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why a manufacturing firm’s decision to integrate forward into advanced services can prove very difficult, as also observed in the growing literature on the servitization phenomenon.
We believe the study makes several contributions both to theory and management practice.
The various economic rationales, often referred to as “theory of the firm”, still remain a fertile area. This relates to how different theories react either in conflict or concert to the integration of different contextual activities. These implications relate especially with respect to the establishment of sequential profit centers, where incentive conflicts between entrepreneurial opportunity and opportunism among different stakeholders take center stage. The growing servitization literature is another stream of research that accentuates these tensions.
Manufacturing firms need to carefully evaluate uncertainty of final markets and the role of the distribution, both in the short-term but also long-term, to assess if integration will restrict downstream dynamic capabilities. The servitization literature has long advocated separating downstream business activities into an independent profit center. As this study shows, integrated downstream business activities will create a new final point of revenue and profit which awakens different aspects in relation to delegation responsibility and authority. This study takes a step back from the potential benefits ascribed to advanced value adding activities, considering how the economic integration rationales with adopted structures and incentive systems affect the delivery of proposed downstream advantages. This has also direct implications for practitioners who must govern and manage the forward integration decisions to advance competitive advantage. Top management must carefully assess the context of the distribution activities and consider how the context influences entrepreneurial behavior and internal opportunism. Failing to do so, can lead to high coordination costs when the decision to integrate forward is based on one set of economic integration rationales without considering other, conflicting perspectives that would caution against integration. The path to divesting integrated activities might prove even more costly when vital resources and capabilities have been diluted by corporate ownership.
The study has some obvious limitations. While case studies allow in depth exploration of contextualized governance approaches, they are also limited in their ability to generalize findings. Since this study is a single case study of forward integration, it provides deep insights into the governance choices made by a representative organization with related structures, systems, associated costs, and benefits. The methodology adopted a theory guided inductive (or
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abductive) approach to investigate the long-linked governance mechanism, following a forward integration decision in a major manufacturing firm. Utilizing a different theory guiding approach or a purely grounded research method might reveal other internal structures and governance mechanisms that affect subsequent performance, but that was beyond the scope of the current study. This also makes it relevant to ask how the Case Company would have performed if it had not embarked on an aggressive strategy of forward integration. While that is beyond the scope of this study, data from one major European national market where the Case Company did not integrate forward suggests that forward integration does boost sales performance in terms of units. In this market the Case Company realized a lower market share than in any of the other integrated markets of comparable size. The interplay between defining firm boundaries with related structures and governance challenges remain a highly relevant topic for contemporary manufacturing firms, one that requires more research to inform executives that contemplate forward integration to incorporate value-adding services.
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