Effect of Service Integration Strategy on Industrial Firm Performance

This study aims to examine the relationship between service integration and manufacturing firms' profitability and to identify profitable services. In order to do so, we examine the service integration data of 202 firms in the machinery and equipment sector in Korea. Firm profitability is calculated from secondary data to eliminate common method bias. We find that the relationship between service integration, measured as the service-revenue ratio, and profitability has an inverted U-shape, likely stemming from political costs, loss of opportunity in manufacturing improvements arising from resource constraints, and an increase in transaction costs. This shows that the effect of service integration on profitability diminishes when firms experience both resource constraints and an increase in transaction costs from implementing the strategy. In other words, the relationship between profitability and service integration depends on the degree of resource constraints and transaction cost. Furthermore, we find that the profitability of services is heterogeneous across different offerings and identify which service offerings are highly profitable, which has not been done in previous research. Process operation outsourcing and technical consulting significantly contribute to profitability. Our finding suggests that managers should strive to minimize the costs and problems stemming from resource constraints and transaction cost. It is also important to utilize external resources to achieve profitability from service integration. In addition, managers also need to realize the different cost-revenue structure of each service