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Market-Based Solutions to Vital Economic Issues
Research
Oct 2, 2018

Is Servicization a Win-Win Strategy? Profitability And Environmental Implications Of Servicization

Abstract

Problem definition: Servicization is a business strategy to sell the functionality of a product rather than the product itself. It has been touted as an environmentally friendly strategy as it encourages manufacturers to take more responsibility for their products. We study when servicization results in a win-win outcome where it can simultaneously increase a firm’s profits and decrease its environmental impact compared with selling products.

Academic/practical relevance: Whereas policy planners are interested in strategies that reduce environmental impact, firms are unlikely to embrace them if they are not profitable. Hence, understanding when servicization results in a win-win outcome is critical both for firms and for policy makers.

Methodology: We construct a stylized game-theoretic model that takes into account several key dynamics not accounted for in prior literature. In particular, we allow the servicizing firm to tailor the service to consumers’ needs, endogenize product durability choice, and also use an environmental impact metric that captures the low discretionary use nature of products.

Results: For products that have a low use impact relative to their production and disposal impacts, servicization can be a win-win strategy only if the firm has sufficiently high operating efficiency. By contrast, for products that have a high use impact relative to their production and disposal impacts, servicization can be a win-win strategy only if the firm has sufficiently low operating efficiency and the consumer segments are adequately similar. Furthermore, servicization can improve consumer welfare and simultaneously improve profitability and environmental impact only for products with a low relative use impact.

Managerial implications: Whether servicization leads to a win-win outcome cannot simply be determined by changes in product durability, as often argued. It critically depends on the firm’s relative operating efficiency, environmental impact of product in its use phase relative to the production and disposal phases, and the similarity of consumer segments. Our results explicitly characterize these relations.


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