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MATCH OR MISMATCH: STRATEGY-STRUCTURE CONFIGURATIONS IN THE

SERVICE BUSINESS OF MANUFACTURING COMPANIES

Heiko Gebauer
Associate Professor
Universität St. Gallen
Institut für Technologiemanagement
St. Gallen Schweiz
Phone: +41 71 224 72 42

Email: heiko.gebauer@unisg.ch

Bo Edvardsson
Professor of Business Administration
Service Research Center
Karlstad University
651 88 Karlstad, Sweden
Phone: +46 54 700 1557
Email: Bo.Edvardsson@kau.se

Anders Gustafsson
Professor of Business Administration
Service Research Center
Karlstad University
651 88 Karlstad, Sweden
Phone: +46 54 700 1556
Email: anders.gustafsson@kau.se

Lars Witell
Associate Professor of Marketing
Service Research Center
Karlstad University
651 88 Karlstad, Sweden
Phone: +46 73 687 72 72
Email: lars.witell@kau.se

FORTHCOMING IN JOURNAL OF SERVICE RESEARCH

ABSTRACT

A new trend seems to be emerging for multinational manufacturing companies to make a strategic

reorientation into becoming service providers. For some companies such as Kone and IBM, the

revenues from services are 50% or more of their total sales. Despite the increasing interest in

exploring various aspects of the service part of the business in manufacturing companies, existing

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research has not focused on the interdependencies between different service strategies and

organizational designs. This paper studies different service strategies in manufacturing companies

and highlights the organizational design necessary for implementing each service strategy. The

service strategies explored are after-sales service providers, customer support service providers,

outsourcing partners and development partners. Each service strategy is supported by

organizational design factors related to the service orientation of corporate culture, the service

orientation of human resource management and the service orientation of organizational

structures. This research concludes that a specific strategy-structure configuration is needed in

order to succeed with a chosen service strategy.

Key words: Organizational design factors, service strategy, service orientation,

manufacturing companies, corporate culture, organizational structure.

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INTRODUCTION

There is a trend in marketing to break free from the manufacturing-based model of the

exchange of value embedded in units of output (Vargo and Lusch 2004 and 2008a/b). This shift is

also visible in manufacturing companies that are striving to become service or solution providers

(Oliva and Kallenberg 2003; Vargo and Lusch 2008b; Jacob and Ulaga 2008). Becoming a

service provider represents a shift in focus for a company since they aim to generate an increase

in revenue from the service part of the business. Kone and IBM are examples of companies that

have made this shift successfully. These companies report that revenues from services are 50% or

more of their total sales. As stated by Vargo and Lusch (2008b, p.256), “The critical and common

theme is rethinking the meaning and process of value creation rather than thinking about how to

market to a different type of customer or how to make a different type of good”. In order to

manage the shift from a manufacturing-based to a service-provider model, companies need a

service strategy. Implementing a service strategy is, however, not a straight road to success. There

is a risk that companies may end up in a mismatch between their organizational arrangements and

their strategic market offerings. The implementation of service strategies includes building up an

ability to deliver services, training personnel to become service-oriented and to a certain extent

developing a new organizational culture. There is also a risk that customers may not adopt the

new service or that it will take too much time for the customers to reach the critical mass

necessary for the service to become profitable (Sawhney, Balasubramanian and Krishnan 2004).

Researchers are increasingly interested in different aspects of service offerings in

manufacturing companies. The research effort has been devoted mainly to determining the factors

that contribute to service orientation, such as the service orientation of corporate culture, total

offering, human resource management, organizational structure and relationship initiation (Martin

and Horne 1992; Oliva and Kallenberg 2003; Neu and Brown 2005; Vargo and Lusch 2004;

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Homburg, Fassnacht and Günther 2003; Edvardsson, Holmlund and Strandvik 2008). There has

been little research, however, that has studied the relationship among components of service

orientation and, in particular, the implementation of different strategy-structure configurations

that transform manufacturing companies into becoming more service-oriented. There are two

logics for understanding the transition from goods to service(s). One is based on a goods-

dominant logic emphasizing value-in-exchange, in which services are viewed as a special type of

good. The other is the service-dominant logic emphasizing value-in-use in the customer’s

business context, which considers service as a process rather than a unit of output (good) (Vargo

and Lusch, 2008b p. 258). These two logics can be viewed as different but co-existing.

In this study, the focus is not on the goods-dominant or service-dominant logic but on the

strategy-structure configuration chosen by manufacturing companies to develop their service

business. The service orientation of firms can be implemented through different service strategies

in order to develop their service business. By strategy-structure configuration, we mean the

congruence between a specific service strategy (including the strategic market offering) and a

specific arrangement of organizational design factors. The frequency of the changes to the

organizational structures indicates that robust strategy and structure configurations are still in

need (Davies, Brady and Hobday, 2007).

This study will contribute to the discussions of integrated solutions (Davies 2004), the

transition from products to services (Oliva and Kallenberg 2003; Neu and Brown 2005) and the

restructuring of manufacturing companies towards a service orientation (Martin and Horne 1992).

Because the existing discussions contain little knowledge on strategy-structure configurations in

the context of re-structuring product manufacturing companies towards service, the following

research question is addressed: how do different service strategies correspond with different

configurations of organizational design factors? The fit between service strategies and the

In our analysis. Siehl and Schneider's (1989) early work on frameworks for analyzing service orientation in manufacturing companies. we focus on identifying the internal congruence between service strategies and organizational design factors. . We make a comparison of the configurations of organizational design factors between companies with "high" and "low" levels of business performance. By concentrating on the question how different service strategies correspond with different organizational design factors. we revitalize Bowen. 5 configuration of organizational design factors is tested in a sample of 195 manufacturing companies. Our results show that choosing the appropriate strategy-structure configuration is vital to improving organizational performance and that many organizations end up in a mismatch between strategy and structure.

Adding services to the existing customer activity chain (temporal expansion) expands the service activities of manufacturers within the pre-sales. Products and services. The service-dominant logic suggests that value is co- created with customers and service denotes a perspective of value creation focusing on value-in- use in the customer’s own context (Vargo and Lusch 2008b). From the perspective of the service-dominant logic (Vargo and Lusch 2004. temporal reconfiguration. Balasubramanian and Krishnan 2004). as well as the integration of products. The notion of increasing the service orientation of a firm has basically meant adding more services to their total offering (Kotler 1994. As mentioned earlier. services and information. become resources or enablers for the . Introducing adjacent chains means that manufacturers offer services that are independent of the customer activity chain associated with the product. Traditionally. Martin and Horne 1992). service orientation in business strategy has been discussed from the perspective of a manufacturing company’s total offering. sales and after-sales phases. spatial expansion or spatial reconfiguration (Sawhney. Grönroos 2008. An illustration of the emphasis on value-in-exchange is the exploitation of new service business opportunities through temporal expansion. Additional business opportunities exist if manufacturing companies start to reconfigure customer activities in the primary and adjacent customer activity chain. there are two logics for understanding the differences in perspectives when focusing on goods compared to service(s): goods-dominant logic emphasizing value-in-exchange and service-dominant logic emphasizing value-in-use (Vargo and Lusch 2008a/b). 6 CONCEPTUAL BACKGROUND Service strategies in manufacturing companies The discussion of service strategies is related to service orientation in business strategy. Vargo and Lusch 2008a). increasing the service orientation of an organization is more than merely adding services to existing products.

7 customer’s value co-creation. or system integrators that strengthen upstream capabilities and move further down into services previously carried out internally by their customers (Davies 2004 p. 258). The locus of value creation moves from the manufacturing company to a collaborative process of co-creation with the customer where the application of knowledge and specialized skill(s) play a key role. Each of the three service strategies is based on unique skills and competencies . The service-dominant logic suggests a number of changes in order to move from a product focus to a service focus: “From thinking about the purpose of firm activity as making something (goods or services) to a process of assisting customers in their own value-creation processes…From thinking about value as something produced and sold to thinking about value as something co-created with the customer and other value-creation partners…From thinking of firm resources primarily as operand – tangible resources such as natural resources – to operant – usually intangible resources such as knowledge and skills” (Vargo and Lusch. The framework helps “to show that rather than simply moving downstream from manufacturing to services”. The systems integration approach (Davies 2004) is in line with fundamental premise number nine in the service dominant logic (Vargo and Lusch 2008a) stating. 2008b p. He develops a framework to identify recent changes in the strategic positioning of capital goods suppliers. The strategic positioning is related to the service orientation and distinguishes between three different service strategies: (1) system integration. Davies (2004) examines the shift in business strategy towards high-value. 752). “all economic actors are resource integrators”. suppliers of capital goods are either systems integrators and providers of services that operate and maintain their products. integrated solutions. The transitional shift is not only a question of thinking differently but also of forming and implementing strategy-structure configurations to develop the service business. (2) operational services and (3) business consulting.

companies offering integrated solutions probably function as resource integrators. Davies' (2004) term “integrated solution” seems to be related to Vargo and Lusch's (2008b) argument that organizations exist to integrate and transform micro-specialized competencies into complex services that are in demand in the marketplace. Therefore. Conceptualization of service strategies in manufacturing companies As outlined in the introduction. Mathieu 2001. five different service strategies have been identified.. Oliva and Kallenberg 2003.g. This means that service strategies are viewed as consistent patterns of manufacturing companies’ past strategic behavior rather than intended strategies (Mintzberg and Quinn 1988). Consistent with related research (e. The first strategy is defined as customer service strategy and is similar to Mathieu's (2001) description of customer service. Our empirical investigation of strategy-structure configurations in the service business of manufacturing companies focuses on realized strategies. Following acceptance of their value propositions defined in the service strategies. Siehl and Schneider 1989. Customer service strategy explores new business opportunities by adding customer service to the sales phase within the existing customer activity chain. As illustrated in Figure 1. manufacturing companies must configure organizational design factors to offer their applied resources for value creation and collaboratively (interactively) create value. the conceptualization of service strategies highlights the nature of the service offering and value creation within the primary customer activity chain (temporal expansion and reconfiguration). Davies 2004). 8 associated with a specific nature of value co-creation in the collaborative process between manufacturing companies and customers. Bowen. The . we do not focus on goods-dominant or service-dominant logic but on the strategy-structure configuration chosen by manufacturing companies to develop their service business.

. Customer service strategy influences overall client satisfaction. A new set of skills within the business relationship is created based on customers’ knowledge of predicting failure rates and suppliers’ risk assessment skills (Oliva and Kallenberg 2003). 9 strategic goal is to augment the product offering through supplementary services (Wouters 2004). manufacturing companies offer advanced services including preventive maintenance. To achieve this goal. After-sales service providers and customer support service providers are consistent with Kotler's (1994) distinction between repair and maintenance services. after-sales service providers offer basic services such as spare parts. Typical services required to implement a customer service strategy include information services. both strategies focus on the after-sales phase and explore new business activities in the existing customer activity chain. repair. the strategic goal of the third service strategy is to prevent any product breakdown. The strategic goal is to react as quickly as possible to any product breakdown. According to the value chain perspective. strengthens the customer’s confidence and strengthens the credibility of a manufacturing company. The second service strategy is the after-sales service provider. process optimization. inspections and basic training to ensure proper product functioning. In contrast. Value creation of after-sales service providers is based on offering products and ensuring proper product functioning. Companies following this strategy are referred to as customer support service providers. Customer support service providers intend to optimize the efficiency and effectiveness of the product. delivery services. Customer support service providers co-create value with their customers during the process of tailoring service offerings to satisfy the unique needs and preferences of an individual customer. Similar to Oliva and Kallenberg's (2003) view of manufacturing companies who provide basic service for the installed base. billing services or documentation. training and maintenance contracts (Gebauer 2008).

Davies 2004). who then advise customers how to design and construct their processes. customers learn about development partners’ capabilities. Customers benefit directly from development competencies. 10 The last two service strategies are interpreted as development partner and outsourcing partner. Both strategies are closely associated with theories such as Kotler's (1994) concept of business services. Through R&D-oriented services. outsourcing partners take over part of the customer processes. This means that outsourcing partners change their position in the value chain towards temporal reconfiguration by modifying the structure and control of activities in the existing customer activity chain. These competencies make it more difficult for competitors to catch up. development partners design and build products and systems using the competencies developed in-house and by the customer. Development partners concentrate on temporal expansion within the pre-sales phase through R&D-oriented services in order to achieve outstanding customer performance. The value proposition of outsourcing partners is based on reducing customers’ capital employed. managing the corresponding risks and reconfiguring the responsibilities within the value chain (Gebauer 2008). and Davies' (2004) description of operational services and system integration. This in-depth understanding makes value-in-exchange possible based on the skill(s) and knowledge of the operational processes. Oliva and Kallenberg's (2003) theory of process-oriented services. Through the collaborative process of co- creation. More specifically. Outsourcing partners and their customers co-create an in-depth understanding of customers’ operational requirements for the process output. Their strategic goal is to assume the operating risk and full responsibility for the customer's operating processes. Insert Figure 1 around here . Both development partners and their customers possess a unique and hard-to-imitate competency position (Wernerfelt 1984.

Fassnacht and Günther 2003). production. Furthermore. we revitalize Bowen. utilizing unobtrusive control mechanisms at organization/customer interface. delivery and consumption (Bowen. organizational structures. financial bonus systems. This association can be nurtured by using customer data in assessing organizational effectiveness. integrating service production and marketing. Service strategies associated with a higher degree of service orientation are positively associated with a service-related culture. recognizing the importance of intangibles. Neu and Brown 2005). Siehl and Schneider's (1989) early work on frameworks for analyzing service orientation in manufacturing companies. establishing relational markets. and managing customer participation in design. complementary and mutually reinforcing. the transition from products to services affects aspects of corporate culture. structure and environment that are internally consistent. This view encompasses Chandler's (1962) definition of structure as the design of the organization through which the service business of manufacturing companies is managed. Service orientation of corporate culture and human resource management mediates the impact of corporate strategy service orientation on service-related performance outcomes (Homburg. evaluating interpersonal skills of customer contact personnel. . Bowen. human resource management. decision processes and measurement systems (Oliva and Kallenberg 2003. Siehl and Schneider (1989) use the term configuration to describe a coalescence of the attributes strategy. Siehl and Schneider 1989). 11 Organizational design factors We believe that service strategies are implemented through the configuration of various organizational design factors. By concentrating on the question of how different service strategies correspond with different organizational design factors.

There is also a paucity of theories to guide the expectations about the direction of possible effects. 12 In our empirical investigation. The two constructs refer to the value of services within manufacturing companies and the degree to which employees behave in a service-oriented way. but the organizational design factors needed to successfully implement the different service strategies may differ. The first construct refers to organizational distinctiveness. Fassnacht and Günther 2003). (2) the service orientation of human resource management and (3) the service orientation of organizational structures. The service orientation of corporate culture involves two constructs. we focus on organizational design factors covering three dimensions: (1) the service orientation of corporate culture. A successful service orientation can be achieved with any of these strategies. We argue that a change in a firm’s service orientation can be implemented through several different service strategies. The second construct covers the proximity of the service organization to customers. It concerns the separation of service from the product business. corporate values of the company and employees’ behavior. personnel training and personnel assessment/compensation (Homburg. The service orientation of the organizational structures captures two constructs. limited attention has been paid to the relationship between service strategy and organizational design factors. the extent to which external customers are aware of the service organization and can identify appropriate points of contact. Proposition Despite the variety of research contributions. namely. The service orientation of human resource management involves three constructs: personnel recruitment. . that is. which represents the degree to which the service business unit is set up as a distinct business unit with the corresponding profit-and-loss responsibility (Oliva and Kallenberg 2003).

Customer service providers. Bravo-Sanchez and Fleisch (2008) argue that after- sales service providers that only offer basic service should integrate the service into the product organization. Conversely. Oliva and Kallenberg (2003) suggest that companies moving into the field of relationship-based and process-oriented services should set up an independent business unit for services. Because of the exploratory nature of this research. It can also be assumed that a customer service strategy requires behavioral competencies and communication skills. we argue that different service strategies require the implementation of different organizational design factors (Hambrick . 13 The provision of customer service requires increasing the service orientation of the corporate culture. this means that after-sales service providers and customer support service providers correspond with a high level of distinctiveness between product and service business. whereas customer support service providers should build up a separate service organization. Siehl and Schneider 1989). and a high level of service orientation in the corporate culture. For our study. a proposition has been developed rather than a formal hypothesis. More specifically. Gebauer. behavioral competencies and communication skills (Neu and Brown 2005. Bowen. increase the service orientation of the corporate culture and invest in a global service infrastructure. Siehl and Schneider 1989). but there is no general agreement on what changes to pursue (Bowen. a high level of customer proximity. whereas after-sales service providers give attention to technical competencies. According to the contingency view. These contradictions illustrate that there is still a lack of empirical research to link service strategies and organizational design factors. outsourcing partners and development partners are assumed to combine technical competencies. Neu and Brown (2005) suggest that companies positioned as service providers should have an integrated product and service division in order to fulfill complex customer needs.

after-sales service providers. “Fit as gestalts” describes the internal congruence between service strategies and organizational design factors. Vargo and Lusch 2008a/b). This analytical approach concentrates on the differences in internal congruence of strategic and structural variables between companies with “high” and “low” business performance. Consequently. outsourcing partners and development partners) depends upon the internal congruence between the service strategies and the organizational design factors This proposition draws on the idea of "fit as gestalts" (Venkatraman 1989). This proposition makes a unique contribution to service management literature because it contributes to the resource-based perspective on value creation. . A specific “fit of gestalts” between one service strategy and one arrangement of organizational design factors is understood as a strategy-structure configuration. Manufacturing companies are only able to achieve the intended value proposition if they form a specific internal congruence in their strategy- structure configurations (Vargo and Lusch 2004. customer support service providers. 14 1984). the link between service strategies and organizational design factors is proposed to be tested empirically as follows: Proposition: The success of each service strategy (customer service strategy.

in that we do not primarily focus on the individual factors. the measurement development and validation are presented in separate sections. In general. the identification of strategy-structure configurations requires factor and cluster analyses as analytical approaches (Venkatraman 1989). Fassnacht and Günther 2003). but rather seek to develop configurations of organizational design factors that correspond with different service strategies. Hoyer and Fassnacht 2002) and organizational design elements are operationalized as reflective scales (Homburg. First. Consistent with the requirements of “fit as gestalts”. Riefler and Roth 2008). . Consequently. 15 RESEARCH METHODOLOGY Given our objective of identifying how different service strategies correspond with different configurations of organizational design factors. Our research methodology is similar to Frohlich and Dixon (2001) or Miller and Roth (1994). The combination of these methods has been recognized as an appropriate means of knowledge production when strategies depend on specific configurations of organizational design elements (Meyer. measurement development and validation for the formative service strategies follows the procedure for successful construction of indexes with formative indicators (Diamantopoulos and Winklhofer 2001. Service strategies are operationalized as formative scales (Homburg. Second. Reinartz. An exploratory factor analysis is used to identify the dimensionality of constructs (Diamantopoulos and Winklhofer 2001). Tsui and Hinings  1993). the section ends with an explanation of the cluster analysis and assessment of the predictive validity of the internal congruence between the service strategy clusters and the clusters of organizational design factors for “high” and “low” performing companies. we use “fit as gestalts” and the corresponding factor and cluster analyses. Diamantopoulos. the scale development for the reflective organizational design elements is described by Churchill's (1979) approach to scale development for multi-item constructs. Krafft and Hoyer 2004.

” The respondents had an average of 10. The units of analysis were company-level as well as Strategic Business Unit (SBU) level. Six face-to-face interviews with service experts were conducted prior to the survey in order to pre-test a preliminary version of the questionnaire. It was assumed that SBUs within the same manufacturing firm could follow different service strategies and implement different organizational design factors (Govindarajan 1989). To avoid confusion in using both terms manufacturing companies and SBUs.87] years of employment with their firm.14 [std. The last two items were measured on a three-point scale anchored by “low knowledge” and “high knowledge. the respondents’ knowledge about the service business and their work experience in the service organization (Kumar. 202 firms were contacted.5%. deviation = 4. Different versions of the questionnaire were discussed with service experts until all interviewees agreed on the items and concrete phrasing of the questions. 16 Sample and data collection Data were obtained from European manufacturing companies in business-to-business markets. The mean . Stern and Anderson 1993). There were no statistical differences between responses at the firm and the SBU level for any of the measures. A sample of companies and SBUs was acquired from a commercial database provider. indicating an adequate amount of experience and knowledge of the key informants for the purposes of the study. There were 195 positive responses. Altogether. The SBU level was chosen in cases where a company had at least two SBUs. we will use the term manufacturing companies. leading to a response rate of 96. The quality of the information provided was assessed through questions about three factors: the amount of time the respondents had worked in the company. Data were collected through questionnaires. The sample consisted of 106 manufacturing companies and 89 SBUs.

6%). It seems reasonable to assume that the respondents had considerable expertise. 37. Measurement of organizational design factors Item selection and generation for organizational design factors were guided by theory (Churchill 1979). The construct for the service .80] and 2. and 4. Homburg. Considering the constructs for the service orientation of corporate culture. Neu and Brown 2005).5%). 5 = highest score).7%) and others (5.4% of the participants achieving more than 5% in the last three years and 44.53]).2%). The overall performance in terms of the median on the annual sales is 221 million €. deviation = 0.. The overall profitability [operating margins] is split into 55. analyzing and controlling instruments (27. The sample characteristics can be described in the following way.6% of the cases a strategic business unit and in 54. We used existing scales or measures adapted from previous studies of service orientation in manufacturing companies (i. 17 responses to the last two items were 2.9% have 250 to 999 employees.23 [std. Fassnacht and Günther 2003. electronic and other electrical equipment and components (38. 20% of the participants have than 100 employees. the orientation of corporate values was assessed using four items that measured the degree to which managers and employees understood the value of services. The industry mix covers machine and equipment manufacturing companies (28. strategic and marketing opportunities (Oliva and Kallenberg 2003).6% employ more than 1000 employees.72 [std.6% achieving less than 5% in the last three years. The value of services included financial. The items for the organizational design factors were measured on a five-point scale (1 = lowest score.4% of the cases the entire company. Oliva and Kallenberg 2003.e. The unit of analysis is in 45. deviation = 0. Considering the number of employees.4% have 100 to 249 employees. 37. Table 1 summarizes the operationalization of the organizational design factors according to the framework presented earlier.

The existing literature describes a variety of scales for measuring proximity to customers (Froehle and Roth 2004). The amount of resources shared between product and service business was reflected in the last item. 18 orientation of employees’ behavior was operationalized using four items. separating the service organization from the product organization would lead to little intra-business unit collaboration and few resources would be shared with the product organization (Neu and Brown 2005). share an essential amount of resources. As illustrated in Table 1. therefore. In this context. The operationalization of the three constructs for the service orientation of human resource management used three to four items referring to personnel recruitment. Integration within the service organization is normally associated with strong intra-business unit collaboration. the three items reflected . the organizational distinctiveness and the proximity to customers were each assessed by three items. the degree of shared resources between the product and service organization was used as the third item. For the organizational distinctiveness. Considering the operationalization of the two constructs for the service orientation of organizational structures. which referred to the aspects of employees’ role understanding. According to Neu and Brown (2005). The second item assessed the degree of implementing a separate profit-and-loss responsibility for services (Oliva and Kallenberg 2003). In contrast. Thus. the proximity of the service organization to customers was operationalized through three items quantifying the degree to which service resources are established within the market organization. Fassnacht and Günther 2003). personnel training and personnel assessment/compensation (Homburg. The items covered various facets of the service orientation of human resource management. the first item measured the degree of separation of the service business from the product business. performance enablers and trusted advisers in order for the service business to expand successfully. The service and product organization. the employees must behave as reliable trouble-shooters.

Sasser and Schlesinger 1997). Homburg.87 for organizational design factors. Previous research consistently operationalizes service strategies through formative measurement of the strategic importance of service categories (Homburg. 19 aspects such as the definition of service responsibilities and the empowerment of service employees (Heskett. the degree of confidence of the factor solutions is permissible and the interpretation of the factors is consistent with the previous conceptualization. Altogether. The Cronbach’s alpha value ranges from 0. formative indicators can be viewed “as causing rather than being caused by .63 to 0. The result of the Kaiser-Meyer- Olkin measure was 0.334 and the associated significance level was lower than 0. as well as 25 items with communalities ranging from 0.77 to 0. Fassnacht and Günther 2003).86.001 in both cases. which provided further support for the factor analysis. Insert Table 1 around here Measurement of service strategies The operationalization of service strategy is not without debate and draws on either the strategic priorities as in traditional strategy management literature or the service offering associated with different service strategies (Gebauer 2008. There was a large test result for sphericity of 4456. 2005). Hoyer and Fassnacht 2002. The final factor solution for organizational design factors contains seven interpretable factors accounting for 71. Unlike reflective indicators.3% of the common and unique variance. Frohlich and Dixon 2001). which are acceptable levels (Nunnally and Bernstein 1994). whereby the latent variables cause the observed variables.91. In terms of measurement validation. all multi-item constructs for organizational design factors were subjected to principal component analysis (PCA) using orthogonal rotation (VARIMAX) (Hair et al.

In general. Siehl and Schneider 1989. Oliva and Kallenberg 2003. p. The list of customer services. we operationalize service strategies through formative scales. (2) indicator specification. All three dimensions have previously been used successfully to measure the service orientation of a business strategy (Homburg. Homburg. Fassnacht and Günther 2003). To achieve sufficient content specification of service strategy. 533). for example. Simon 1992. Critical for the design of valid indexes with formative indicators is the indicator specification. The number of services in the service strategy is calculated by the sum of the services offered. Hoyer and Fassnacht 2002. the number of services is more critical. Whereas the broadness of services and the emphasis on services easily captures the entire scope of a service strategy. According to existing literature. (3) indicator collinearity and (4) external validity (Diamantopoulos and Winklhofer 2001). the number of services is classified into five service strategies (Bowen. (2) how many customers these services are offered to (broadness) and (3) how strongly these services are emphasized (emphasis). In the present context. Gebauer 2008). The three dimensions refer to (1) the number of services offered. 20 the latent variable measured by the indicators” (MacCallum and Browne 1993. Using these three dimensions to specify the content of a service strategy is in line with the focus on product offering as a key strategic decision in the product strategy (Homburg. Mathieu 2001. Formative measures involve the construction of an index rather than a scale (Diamantopoulos and Winklhofer 2001). Fassnacht and Günther 2003. captures five services that are measured on a dichotomous scale (with “0 = not offered” and “1 = offered”) indicating whether or not a service was offered . The indicators must capture the entire scope of the service strategies as previously described. four issues are critical to the successful construction of indexes with formative indicators: (1) content specification. Vandermerwe and Rada 1988). three dimensions were considered to capture the major facets of service strategies.

The emphasis on one service strategy. multicollinearity is a potential problem for formative indicators and requires tests for indicator collinearity by obtaining the variance inflation factor. 0–5 for customer service strategy) it was converted to a five-point scale similar to the one used for the other two items. (2) how many customers these services are offered to (broadness) and (3) how strongly these services are emphasized (emphasis). broadness of and emphasis on services for all of the five service strategies) revealed serious multicollinearity problems. substantial collinearity among indicators would affect the stability of indicator coefficients. remains fuzzy on how external validity should be established . Fassnacht and Günther 2003). In addition. Therefore. is calculated as a mean of the three items. which is under the common cut-off threshold of 10 (Diamantopoulos and Winklhofer 2001). The specific services for each service strategy are listed in Table 2. our analysis does not include any dependent variable for the service strategies. the multicollinearity among the 15 indicators listed in Table 2 did not seem to pose a problem because the maximum variance inflation factor came to 2. More specifically. The first three determinants for successful construction of indexes are straightforward. therefore. Insert Table 2 around here Since formative measurement models are based on linear equation systems.177. Thus.. the index for each service strategy retained the three initial dimensions of (1) number of services offered. The literature. Since the number of services is additive (e. None of the 15 indicators (number of services.g. we must assume equal weights for the three items. however. The specific services mentioned in Table 2 were considered to capture the entire scope of the service strategy in terms of strategic marketing offering. 21 (Homburg.

Validation along these lines requires (1) that information be gathered for at least one more construct than the one captured by the indexes.001. 22 (Diamantopoulos and Winklhofer 2001. Of particular interest is the sign and magnitude of the parameter estimates (β1…5) between service strategies and service differentiation. by focusing on the γ1…15 parameters.91. Insert Figure 2 around here Estimation of the model resulted in a good overall fit (χ2 =379. is to link the index to another reasonable construct and to estimate a multiple indicator and a multiple cause model (Diamantopoulos. Riefler and Roth 2008).006. RMSEA = 0. The nature of formative measurement limits the assessment of external validity to examining how well the formative constructs are related to other (reflective) constructs. new service development. (2) that this other construct is measured by means of reflective indicators and (3) that a theoretical relationship can be postulated to exist between the constructs (Diamantopoulos and Winklhofer 2001). GFI (Goodness of Fit Index) = 0. while allowing the assessment of the proposed indicators and formative scales for service strategies as a set. Krafft and Hoyer 2004. These three reflective items were chosen to represent the effects of achieving competitive advantages associated with implementing the service strategies. we can assess the contribution and significance of the individual indicators. degrees of freedom = 72. As illustrated in Figure 2. Service differentiation was assessed by the degree of service differentiation. Figure 2 shows that the service strategies investigated in the present study act as predictors of service differentiation. and price level of services (Kim and Lim 1988). Reinartz. we estimated a model that can be described as a formative first-order and reflective second-order model. Riefler and Roth 2008). In addition. TLI (Tucker-Lewis-Index) = . Diamantopoulos. A satisfactory approach to validation.046. p<0.

however. (2) indicator specification. p<0.46).10). we assume that the elimination would alter the nature of the construct on after-sales service strategy and outsourcing partner strategy. A comparison of the model that includes all indicators. with a second model that does not include the two insignificant indicators.23. β4=0. p<0. The paths between the service strategies investigated in the present study and service differentiation were found to be significant and consistent with expectations (β1=0. p > 0.92.1 and β5=0. The comparison reveals that both models differ only marginally in the variance explained (R2) for the latent variable of service differentiation. p<0.01. The proportion of variance explained by the service strategies investigated in the present study is at an acceptable level (R 2 = 0. Two of the γ1…15.20. Thus.96). p<0. degrees of freedom = 2. CFI (Comparative Fit Index) = 0. p<0.38.31. turned out to be insignificant: emphasis on basic services for the installed base and emphasis on operational services. (3) indicator collinearity and (4) external validity can be interpreted as satisfactory leading to a robust approach to formative scale constructions for service strategies. Nevertheless. the results of the factor analysis of organizational design factors and formative index of service strategies were used as input for two .05. Thus. the two indicators were kept in the formatives scales.15. Overall.05). showed no significant deterioration in fit (Δχ2 = 2. Perhaps these two indicators should not be included in the index for after-sales service provider and outsourcing partner.89. following Diamantopoulos and Winklhofer's (2001) recommendation that indicator elimination should not be divorced from conceptual considerations.05. Cluster analysis According to the requirements of “fit as gestalts”. β2=0. β3=0. evidence in support of the validity of the service strategy indexes was obtained (Diamantopoulos and Winkelhofer 2001). 23 0. the assessment of the four critical issues (1) content specification.

as suggested by Ketchen and Shook (1996). were used as an indicator. where n is the sample size. Second. This significance test in ANOVA evaluates the between group variability against the within-group variability when computing the significance test for the hypothesis that the means in the groups are different from each other. Fourth. Predictive validity means that “high” and “low” performance businesses probably differ in their internal congruence between service strategies and organizational design factors. Only models with three to six clusters. managerial interpretability of the clusters using ANOVA tables was used to substantiate the number of clusters (Miller and Roth 1994). therefore. 24 independent cluster analyses. the number of service strategies and organizational design factors were used as indicators for the potential number of clusters. confidence in the number of clusters is greater when multiple methods converge. the pronounced increases in the tightness of the clusters. Assessment of predictive validity The final step of analysis. To ensure predictive validity (Venkatraman 1989). the results of the K-means cluster analysis were verified using a hierarchical cluster analysis while changing the agglomeration coefficient and observing breaks in the dendrogram (Ketchen and Shook. as measured by the R2 and pseudo-F statistic. A K-means cluster analysis requires the researchers to specify the desired number of clusters in advance. we initially used a K-means cluster analysis. contains the assessment of predictive validity. Determining the number of clusters in advance is not without bias (Ketchen and Shook 1996). 1996). our initial decision of the number of clusters was guided by four criteria. Finally. “fit as gestalt”. To reduce this bias. To ensure the reliability of the derived clusters. the number of clusters was limited to between n/30 and n/60. Third. First. were considered. For both cluster analyses. the sample was divided among respondents who were .

The 5% level was selected because it represents the average operating margin in European manufacturing industries. This cluster achieves only low scores for maintenance. By using a cross-classification table. we illustrate that the high-performance respondents and low-performance respondents belong to different configurations between service strategy clusters and clusters of organizational design factors. It achieves the highest degree of operational . The corresponding cluster means are illustrated in Table 4. We used t-tests to test for differences in performance between companies with a good strategy- structure fit and those with a poor strategy-structure fit. 25 highly successful and those who were less successful in their alignment between strategy and structure. RESULTS Service strategy clusters As illustrated in the corresponding ANOVA table (Table 3). Cluster 3 is interpreted as outsourcing partners and has 24 members. while operational and R&D services are of low importance. This explains why customer service strategy was not indicated as a strategy cluster among the 195 manufacturing companies. operational and R&D services. Additionally. The customer support service strategy does not discriminate among the four clusters. the mean for basic services is significantly lower for customer support service providers than for after-sales service providers. The first cluster consists of 61 members and it can be interpreted as after-sales service providers because it is dominated by basic services for the installed base. A total of 108 respondents achieved an operating margin of more than 5% and 87 respondents achieved less than 5%. leading to an overall profitability [operating margins] of more than 5% in the last three years. only four out of five service categories discriminate among the four clusters. Cluster 2 consists of 77 members and it can be interpreted as customer support service providers because its mean is the highest for maintenance services.

similar descriptions can be formulated for the remaining clusters 6. cluster 5 is described by low organizational distinctiveness and customer proximity. Only service orientation in corporate values is on a medium level. As illustrated in Table 4. . R&D services are of little importance. The four clusters contain 98. In addition. The ANOVA table suggests that all seven organizational design factors discriminate among the four clusters. 26 services. The interest in basic service for the installed base and maintenance services is on an average level. Insert Table 3 around here Organization design clusters Interestingly. The most distinct feature of cluster 6 is high service orientation across all factors. whereas cluster 7 is characterized by high service orientation across all factors. while Table 4 depicts the configuration of organizational design factors for each cluster. Four distinct clusters emerge among the organizational design factors. cluster 4 represents a group of 33 members that can be interpreted as development partners. for example. 7 and 8. Table 3 illustrates the corresponding ANOVA table with the different configurations of organizational design factors. 20 and 21 cases respectively. the means are on an average level. is characterized by low service orientation in the organizational design factors for employee behavior. except for personnel recruitment and training. Finally. 56. personnel recruitment. whereas the interest in operational (outsourcing) services is low. Cluster 5. the results of the cluster analysis confirm our previous specification of the desired number of clusters. In terms of basic services for the installed base and maintenance services. Each cluster represents a specific configuration among individual organizational design factors. personnel development and personnel assessment. This cluster is dominated by a high level of interest in R&D-oriented services.

In total. Insert Table 5 around here Interpretation of results .27. To explore the present proposition of the relationship among the various clusters. except for organizational distinctiveness and personnel compensation assessment. p< 0. Table 5 depicts the results of the classification matrix and the percentage of companies correctly and/or incorrectly classified is illustrated in the notes. the four clusters on service strategies are shown as columns and the four clusters on organizational design factors are shown as rows. As illustrated in Table 5. Insert Table 4 around here The relationship between service strategy and organizational design clusters Compared to the conceptual framework. 27 Cluster 8 is characterized by high service orientation across all factors. four out of the five suggested service strategies and four configurations of organizational design factors could be identified.7% of all manufacturing companies are correctly classified. a cross-classified table was created for the four service strategy clusters and the four organizational design factor clusters. Furthermore. a t-test confirms that the performance of the four combinations on the diagonal from the top left to the bottom right is higher than the performance of other potential combinations (t=2.05). 89. Our research confirms the ability of the explained relationship between service strategy and organizational arrangement to predict performance better than random chance. The four strategy clusters are consistent with the conceptual framework and substantiate the proposed strategic service offerings.

The more specific implications of these four strategy- structure configurations are discussed later in managerial implications. keep their set of organizational design factors associated with after-sales service providers. Consequently. Outsourcing partners’ success depends on implementing the organizational arrangements in cluster 7 (high service orientation across all factors. personnel recruitment and personnel training. A general pattern about configurations between service strategies and organizational design elements is emerging. Finally. One interesting discovery from the four emerging strategy-structure configurations is that many of the companies that fail with their service strategies. 28 According to the initial proposition. advanced training and maintenance contracts without focusing on the service orientation of employees’ behavior. except for personnel recruitment and training). except for organizational distinctiveness and personnel compensation assessment). The most common mismatch is the implementation of the customer support service provider. Companies aim to work with preventive maintenance. each service strategy corresponds with only one specific configuration of organizational design factors. Customer support service providers are most likely to be successful if they implement the organizational arrangements described in cluster 6 (high service orientation across all factors). outsourcing partner and development partner strategy through the configuration of the . development partners are most likely to achieve success if they focus on the organizational issues of cluster 8 (high service orientation across all factors. such as customer support service providers’ outsourcing partners or development partners. adopting a new service strategy is not a straight road to success since companies seem to get stuck in a mismatch between strategy and organizational design factors. After-sales service providers are most likely to be successful if they implement the set of organizational design factors associated with cluster 5 (low service orientation across all factors. except medium emphasis on the service orientation of corporate culture and proximity to customers). process optimization.

No other service strategy such as customer support service provider and outsourcing partners can be implemented successfully if the managers strongly distinguish between product and service business or emphasize the proximity to customers. Neu and Brown 2005) and the restructuring of manufacturing companies towards a service orientation (Martin and Horne 1992). In general. Cluster 7 differs mainly from the other three clusters by its high level of emphasis on distinctiveness between products and services as well as its high level of proximity to customers of the service organization. 29 organizational design factors of cluster 5. The outsourcing partners only fit with configurations of organizational design factors beyond cluster 7. These organizational configurations are counterproductive for the implementation of an after-sales service provider strategy or a development partner strategy. the focus on the transition from products to services (Oliva and Kallenberg 2003. This argument is similar to the third common mismatch. We suggest four specific configurations between service strategies and organizational arrangements. We argue that the change in focus of manufacturing companies can be viewed as steps taken towards service orientation. The ensuing implication is for outsourcing partners to set up an independent service organization and locate service units on the customer side. A second common mismatch can be identified for cluster 7. the findings contribute to the discussions of integrated solutions (Davies 2004). DISCUSSION Theoretical implications This empirical investigation of manufacturing companies highlights how the service strategies investigated in the present study correspond with the configuration of organizational design factors. which extends the previous research on the strategic restructuring of manufacturing companies towards service orientation. and service .

The decision of whether to integrate or to separate the service business should take into consideration the type of service strategy used to move along the transition line from products to services. the findings offer guidance to the contrasting views of Oliva and Kallenberg (2003) who suggest separating service and product business. our empirical investigation makes four specific contributions. The requirements for implementing service strategies contribute to the emerging resource-based perspective on value creation. Second. First. parts of the service should be integrated into the existing product organization (specific R&D team in the R&D organization). it is better to separate the service business. Grönroos 2008). using skill(s) and knowledge to achieve competitive advantages. In the case of following the service strategy of a development partner. The four service strategies investigated in the present study and their corresponding organizational configurations are not intended to be exhaustive. as well as Neu and Brown (2005) who propose integrating product and service business. 30 orientation can then be translated into different service strategies based on a company’s specific situation. The service strategies investigated in the present study represent different avenues for developing a service orientation in a manufacturing company. If manufacturing companies try to implement their service strategy through providing customer support services or operational (outsourcing) services. More specifically. Only if manufacturing companies form one of the four successful strategy-structure configurations will they be able to achieve the intended value proposition (Vargo and Lusch 2004 and 2008a/b. The identification of the four strategy-structure configurations helps to shift the basis for value exchange. it contributes to Davies' (2004) missing link between organizational structures and strategies for high-value-added services. whereas the average . but rather to highlight potential directions for strategic management research in the context of service orientation.

Product services can be further distinguished into services for ensuring the proper functioning of the product (after-sales services) and for optimizing the efficiency and effectiveness of the product within the customer process (customer support services). The mediation effect can either be that service strategy mediates the relationship between organizational design factors and performance or that organizational design factors mediate the relationship between service strategy and performance. to total offerings dominated by services (Kotler 1994). Fourth. but the existing literature on fit as mediation in strategic management consistently describes the mediation effects as structure that mediates the relationship between strategy and performance. Third. Prajogo and Sohal (2006) investigate. for example. how total quality management mediates the relationship between organization strategy and organization performance. Because the different items of customer services no longer discriminate among the strategy clusters. the findings extend the existing knowledge about how manufacturing companies can move from the total offerings of products and services dominated by products. the findings implicitly suggest mediation effects. The results do not comprehensively suggest which mediation effect is relevant for the strategy-structure configuration. 31 level of customer support services for DP also suggests separating these services from the product business. Mathieu's (2001) service avenue (specifity) of customer service is part of all of the four service strategies. Because this type of mediation effect has been substantiated in the . The bundling of operational services and R&D-oriented services into the service strategies of outsourcing partners and development partner extends Mathieu's (2001) concept of service products. Both service strategies highlight the service products that manufacturing companies should emphasize in order to achieve a total offering dominated by services.

and a high level of service orientation of corporate values and . it could be assumed that the configuration of organizational structures mediates the relationship of service strategy and performance. Venkatraman 1989). More specifically. managers who consider an after-sales service provider strategy should focus on the implementation of service orientation in corporate values. they do not need to make a distinction between product and service business. The degree of organizational distinctiveness is high and differs partly from the other three clusters.g. Furthermore. 32 literature (e. Consequently. but more important for after-sales service providers. Managers implementing a customer support service provider strategy should be conscientious about the service orientation of personal recruitment. training and assessment. managerial efforts to implement an outsourcing partner strategy requires a high level of organizational distinctiveness between products and services. Similar to outsourcing partners and development partners. a high level of proximity to customers. By implementing an after-sales service provider strategy. the service orientation of employees’ behavior. the implementation of the service orientation of employees’ behavior is less important for outsourcing partners and development partners. personnel training and personnel assessment/compensations are less important. personnel recruitment. Proximity to customers is of average importance for implementing an after-sales service provider strategy. In contrast. the customer support service provider strategy requires implementation of high levels of service orientation in the corporate values. Managerial implications The four specific configurations serve as managerial guidance for implementing various service strategies. Only if managers understand the characteristics of the company's service strategy will they be able to implement the right organizational design factors.

The degree of proximity to customers is also high and only the organizational distinctiveness is on an average level. An adequate configuration among organizational factors and service strategies leads to coalescence. Instead of concentrating on increasing the service orientation of individual organization elements. In line with Bowen. The results of the cluster analysis. complementary and mutually reinforcing. do not reveal to what extent individual organizational design factors contribute to the success of each service strategy. The various fits and misfits between strategy and organizational configurations also lead to the most important managerial implication. Our results express how the success of each service strategy depends on the implementation of specific configurations of organizational design factors. we proposed that organizational performance depends on the fit between service strategy and configurations of organizational design factors. This union enables managers to achieve above-average company performance. For this cluster. Siehl and Schneider's (1989) framework on internal harmony between strategy and structure. however. therefore they are internally consistent. The implementation of the development partner strategy is characterized by a high level in the five factors reflecting the service orientation of the corporate culture and human resource management. Limitations and future research opportunities Although this study has its merits as indicated earlier. 33 employees’ behavior. the three factors capturing the service orientation of human resource management are only of average importance. along with the individual contribution of each design factor to the . The configuration of organizational design factors is believed to be a significant factor in organizational performance. it also has some limitations. managerial actions must focus on configurations among organizational factors and service strategies.

In view of the increasing importance of services for the adjacent customer activity chain (Sawhney. require broad data sets on each service strategy in order to deal with methodological issues reported in the relevant literature (Baumgartner and Homburg 1996). Spatial expansion and reconfiguration of the adjacent customer activity chain (Sawhney. that is. Future research could draw on fit as mediation or fit as moderation using structural equation modeling (Venkatraman 1989). These promising research approaches for understanding individual impact. service strategies concentrating on this activity chain should provide promising research prospects. only service strategies addressing the primary customer activity chain are considered. By providing integrated solutions. 34 success of each service strategy. The contribution of each organizational design factor to the success of service strategies is considered to be beyond the scope of this research goal and its corresponding methodology. Balasubramanian and Krishnan 2004). Understanding how individual factors contribute to the success of each service strategy offers interesting future research opportunities. but future research should concentrate more explicitly on investigating integrated solutions in order to understand the link between services and the nature of value creation better. companies following these service strategies act somewhat as resource integrators where value is defined by the customer in the context of interactions and networks (Vargo and Lusch 2008b). the service strategies support the relational nature of value creation. Thus. All of the four service strategies can also be interpreted as offering different degrees of integrated solutions. Our empirical investigation concentrates on service strategies associated with moving downstream in the primary customer value chain. If the complexity of the total offering . Balasubramanian and Krishnan 2004) are considered to be beyond the scope of this paper. Integrating service strategies from the supplementary customer activity chain would also lead to a re-consideration of the integration of products and services.

or manufacturers of digital entertainment equipment who eliminate their goods and start selling digitized entertainment. then the argument can be substantiated for managers to integrate the responsibilities of multiple value chain activities in order to provide a complex total offering (Neu and Brown 2005). nor do they predict whether the strategy-structure configuration functions through strategy-follows-structure or structure-follows-strategy paradigms (Chandler 1962). Thus. . The service strategies investigated in this study are not meant to be exhaustive. Acknowledgement The authors would like to thank the editor and two anonymous reviewers for helpful comments to improve the quality of the manuscript. but rather to highlight potential strategic directions for manufacturing companies moving into the service business. manufacturing (1) is just another service and (2) it results in output that has value only if it results in service. Furthermore. Alternative strategic directions might be reached through understanding that in the service dominant logic. such as General Electric selling jet-engine usage rather than the jet engines themselves. Both questions may provide promising research prospects. 35 increases by adding services to the supplementary customer activity chain. The findings do not offer guidance on whether the service strategies are following the path of emerging or intended (deliberate) strategies. the service strategies are conceptualized as realized strategies. future empirical studies should include strategic directions in outsourcing manufacturing or selling service flows from the manufactured goods.

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40 TABLES and FIGURES Figure 1: Service strategies. .

. 41 Figure 2: Formative first-order and reflective second-order model.

. 42 Table 1: Results of the exploratory factor analysis [organizational design factors].

simulation) R&D-oriented services Development services Development partner Construction (design) services Business consulting in product and process development Managing the whole maintenance function Operating the product Operational services Outsourcing partner Managing spare parts logistics Operating repair teams for customers Managing the training and personnel development Table 2: Measurement of the number of services for each service strategy. . 43 Number of services for different service strategies List of services Information services Basic advice services Customer service Customer service strategy Documentation Transport to client Installation/commissioning Product-oriented training Help desk Basic service for the installed base Inspection services After-sales service provider Diagnosis services Repair services Preventive maintenance Full maintenance contracts Maintenance services Customer support service provider Annual maintenance activities Service-level agreements on maintenance Process-optimization through continuous maintenance Process design Process-oriented engineering (tests. optimization.

44 Table 3: ANOVA tests associated with both cluster analyses. .

. 45 Table 4: Cluster means of discriminating variables [n = 195].

 italics ­ low performance 3) To be read as: 96 (40+31+12+13) high performing manufacturing companies are correctly classified into the four  strategy­structure configurations (88.8%) are  incorrectly classified in one of the our strategy­structure configurations. 2) Bold ­ high performance SBUs.8%). Correctly  classified are 79 (31+9+15+10+3+4+4+3) for low performing manufacturing companies (90.   . which do not belong  to the four strategy­structure configurations.7%) correctly and   20 (10.2%).  provider except of medium emphasis on  service orientation of corporate  culture and proximity to  customers             (n=98) 40 3   31   9   15 Cluster 6: High service  Customer support orientation across all factors     service provider         Cluster on  organizational (n=56) 8 10 31 4   3     design factors Cluster 7: High service  Outsourcing partner orientation across all factors.3%) incorrectly classified manufacturing companies.2%).  except for organizational  distinctiveness and personnel  compensation/assessment             (n=21)     4 3     13 1                     Notes: 1) The grey cells indicate the four strategy­structure configurations. this leads to 175 (89. Incorrectly are 12 (8+4) high performing companies (10. 46     Strategy clusters     Cluster 1  (n=61) Cluster 2  (n=77) Cluster 3  (n=24) Cluster 4  (n=33) After­sales service Customer support Outsourcing partner Development partner provider service provider Cluster 5: Low service  After­sales service orientation across all factors. whereas nine low performance manufacturing companies (8.  except for personnel recruitment  and training             (n=20)       4 12     4 Cluster 8: High service  Development partner orientation across all factors. In total.

. 47 Table 5: Strategy-structure configurations.