When is servitization a profitable competitive strategy?

Although servitization has emerged as a new competitive strategy for manufacturers, there has been little research about product-level servitization. We investigate the competition between two channels, one separately providing both goods and services and the other providing inseparable servitized goods through a game theoretic approach. Two critical parameters to understand competition between the two channels will be proposed: (1) service dependency – a degree of dependency of physical goods upon services – and (2) channel substitutability – a degree of substitution between conventional channels and servitized one. The study reveals that the servitization strategy is a better choice for a manufacturer selling physical goods only when the goods require a higher level of service (i.e., high service dependency), and when the competition between the two channels is more severe (i.e., high channel substitutability). In addition, obtaining cost efficiency is found to be an important factor to achieve higher competitive advantage over the other channel.