External growth - an option for achieving service growth in industrial companies

Purpose: Service growth contributes to achieving competitive advantages for industrial companies. However, the servitization literature assumes that service growth is internally driven by developing service capabilities and extending service offerings. This assumption neglects external growth through mergers and acquisitions as an option for growing the service business. To close this research gap, we test whether mergers and acquisitions contribute to service growth in industrial companies. Design/Methodology/Approach: To study external growth, we deployed a time series and regression analysis. We consider the volume of acquisition activities as a key explanatory variable, and distinguish between two types of acquisitions: product companies and service providers. Dependent variables are the growth rate for service revenue and the growth rate in the share of service revenue. Data were obtained from annual reports of 53 European industrial companies over a period of 6 to 10 years. Altogether, we analyzed 452 data points on external growth. Findings: The hypothesis on the positive relationship between external growth (acquisition of product companies and acquisition of service providers) and service performance (growth rate for service revenue and share of service revenue) cannot be rejected. Interestingly, the acquisition of product companies strengthens service revenue growth rate. The only option to increase the share of service revenue in a way that service revenue grows faster that product revenues is the acquisition of service providers. Surprisingly, investments in companies for external growth appears to be an antecedent for extending the service business. Originality/Value: Our study is the first quantitative study on external growth as an option for achieving service growth in industrial companies. It opens up the current servitization literature towards a discussion on external growth, integrating aspects of mergers and acquisitions as an efficient way to develop service capabilities.