services strategy. Companies

therefore need to create internal alignment among their organizational factors, such as strategy and

structure, so that they ‘fit’ the conditions in the external environment (Neu and Brown, 2008).

2.1. Services strategies

Manufacturers are often confused about their strategic aims for services, i.e. sales growth or

supporting product sales (Young, 2008). When services that support a company’s products are used

to provide a springboard into more competitive services markets, these services will often lose margin

and erode company profits (Young, 2008). To help classify a PCB’s services strategies Mathieu

(2001) developed a typology based on a company’s organizational intensity and service specificity.

Organizational intensity refers to the strength and scope of the impact of services on firms, in terms of

their tactical, strategic or cultural commitment to services. A tactical commitment to services leads to

service-related actions within the product marketing mix which have a limited impact on the company

overall, which generally involve PCBs using services to create differentiation of their own products

(Kotler and Keller, 2006). A strategic commitment to services adds a key competency to a firm’s

portfolio, without changing its mission, e.g. companies are developing services that are less

dependent on their own products and more focused on customers’ business processes (Davies,

2004; Gebauer, 2008; Wind, 2006). A cultural commitment to services suggests that services are

being used to reshape the mission of the firm, redefining it as a services rather than product

organization, which may result in services being provided on other companies’ products (Davies et al.,

2006; Foote et al., 2001). Service specificity categorizes three types of service offerings: customer

service (the interaction quality between supplier and customer), product services (services that

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support a supplier’s products) and service as a product (services independent from a supplier’s

products).

Two recent services strategy typologies for PCBs have been developed by Gebauer (2008) and

Raddats and Easingwood (2010). Gebauer (2008) characterizes four service provider types: After-

sales service providers (ASPs), Customer support providers (CSPs), Outsourcing partners (OPs) and

Development partners (DPs). Raddats and Easingwood (2010) specify four services strategies:

services engagement, services extension, services penetration and services transformation (Figure

1). Raddats and Easingwood’s (2010) strategies are determined by whether services are

predominantly focused on products or activities in the customer’s operational environment and

whether they only address own brand products or also include those of other original equipment

manufacturers (OEMs).

Take in Figure 1

A services engagement strategy is when a PCB provides services closely linked to its own products,

helping to create differentiation and potentially a services revenue stream (Raddats and Easingwood,

2010). This strategy comprises a customer service strategy (or CSS [Gebauer et al., 2010c]) and the

activities of an ASP, which provides basic unbundled standardized and predefined services for the

installed base (Gebauer, 2008). A services extension strategy is when the services provided under

services engagement are also applied to other OEMs’ products (Raddats and Easingwood, 2010). A

services penetration strategy is when services are provided on own brand equipment that help

customers with an operational activity which they might have previously performed in-house (Raddats

and Easingwood (2010) which is similar to CSPs providing maintenance services aimed at preventing

product breakdowns (Gebauer, 2008). A services transformation strategy is when PCBs deliver

output-based services in a multi-vendor equipment environment (Raddats and Easingwood, 2010),

analogous to OPs, which take over responsibility for the customer’s operational processes (Gebauer,

2008). The two typologies are not completely overlapping, with services transformation also including

the provision of technical consultancy and systems integration (Raddats and Easingwood, 2010)

whilst DPs provide research and development (R&D)-orientated services (Gebauer, 2008). Raddats

and Easingwood (2010) hypothesise how PCBs transition between different strategies (A, B, C on

Figure 1) whilst Gebauer et al. (2010c) propose four strategy changes: from CSS to ASP, ASP to

CSP, CSP to DP and CSP to OP, with their assertion that manufacturers’ service strategies are

unstable, meaning that any given transition may not be the last.

2.2. Structure

August et al. (2006) set out two main approaches for PCBs organizing services within their corporate

structures: SBUs where products and services are combined and SBUs where services are

independently managed. The choice between the two approaches depends upon a company’s

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strategy and where differentiation comes from, i.e. having a combined SBU is best to protect the

existing product businesses, whilst an independent services SBU is best when services are a growth

platform for the company (August et al., 2006). Gebauer and Kowalkowski (2011) highlight a third

approach, customer-focused SBUs, which bring together products and services into sector- or

customer-specific solutions. In this situation, product and services sales are the responsibility of the

customer-focused SBUs.

2.2.1. Combined product and services SBUs

Integrating services into product SBUs means that both product and services sales are controlled by

the same organization, with its own P&L (Gebauer et al., 2010a). Within this approach Gebauer et al.

(2009) propose three categories; product SBUs, product-service SBUs and service-product SBUs,

with services playing an increasingly important role within each category, e.g. within a product SBU

technical support is attached to manufacturing, within a product-service SBU it is a dedicated function

whilst in a service-product SBU services are run as a profit centre within the SBU. Gebauer et al.

(2009) propose a fourth category based on separate service and product SBUs and find that out of

the four categories product-service and service-product SBUs are most prevalent, although this is

probably because most companies in their research were at the early stages of servitization.

Combined product/services SBUs are appropriate when services are used to gain product market

share (Michel et al., 2003) with companies providing services based on their traditional product

businesses more likely to have combined organisations (Brechbühl, 2004). Equally, Gebauer et al.

(2010c) find combined organizations suitable for DPs. Where services are designed to increase

product differentiation then they are inseparable from the product package and must therefore be in a

combined unit (Cova et al., 2000). However, the less related a company’s services are to its

traditional product businesses, the more likely it is that a separate organisation should offer the

services (Brechbühl, 2004; Michel et al., 2003).

In a highly complex market (e.g. the IT sector) success requires a firm to adapt its strategy and

organization to fit the market environment, and this is often best achieved by keeping services in

combined units with products and software (Neu and Brown, 2005). Whilst this finding might at first

appear surprising given the number of commentators advocating independent services SBUs (e.g.

Oliva and Kallenberg, 2003), it is possible that in some industries PCBs have moved beyond a

separation of product and services units and that a different type of combined organization is

necessary, i.e. customer-focused SBUs (Gebauer and Kowalkowski, 2011).

2.2.2. Independent services SBUs

Independent services SBUs are often an effective way to enable the transition to a more services-

focused business, e.g. Gebauer et al. (2010c) find that three out of four manufacturing service

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providers (ASPs, CSPs and OPs) require distinctive product and service organizations. Services

might command a lack of managerial support in combined organizations which could lead to failure

(Brax, 2005), with the greatest potential conflict when products and services are in combined

organizations and therefore separate services SBUs a way to improve the success of a service

transition strategy (Fang et al., 2008). Companies seeking to exploit service opportunities in their

installed base quickly isolate their service operations and personnel from the product side of the

business (Oliva and Kallenberg, 2003), although it is unclear whether this is to increase managerial

focus on their services organization or to help enable a services culture. Whilst having a separate

services organization leads to increasing service orientation in corporate culture, this separation does

not directly strengthen the impact of service culture on business performance (Gebauer et al., 2010a).

Despite calls to separate services from product-based activities (Young, 2008), some companies

have been reluctant to do this, perhaps because of senior managers’ disbelief in the propensity of

services to significantly contribute to company sales and provide attractive margins (Gebauer, 2009).

Such managers appear risk averse with respect to services and prefer to focus on the obvious

tangible features of their products at the expense of intangible services (Gebauer, 2009). Gebauer et

al. (2005) coin the expression the ‘service paradox in manufacturing companies’, to explain why

despite increasing investment in the services business, growth and returns often do not match senior

managers’ expectations, with the possibility that the competencies required to bring about a

successful transition are beyond the capabilities of the company (Oliva and Kallenberg, 2003).

Equally, treating services as an independent growth business requires a separate organization which

will lead to higher costs and risks (Mathieu, 2001).

2.2.3 Customer-focused SBUs

Homburg et al. (2000) set out a shift from a product-centric company selling a limited number of

products to many different customers, to one selling a broader set of products (including services) to a

narrower set of customers, with this transition requiring the setting up of customer-focused SBUs,

based on groups of customers related by industry or some other non-geographic similarity. This

organizational category differs from the previous two in that the basis of the organizational structure is

specifically created to align with a feature of the market (customer or sector) rather than offerings from

the company (products or services). Product-centric companies, which try to find many customers for

their products can thus be contrasted with customer-centric companies, which supply and integrate

many products for fewer customers (Galbraith, 2002). Customer-focused SBUs have primary P&L

responsibility, with product-based SBUs seen as suppliers to them (Homburg et al., 2000). In this

model, ‘service’ is a responsibility of the customer-focused SBUs, although alternatively PCBs might

have independent services SBUs even if they do not have P&L responsibility (Homburg et al., 2000).

Within this organizational arrangement the PCB’s corporate centre has a role in coordinating services

and product SBUs and providing oversight and leadership, with customer-facing units bringing

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products and services together (Davies et al., 2006; Homburg et al., 2000). Increasing customer

orientation in organizational structures can be achieved in one of two ways; setting up customer

teams in the sales organizations of product SBUs or the establishment of customer-focused SBUs

(Gebauer and Kowalkowski, 2011). Gebauer and Kowalkowski (2011) stress that a move towards a

more customer-focused organization requires more emphasis on service orientation within the

corporate structure, with the likelihood that to be able to offer solutions based on customer/supplier

relational processes (Tuli et al., 2007) requires customer-focused SBUs to bring together appropriate

products and services.

Given the strong link between strategy and structure (Chandler, 1962; Galbraith, 2002; Neu and

Brown, 2008; Porter, 1998) it is important to determine which organizational structures are

appropriate for different strategies. Gebauer et al. (2010c) identify the organisational structures

suitable for the service provider types outlined by Gebauer (2008) but this has not been attempted for

the Raddats and Easingwood (2010) typology. Auguste et al. (2006) suggest that combined product

and services SBUs are appropriate for when services are intended to help differentiate a PCB’s

products and independent services SBUs suitable for when a PCB is seeking services-led growth.

However, independent services SBUs, which control their own P&L, can be problematic when PCBs

are providing product and services solutions. The introduction of customer-focused SBUs (Gebauer

and Kowalkowski, 2011; Homburg et al., 2000) appears a valuable approach in this regard. Thus, the

first research question was:

RQ1. What strategy/structure configurations are appropriate for PCBs undergoing servitization?

Given that PCB services strategies appear unstable (Gebauer et al., 2010c) it is valuable to consider

how organizational structures might change in light of evolving services strategies (Raddats and

Easingwood, 2010). Thus, the second research question was:

RQ2. How do PCB organizational structures evolve in light of changing services strategies?

3. Methodology

A comparative research design was employed to answer the questions using semi-structured

interviews (Bryman, 2008). This design was chosen because of the exploratory nature of the study,

seeking inter-relationships between services strategies and organizational structures. Companies

were selected to take part in the research through a non-probability stratified purposive sampling

approach (Kemper et al., 2003) across eleven sectors, with this research focused on their activities in

the United Kingdom (UK). Companies were large (all had a global turnover of over £1 Billion per

annum) and were involved in ‘manufacturing’ as defined by the UK’s Standard Industrial Classification

(SIC) of Economic Activities. Suitable companies were identified as those that emphasised their

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service offerings, with this attribute assessed through analysis of company websites. A senior

manager, within the company’s services organization, was identified and contacted initially by post or

e-mail, with a telephone follow-up if necessary. In total, 22 companies and in three cases, two

separate divisions of companies took part in the research. This gave a sample of 25 organizations,

with the initial interviewees often providing intra-company recommendations for a second interviewee,

enabling 40 managers to be interviewed in total (20 from sales/marketing, 20 from operations).

Anonymized details of the companies and number of interviewees by sector are shown in Appendix 1.

All companies approached agreed to take part in the research, although not always the first person

contacted in each company. Interviews took place over a 6-month period, predominantly in a face-to-

face environment (31/40), with each interview lasting about an hour.

The preliminary questions for the interviews were set out in an interview guide (King, 2004) and were

based on relevant ideas from the literature. For example, it was important to determine the role of

services within each company (e.g. defend or grow – Auguste et al., 2006) and more specifically

which services strategy was being adopted. The focal questions centred on organizational structures

for services and how these supported the strategy, together with the advantages/disadvantages of the

chosen structure. When the organization of services within the corporate structure had changed the

reasons were explored. The interview guide was pilot tested on two managers who did not form part

of the final study, with some minor changes made to questions in light of these interviews. Issues

related to reliability and bias are important for qualitative interviews (Bryman, 2008), with interviewer

bias reduced by limiting interventions during the conversations and interviewee bias alleviated

through stressing that data would remain anonymous so that conversations could include potentially

confidential information. Equally, interviews were recorded and a transcript returned to each

interviewee for validation, with about half making minor changes to their transcript. This approach to

data collection also provided strong support for the internal validity of the study through the

researcher being able to access interviewees’ knowledge and experience (Bryman, 2007), with it

possible to test casual relationships during the interviews (Saunders et al., 2007).

Interpretation of the data was facilitated through using NVivo 7 (QSR International) by analysing

interview transcripts and thematically coding the data based on the main themes and subthemes

(Bryman, 2008), which were modified, if appropriate, after analysing each transcript (Miles and

Huberman, 1994). Michel et al. (2003) emphasise the importance of thematic analysis (i.e. theme by

theme and frequency) for B2B marketing environments. The final thematic coding structure was

reached after an analysis of further transcripts brought forward neither new codes nor relationships,

i.e. theoretical saturation was reached (Bryman, 2008). The coding structure was based around PCB

services strategies and organizational structures, as outlined below.

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4. Results

PCBs were observed to utilize three main organizational structures to exploit the services opportunity:

combined product and services SBUs for when services are used to differentiate products;

independent services SBUs when the intention is to grow services revenue; and customer-focused

SBUs addressing distinct market sectors or customer groups. In each case the SBU had P&L

accountability and responsibility for sales. Results are presented within the strategic framework

proposed by Raddats and Easingwood (2010) and are shown in figure 2.

Take in Figure 2

4.1 Services engagement and extension

4.1.1 Combined product and services SBUs

Results from this research supported the notion that combined product and services SBUs are

common for companies for whom product differentiation is low. This was apparent in company 4

which supplies quarry products and engineering support to its customers. Equally, the interviewee

from company 5 noted:

“It is the Market Managers [customer-facing role] that come up with the service[s] offers

that complement the products, as there is very little to differentiate one gas supplier from

another in terms of products” (Marketing Manager, chemical sector).

This finding was also evidenced in company 6 for which ‘Technical Services’, linked to the company’s

products (e.g. helping a customer’s production manager to test new products) are integrated with

product businesses. Company 14 also provides consultancy services, with the resources for these

services residing within each product SBU and the expertise predominately provided to internal

customers.

4.1.2 Independent services SBUs

For companies 12 and 13, services are centred on their own products. Both companies originally had

combined product and services SBUs, but set up independent services SBUs focused on providing

after-sales support to end customers and the dealers that sell their machines. Within these SBUs are

specialist areas such as financial services, as well as maintenance and repairs. Some companies that

have extended their product-attached services to include products from other OEMs, have an

independent services organization (see Figure 3).

Take in Figure 3

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Examples from this research show that company 10 transitioned from having combined product and

services SBUs to an independent services SBU as services started to represent a significant

proportion of corporate turnover, whilst company 16 maintained the independence of its services as

its strategy changed to address products from other vendors.

4.2 Services penetration

4.2.1 Combined product and services SBUs

A services penetration strategy leads to differing organizational structures with the dilemma for some

companies that although services generally represent a significant business line, they are closely

linked to their own products and therefore an independent services SBU might prove divisive (see

Figure 4).

Take in Figure 4

Company 11 maintained an independent services SBU as its services strategy changed. However,

this organization was seen as too self-serving and was therefore broken up and fragmented in

combined product and services SBUs. The General Manager from division 11a noted that the

‘pendulum’ was then deemed to have swung too far the other way, with services too focused on

products and being ‘given away’, so a virtual business was created whereby the resources still reside

within the product SBUs but report into a virtual services SBU that coordinates policy, reports financial

results and enables the sharing of best practice. The interviewee from division 11a noted that this

approach still results in resources being over-focused on products and that in future services might

become a ‘real’ SBU with its own P&L. However, the interviewee from division 11b noted the

problems of an independent services SBU:

“The impact of an under-performing train would have been immediately obvious if it had

been kept within the same organization, whereas it became quite a divisive element

since the services people took contracts on and would blame the manufacturers who in

turn would say the train was not being maintained properly”, (Strategy and Business

Development Manager, transport sector).

This is also the case for company 9, which too went through a degree of structural flux. The

independent services SBU of division 9b used to be stand-alone with its own P&L, but it has now

been brought back into respective product SBUs, with the rationale being that without selling products

first there is nothing to maintain, with separated units causing unnecessary conflict within the

organisation with respect to pricing for example. The Business Leader from division 9b noted that

these difficulties meant that the products and services were re-combined within the company.

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For company 3 the transition to services penetration maintained the combined product/services

SBUs, although a virtual independent services SBU has been created, with the company maintaining

combined product and services SBUs but reporting financial results for services separately. A

Business Development Manager in company 3 stressed how product-centric his company was and

that this arrangement, whereby a Board member has responsibility for services growth and

development but no P&L responsibility, was the furthest the company would likely go, in terms of

developing an independent services SBU. However, the instability of this structure means that there

might still be a degree of flux in how services are organized within the company.

4.2.2 Independent services SBUs

Other companies, including two from the energy sector, have embraced the concept of an

independent services SBU more fully. The Sales and Marketing Director in company 8a justified this

approach by noting that when the equipment side of the business gets very busy the services side

can get forgotten, and from a customer’s perspective a consistent level of delivery is required

throughout the lifecycle of the plants, so having a separate reporting function for services is valuable

(with this structure also apparent in company 8b). The Director from company 7 also emphasised the

need for service operations to be local to customers to truly understand their requirements. An

independent services SBU was the (currently) settled structure for some companies in the

telecommunications sector (19 and 21), although both had previously operated combined

product/services SBUs.

4.3 Services transformation

4.3.1 Independent services SBU

Companies that have undergone a services transformation have moved the focus of their services

away from their own products, with it unlikely that a combined product and services SBU will be an

appropriate organisational model, because of their likely focus on own brand products. The decision is

therefore between an independent services SBU and customer-focused SBU (see Figure 5).

Take in Figure 5

Within the information and communication technology (ICT) sectors, companies 17, 18 and 20 have

radically changed their services strategies away from a focus on own brand products (with combined

product/services SBUs) and have established independent services SBUs to facilitate the change,

which are split into sub-units by the type of services offered, e.g. consulting, integration and

outsourcing (company 18).

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4.3.2 Customer-focused SBUs

Two former PCBs from the ICT sector have adopted an organizational structure more aligned to their

market or customer segments (companies 15 and 22), as product-led sales growth has become less

likely and separate product and services SBUs less appropriate. When services are dominant within a

company, the customer’s business is the focal point, with the Managing Director of company 15

stating that his business is organized this way, managing P&Ls at the market- rather than the product-

or services-level. A problem with this approach is the lack of management of individual services which

means that they are sometimes hard to define with an attendant risk of insufficient or excessive

resource allocation. However, the over-riding view of the interviewee from this company was:

“A service[s] company should organize around the customer because in a services world

the customer is the central focus. In a product world the dynamics are very different”

(Managing Director, IT sector).

Company 22 is also organized around customer groups (with each SBU having its own P&L)

providing multi-vendor products and services to each group, e.g. telecommunications service

providers and large enterprise customers running carrier-size networks. Companies 1 and 2 have re-

aligned their businesses around market sectors because they have not been able to drive sufficient

sales growth from their products. Company 1 has transitioned from having an independent services

SBU to customer-focused SBUs reflecting different customer groups, as its strategy has switched to

encompass services linked to aircraft from other vendors. A Programme Manager from this company

warned of potential intra-organizational conflict arising from cultural differences between the product

and services businesses within the company. For example, the product side of the company views the

services side as somewhat of a ‘maverick’, doing what it needs to grow services revenue even if this

puts pressure on the product side of the business in terms of the service contracts it signs

(Programme Manager, Company 1). Company 2 has transitioned from a manufacturer of military

vehicles to a broad-based services company addressing different market segments, including military

and non-military sectors. As such it is logical to have SBUs aligned to the needs of individual

customer groups. To complete the transition to a services business, in 2010 the company was

acquired by an engineering support services company.

5. Discussion

5.1 Theoretical contribution

The findings from this research show a complex picture of how PCBs are dealing with the critical

challenge of organizing their corporate structures to address the services opportunity. The results

show three main organizational models; combined product and services SBUs, independent services

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SBUs (Auguste et al., 2006) and customer-focused SBUs (Gebauer and Kowalkowski, 2011). This

study contributes to previous research in three ways. Firstly, it provides support to the idea that

structure is predominantly determined by strategy (Chandler, 1962; Galbraith, 2002; Neu and Brown,

2008; Porter, 1998), although there is also evidence that structure is influenced by a PCB’s products;

i.e. PCBs with commodity products favour combined product and services SBUs, whilst those with

products which do not generate sufficient sales growth favour customer-focused SBUs. Secondly, in

addressing RQ1 (‘What strategy/structure configurations are appropriate for PCBs undergoing

servitization?’), this research brings together these three organizational structures and combines them

with the services strategies proposed by Raddats and Easingwood (2010) to provide a new

framework through which PCB strategy/structure configurations can be investigated. Thirdly, an

assessment of how structures might change when PCBs undergo services-led growth is now possible

based on Raddats and Easingwood’s (2010) growth options, addressing RQ2 (‘How do PCB

organizational structures evolve in light of charging services strategies?’).

With respect to RQ1, the new framework of strategy/structure configurations provides a valuable tool

to assess the contribution of this study (see Figure 2). A services engagement strategy (Raddats and

Easingwood, 2010) is analogous to Mathieu’s (2001) customer service and product services

categories (with a tactical or strategic organizational intensity), where services are in combined SBUs

with products (e.g. companies 4 and 5) with the aim of creating own product differentiation (supporting

Cova et al., 2000). For some PCBs following a services engagement strategy, services are in an

independent SBU (e.g. companies 11 and 12), with the aim of generating sales growth (aligned to

Auguste et al., 2006). A services extension strategy (Raddats and Easingwood, 2010) is analogous to

Mathieu’s (2001) service as a product category (with a tactical or strategic organizational intensity),

with an independent services SBU usually required (e.g. companies 10 and 16), since isolation of the

services activity is desirable (supporting Oliva and Kallenberg, 2003). In terms of answering Oliva and

Kallenberg’s (2003) question as to why companies do this (management focus or services culture),

this research showed support for the significance of management focus on services growth.

A services penetration strategy (Raddats and Easingwood, 2010) is similar to Mathieu’s (2001)

customer service and product services categories (with a cultural organizational intensity) and leads

to PCBs with combined product and services SBUs or independent services SBUs. There appears no

settled structure between these positions, with some companies exhibiting a degree of flux between

the two structures, supporting Gebauer et al.’s (2010c) view that structures are unstable, e.g.

companies 9 and 11. This is caused by changing managerial perceptions of the relative merits of

combined product and services SBUs and independent services SBUs. For PCBs that maintain

combined product and services SBUs, the disadvantages of an independent services SBUs were

notable, i.e. the possibility that an independent unit could be too self-serving (company 11) and the

potential for intra-organisational conflict (company 9) as a consequence. Gebauer et al. (2010c) see

the need for increasing organizational separation between products and services in moving from an

ASP to a CSP, although this research suggests that some PCBs are reluctant to make the transition

13

to a fully independent services SBU. Instead, for companies 3, 9 and 11, although P&L responsibility

still resides within a combined product and services SBU, services are run as a virtual business, with

the aim to provide a focus on services growth but avoid intra-organisational conflict. This finding

appears contradictory to that from Fang et al. (2008), for whom an independent services SBU was

seen as the solution to intra-organisational conflict. It might be that companies operating virtual

services SBUs are conforming to Gebauer’s (2009) assertion that managers do not believe that

services can make a sustained contribution to sales and profits; however evidence from this research

suggests that it may be a pragmatic decision based on an understanding that without their own

products PCBs undergoing a services penetration strategy could have few services to sell. A virtual

services business is not however a panacea with de-facto combined units potentially leading to a lack

of focus on services growth (Division 11a).

A services transformation strategy (Raddats and Easingwood, 2010) is similar to Mathieu’s (2001)

service as a product category (with a cultural organizational intensity). Following this strategy, it is

suggested that PCBs can either have an independent services SBU or a customer-focused SBU.

Some companies following this strategy had established services SBUs which were driving sales

growth (e.g. companies 17 and 20) alongside product SBUs. However, as products cease to provide

sufficient growth (e.g. companies 1 and 2) then an organizational structure based on customer-

focused SBUs becomes the principal approach, with products and services combined into customer-

focused solutions (in line with Homburg et al., 2000). This finding is perhaps an explanation as to why

Neu and Brown (2005) find combined units most important for companies in the IT sector, as these

companies have sometimes moved to customer-focused SBUs to provide customer solutions (e.g.

company 15). The ability to address customers’ operational requirements with a suite of products and

services, which might include those from third parties, is thus a strong advantage of this structure. On

the downside, if services are run as a central resource to maximise efficiency (rather than as a profit

centre) then they may not be effectively managed (noted by the Managing Director in company 15),

which might result in undefined service offerings and missed opportunities through lack of services

innovation.

With regards to RQ2, Raddats and Easingwood (2010) propose three services growth options (A, B,

C). Gebauer et al. (2010c) highlight an additional services strategy change (from CSS to ASP) which

is similar to a change from customer service to product services (Mathieu, 2001). Gebauer et al.

(2010c) find this transition leads to increasing organizational separation between products and

services, which was supported by findings in this research (companies 12 and 13). Therefore an

independent services SBU is beneficial for some companies providing services linked to the installed

base of their own products (supporting Oliva and Kallenberg’s [2003] call for the early isolation of

services). When a PCB’s services are also provided on other OEMs’ products (Services growth option

A – Raddats and Easingwood, 2010), then isolation becomes vital (companies 10 and 16). Services

growth option B (Raddats and Easingwood, 2010) is similar to the transitions from ASP to CSP and

CSP to DP (Gebauer et al., 2010c), with increased organizational distinctiveness between products

14

and services for the former transition but not for the latter. It is possible that the CSP/DP divide is

more ambiguous than implied by Gebauer et al. (2010c), i.e. CSPs provide customers with process-

orientated services whilst DPs support customers to provide these services themselves (Gebauer,

2008), with flux in PCB organizational structures a possible consequence of this ambiguity. This

research suggests that growth option B might not initially lead to a change in organizational structure,

although if the SBU does not deliver the expected benefits of the changing strategy then the structure

might change. Thus a combined product/services SBU would change to an independent services

SBU, although as previously noted (Gebauer et al., 2005) the new structure might also lead to

disappointment, hence a change back to the original (or a modified version of the original) structure

(e.g. company 11a). To successfully undertake services growth option C (Raddats and Easingwood,

2010) the PCB must firstly set up a real (rather than virtual) independent services SBU, supporting

Gebauer et al. (2010c) who see increasing organizational distinctiveness between a CSP and an OP.

Combined product and services SBUs are unlikely to be able to manage the creation and delivery of

solutions offerings (Tuli et al., 2007) because of their focus on own brand products (e.g. company 17

demonstrates the importance of having an independent services SBU to offer vendor-agnostic

services). The organizational transition from independent services SBUs to customer-focused SBUs

(e.g. company 2) is in line with Homburg et al. (2000), although this change might not be appropriate

for companies with products which continue to provide market differentiation and growth.

5.2 Managerial implications

Organizational structure is a key decision managers in PCBs must make in order to maximise the

effectiveness of services. This research suggests that the appropriate structure depends largely upon

a company’s strategy. If the strategy is to help create product differentiation then combined product

and services SBUs are appropriate, with this a common situation for companies selling commodity

products. If services-led growth is sought then independent services SBUs with their own P&L are

often most appropriate in order to focus management attention. However, for companies for whom

services growth is linked to the operation of their own products, a virtual services organization may be

appropriate, since an independent services SBU can be too self-serving and not work in the best

interests of a company’s product businesses. In this virtual organization P&L responsibility still resides

within combined product and services SBUs but a degree of management focus is provided on

services, e.g. propagating best practice around the company. When services dominate corporate

revenue it is often appropriate to organize around market or customer groups (customer-focused

SBUs), with these units combining multi-vendor products and services to provide customer solutions.

By aligning structure to strategy, companies will have the best chance of using services to maximise

corporate success.

15

5.3 Limitations and further research

The main limitation of this research is that it is an exploratory study with a purposive sample and the

findings cannot be generalized to the population. A quantitative investigation would thus be useful to

test the strategy/structure framework. Equally, it is a UK-focused study with similar studies in other

countries or at a global level likely to provide insight into the usefulness of the framework. Whilst this

is an extensive study covering 11 sectors, there were more interviewees from the CoPS sectors (in

particular ICT sectors), with four sectors having less than three interviews. Future research could

therefore focus on non-ICT sectors. Finally, changes in strategy/structure configurations were not

observed for any particular company, with a longitudinal study of PCBs undergoing services-led

growth likely to provide data to confirm the relevance of the proposed models of change in

organization design.

Acknowledgements

The authors gratefully acknowledge the constructive comments of the three anonymous reviewers on

earlier versions of this paper.

16

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Appendix 1 – Companies that took part in the research

Sector CoPS Company ref. No. Interviewees

Aerospace and defence Yes 1, 2, 3 6

Chemicals No 5, 6 4

Construction Yes 12, 13 4

Energy Yes 7, 8a, 9a 3

Electrical machinery Yes 10, 11a 3

Information technology (IT) Yes 15, 16, 17,18 8

Medical equipment Yes 9b 1

Metals No 14 2

Quarrying No 4 1

Telecommunications Yes 19, 20, 21, 22 6

Transport Yes 8b, 11b 2

Total 25 40

21

Figure 1 – PCB services strategies and options for growth (adapted from Raddats and

Easingwood, 2010, p. 1341)

penetration

Mult

i-ven

dor

ori

enta

tion o

f se

rvic

es

Ow

n a

nd t

hir

d p

arty

pro

duct

sO

wn p

roduct

s

Product/customer orientation of services

Products Customers

Services

engagement

Services

penetration

Services

extensionServices

transformation

A C

B

22

Figure 2 – PCB services strategy and structure configurations

Dominant

services

strategy

Organizational

structure

Combined

product and

services SBUs

Independent

services SBU

Customer-

focused SBUs

Services

engagementServices

extensionServices

penetration

Services

transformation

4, 5 , 6, 14

12, 13 10, 16 7, 8a, 8b, 19,

2117, 18, 20

1, 2, 15, 22

3 , 9a, 9b,

11a, 11b

23

Figure 3 – Changes in organizational structure as a result of services growth option A

Dominant

services

strategy

Organizational

structure

Combined

product and

services SBUs

Independent

services SBU

Customer-

focused SBUs

Services

engagementServices

extensionServices

penetration

Services

transformation

10

16

Black arrows = changes in strategy (reference numbers identify indicative companies)

24

Figure 4 – Changes in organizational structure as a result of services growth option B

Dominant

services

strategy

Organizational

structure

Combined

product and

services SBUs

Independent

services SBU

Customer-

focused SBUs

Services

engagementServices

extensionServices

penetration

Services

transformation

3

11

Black arrows = changes in strategy (reference numbers identify indicative companies)

White arrows = changes in structure

25

Figure 5 – Changes in organizational structure as a result of services growth option C

Dominant

services

strategy

Organizational

structure

Combined

product and

services SBUs

Independent

services SBUs

Customer-

focused SBUs

Services

engagementServices

extensionServices

penetration

Services

transformation

17

1

Black arrows = changes in strategy (reference numbers identify indicative companies)

White arrows = changes in structure