Service Transition Strategies in Manufacturing: Implications for Firm Risk

This article investigates the impact of service transition (the infusion of services in addition to goods to a manufacturing firm's offering) on firm-idiosyncratic risk. The authors analyze a unique data set of 168 publicly traded manufacturing firms over a 6-year financial window (2006-2011), with the results showing that service transition produces a substantial increase in idiosyncratic risk. This effect, however, varies depending on critical firm contexts. First, strategic coherence (research and development intensity and service relatedness) mitigates market misgivings and causes idiosyncratic risk to decrease as service becomes more central to the offering. Second, misappropriation of resources (marketing expenses and resource slack) exacerbates the impact, resulting in increased firm risk. In light of the findings, the authors were able to expand the primary theoretical underpinnings concerning service transition by (1) providing a more holistic framework to view the phenomenon (behavioral theory of the firm), (2) demonstrating contextual boundaries around service transition, and (3) providing managers with useful insights to inform strategic firm-level decisions.