Project

Pathways to sustainable growth through servitization for manufacturing firm
Submitted to: Prof Ali Raza Qurashi
Submitted by: M. RizwanAkram
Program: MBA(2.5)(Project Managment),
Registrationno: 1634-315002
University: Prestion University- Lahore Campus
Mob: 03142437414/03116333401
rizwan.akram83@gmail.com

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BY THE GRACE OF ALMIGHTY ALLAH
By the grace of ALLAH ALMIGHTY, the most merciful, this is LORD of this world, who though Man what
he knows not. Above all we are indebted to ALMIGHTY ALLAH, LORD of our lives and everything in this
universe and His Prophet HAZRAT MUHAMMAD (peace be upon Him), who’s blessings enabled us to
pursuit higher ideas of life.

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DECLARATION
Muhammad Rizwan Akram, Registration No, 1634-315002 student of MBA (2.5y) at
Preston University, Lahore do solemnly declare that:
1. During the period of registered study in which this dissertation was
prepared. The author was not registered for any other academic record or
qualification.
2. The material including in this thesis had not submitted for any academic
record or qualification other than that for which it is now submitted.
3. This thesis represented the original research of author
__________________
Researcher

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CERTIFICATE OF ACCEPTANCE RESPONSIBILITY
It is certified that this report has been assessed bythe external and internal
examiner. All the work is done according to the requirement of University report
format. Hence this report is accepted by the External and Internal Examiner.
________________ ________________
Internal Examiner External Examiner

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DEDICATED TO
My worthy parents, the Respected teachers
who Always urge and motivate me to try to
find ways and are always with me in Every
Hardships of life and has waited for me to be
here at Final stage.

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Acknowledgement
Most grateful to Almighty Allah who enabled me to utilized my
knowledge and skills for the preparation and completion of this
Project report. I want to express my most humble gratitude to my
Teacher and all others who furnished me with the opportunity to
complete report. I am also grateful to my colleagues and friends who
provided with the moral support during the completion of this
report.
RizwanAkram

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Executive Summary
Main purpose of this project was to extract valuable knowledge by
working in a well-known and professional organization in order to
apply the knowledge acquired during MBA~Mphill program. Report
include complete introduction, Vision and Mission problem and their
solutions.
Personal experience which include work in Operations of the
organization. Report also include Financial Statements Horizontal and
Vertical Analysis, SWOT and PEST analysis of the organization in
detail which shows the effects which beneficial or harmful for the
company and also carry managerial and strategic aspects which have
been evaluated to analyze the current position of the organization. I
have learned that how management is managing the finance
department.

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The Newborn and Future for Changhong to
Challenge Internet
Compared to the global financial crisis, the
consumer electronics industry is currently
experiencing a revolution. This can be
counted as another earthquake because the
new technologies of mobile internet, big
data, cloud computing, and life sciences are
changing people's lives. Under the new
opportunities and challenges, Changhong
Group will develop terminal devices and
services of Smart home, Smart community, and Smart city. The layout
of smart devices and application services will become the core
capabilities.
Based on people, smart strategic planning will make the strong
foundation for Changhong. At the same time of stimulate business
vitality, Changhong Group will build capacity through horizontal platform
and strengthen the core competitiveness.
We are confident to make Changhong a respected and trustful
enterprise with leading temperament in consumer electronic industry in
the world.

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Contents
Introduction................................................................................................................................... 11
1.0. Introduction of CHANGHONG.................................................................................... 11
1.1. Air Conditioners ........................................................................................................... 12
1.2. Hefei Meiling ................................................................................................................ 12
2. History.......................................................................................................................... 13
3. Introduction of RUBA ................................................................................................. 17
3.1. RUBA Group................................................................................................................. 17
3.2. Introducton of CHNANGHONG RUBA COMPANY Private..................................... 17
4. VISION ....................................................................................................................... 18
5. MISSION .................................................................................................................... 19
6. TO BE......................................................................................................................... 19
6.1 Good Governance.......................................................................................................... 20
6.2 Work Enviorment.......................................................................................................... 20
6.3 Goonverservation.......................................................................................................... 20
6.4 Customer Satisfaction ................................................................................................... 21
6.5 Ethical behavior............................................................................................................. 21
6.6 Whistle Blowing Policyt ............................................................................................... 21
6.7 Unlawful activity........................................................................................................... 21
6.8 Forward to code of conduct........................................................................................... 21
7. Company Information................................................................................................. 23
7.1 Board of Directors......................................................................................................... 23
7.2 Board of Supervisior ..................................................................................................... 24
7.3 Top Managment ............................................................................................................ 24
7.4 Pateern of shareholding in Pakistan.............................................................................. 24
7.5 Auditors......................................................................................................................... 24

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7.6 Legal Advisor................................................................................................................ 24
7.7 Banks............................................................................................................................. 25
7.8 Head Office & Worksanks ............................................................................................. 26
7.9 Brand Elecments ............................................................................................................ 26
7.10 Organization Strature ..................................................................................................... 27
7.11 Business Division........................................................................................................... 28
8. Company Awards & Achievements............................................................................ 31
9. Departments ............................................................................................................... 31
9.1 Main Departments.......................................................................................................... 34
9.2 Detail of Department...................................................................................................... 34
10. Orgnization Culture .................................................................................................. 35
11. Product & Services..................................................................................................... 36
12. Strategy ...................................................................................................................... 39
13. Analysis...................................................................................................................... 40
13.1 Analytical Financial Statement Analysis ....................................................................... 34
13.2 SWOT Anaylsis.............................................................................................................. 34
13.3 PEST Analysis................................................................................................................ 34
14. Brand Value ............................................................................................................... 47
15. Financial Data ............................................................................................................. 48
16. Problem Identification & Conclusion ......................................................................... 51
16.1 Accounts Department..................................................................................................... 51
16.2 Internal Audit Department ............................................................................................. 51
16.3 HR Department .............................................................................................................. 52
17. Backgroup of Problem ................................................................................................ 53
17.1 Introduction ................................................................................................................... 53
17.2 Literature review ........................................................................................................... 55

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17.3 Theoretical devlpoment of the research model .............................................................. 56
17.4 Hypothesis...................................................................................................................... 57
17.5 Research Methodology .................................................................................................. 60
17.6 Result ............................................................................................................................. 71
17.8 Discussion & Conclusion............................................................................................... 72
18. Strategy to encounter problem-Pk .............................................................................. 76
18.1 Service Team Structure .................................................................................................. 77
18.2 Complaint Process Improvement Plan ........................................................................... 78
18.3 Service Manpower Analysis........................................................................................... 79
18.4 Plan for technicians management & efficieny ............................................................... 80
18.5 Service Network Plan..................................................................................................... 81
18.6 Direct service center opening road map 2016~2020...................................................... 82
18.7 DSC opending strategy for the year 2016~2020 ............................................................ 83
18.8 ASC Management Plan.................................................................................................. 84
18.9 Replacement process control-Action plan...................................................................... 86
18.10 Product Technical Traning Management ....................................................................... 86
18.11 Tranaing calander........................................................................................................... 87
18.12 Service Strategy Management 2016~2020- One Look .................................................. 88
19. Social Responsibility ................................................................................................. 89
19. Appendix .................................................................................................................... 95
20. Biblography................................................................................................................. 96

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1. INTRODUCTION
1.0. Introduction of CHANGHONG
Established in 1958, Changhong has grown into one of the largest consumer electronics
providers in china, specializing in R&D, manufacturing and marketing of consumer
electronics products.
Changhong became a public company with shares listed on the shanghai stock exchange in
1994. In the last 5 years, Changhong has experienced substantial growth increasing its
revenue from AUD $1.6 billion in 2004 to AUD $7.6 billion in 2009.
Worldwide, Changhong has over 72,000 employees and is an industry leader as the biggest
supplier of consumer electronics in Asia. For 18 consecutive years, Changhong has been
ranked no.1 in the Chinese domestic market with one out of every four TVs sold in china
being manufactured by Changhong.
Changhong also has an established overseas network including branches in Europe,
Southeast Asia and the Middle East. It is continually expanding into other overseas
markets providing high quality products and services to over 90 countries and regions. This
global network includes a support structure of more than 20,000 sales and service
worldwide outlets.
Changhong’s goal is to actively participate in the development of a global digital industry.
With world-class manufacturing facilities, numerous new product lines in development and
world leading R&D technologies, Changhong is committed to productinnovation.

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1.1. Air Conditioners
Changhong is one of Asia’s biggest air conditioner manufacturers. Changhong makes a
wide range of air conditioners including window-type, split-type, cabinet-type, inverter-
type, VRV, cold water-type and household central-type ACs, with an annual production
capacity of 4,800,000. Changhong owns state-of-the-art equipment and facilities to ensure
constant innovation. Since 1999, Changhong air conditioners have been available in over
70 countries including America, Russia, Australia, Indonesia, Europe union, Czech,
Pakistan, Thailand, Peru. Changhong owns two production centers, at Sichuan and
Guangdong and subsidiary companies in Australia and Indonesia. It has the UL, CE, CB,
TUV and CCIB certifications.
1.2. Hefei Meiling
As one of china’s earliest home appliances enterprises, Hefei Meiling co. Ltd. Was
established in 1964 and has grown to become a reputed player in the field of refrigerator
and freezer production and sales along with washing machines and air conditioners.
Meiling has a leading share of the domestic market and also exports to more than 100
countries around the world. With three manufacturing bases, namely Hefei, Mianyang and
Jingdezhen, Meiling has an annual production capacity of 15 million, which includes
refrigerators and freezers, washing machines and air conditioners.
Refrigeration has been Meiling’s forte for 29 years and it is known for its design, R&D and
quality control. Meiling has extraordinary achievements in the fields of energy saving,
deep freezing and environment-friendly technology.
Meiling Has Passed ISO9001, ISO14001, OHSAS18001, IECQQC08000 And Its Leading
Products Have Passed GS, CE (ERP), UL, CSA, C8, SASO (EER), S-Mark and Other
International Safety and Energy Authentications.

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2.
2015
World’s Top 500 Brands were released Changhong rises to No. 291.
 On December 15, the World’s Top 500 Brands ranking list for the year 2015 was released by World Brand
Laboratory in New York. Changhong ranking 291 rises 5 ranks compared with last year.
Changhong Integrate Panasonic SANYO TV China’s District Business
 On October 27, Sichuan Changhong announced that Changhong and Panasonic had agreed on strategic
cooperation about integrating SANYO TV China’s district business including Changhong receiving
SANYO TV R&D team, marketing team, distribution channel, etc. and having the right of use of SANYO
TV brand in China.
Changhong CHiQ ID designer won Chinese Government Friendship Award
 On October 27, Edoardo，Chief Design Director of Changhong Innovation Design Center was listed in
Chinese Government Friendship Award for the year 2015 and his is the only foreign experts receiving this
honor in household appliance industry in 2015. It is said that there are only two people gained this honor
in product design field since this award was established 24 years ago and Edoardo is one of them. What’s
more, he is the only designer in household appliance field who gained this honor. This strongly shows
China’s emphasis and affirmation on innovation design.
Changhong released the world’s first internet of things smart phone.
 On April 20, Changhong released the world’s first internet of things smart phone. Based on the globally
original IPP framework (Personal Integrated Gateway) with proprietary intellectual property and by
integrating cloud service data processing platform and powerful intelligent terminal Changhong redefines
smart phone under the circumstance of Internet of Things, namely, “Taken sensor as the main part of
Internet of Things control, interactive and collaborative center”, realizing the universe connection, control,
coordination, interaction, sharing between smartphones and other smart terminals and firstly guiding smart
phones into the era of Internet of Things.
Changhong lauched the second generation CHiQ product
 On March 26, the 2015 Spring Changhong CHiQ second generation product launch conference
was held and the world’s first mobile internet TV was released. CHiQ second generation TV applies
original "M+Two-chip "intelligent connection technology and equips one TV chip plus one high-

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performance mobile chip, which makes the terminal with mobile chip can connect with TV freely and
seamlessly, therefore, integrating smart TV into the mobile internet ecosystem.
Changhong set R&D center in Silicon Valley
On January 9, Changhong announced that North America R&D center was officially established i
n Santa Clara.
2014
The financial shared system innovated by Changhong became the first Harvard MBA
case in this industry.
In July 2014, the financial shared system innovated by Changhong become the first Harvard
MBA case in this industry. Harvard says Changhong’s financial shared system shows a new
finance control system when a big TV manufacturer faces financial austerity and global market
and it is a successful innovation try in finance control filed for China’s leading enterprise in
2014.
Changhong held the 2014 Spring air conditioner product launch conference
On March 31, 2014, Changhong held the Spring air conditioner product release conference and launched
the world’s first body status sensing air conditioner. The launch of CHiQ air conditioner marked that TV,
refrigerator and air conditioner of Changhong’s differentiation terminal brand based on home internet---
CHiQ series were all launched.
Meiling CHiQ refrigerator product launch was held in Mianyang Sichuan.
On February 26, 2014, Meiling CHiQ refrigerator product launch was held in Mianyang Sichuan.
Meiling launched the world’s first comprehensive market-based cloud image recognition refrigerator---
CHiQ refrigerator. It applies cloud image recognition technology, integrates cloud calculation, internet of
things, big data, frequency conversion and other technologies and realizes information interaction between
human and refrigerator, human and food.
Changhong held 2014 Spring TV product launch and released ChiQ TV
On January 18, 2014, Changhong held 2014 Spring TV product launch and released ChiQ TV, the new
differentiation smart TV based on family internet. CHiQ smart TV is the first TV product completely
realizing integration of three networks in domestic.
2013
Huayi Compressor became the first biggest household compressor manufacturer in
the world.
On December 28, 2013, Changhong announced that its subsidiary company Huayi Compressor had
manufactured and sold 34 million refrigeration compressors in 2013, becoming the first biggest household
compressor manufacturer in the world. Meanwhile, Jiaxing refrigeration compressor base puts the project
of annual output 5 million high-performance and inverter compressors into operation, ranking among the
global biggest refrigerator compressor research and development base.
Changhong held the “Make your imagination fly” press conference
On October 15, 2013, Changhong held the “Make your imagination fly” press conference and released the
world’s first family internet product modality which can completely realize interconnection, interflow and

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mutual control. Under the big intelligent era, it creates the Human-centered new living style for
customers.
Changhong USA Limited Company was established
On June 18, 2013, Sichuan Changhong announced that in order to further expand North America market,
the subsidiary company Guangdong Changhong planned to invest 500,000 dollars to establish Changhong
USA Limited Company registered in greater Los Angeles region and mainly conducting electric
equipment product sales, service, agent service and other business activities.
2012
Jiaxipera set Technology Marketing Center in Spain
On December 7, 2012, Jiaxipera Company European Technology Marketing Center was founded in
Barcelona, Spain.
Huayi Compressor got the prime assets of the world’s fourth-largest commercial
compressor provider Cubigel Company
On August 2, 2012, Changhong subsidiary company Huayi Compressor announced that Spanish court
judged Huayi Compressor got the prime assets of the world’s fourth-largest commercial compressor
provider Cubigel Company, which marked Huayi Compressor had made an important step towards
world’s number one.
2011
Changhong’s refrigerator compressor technology center won the title of “National
Level Technology Center”
On November 16, 2011, Changhong’s refrigerator compressor technology center won the title of
“National Level Technology Center”. Till now, Changhonghas the largest number of technology center
“National Team” including Changhong Technology Center, Engineering Center, Meiling Technology
Center, etc. in household appliance industry
The signing ceremony of Changhong-RUBA strategic cooperation and Pakistan Joint
venture project was held
On June 28, 2011, the signing ceremony of Changhong-RUBA strategic cooperation and Pakistan Joint
venture project was held in Mianyang and Changhong announced officially establishing strategic
cooperation relationship with Pakistan most powerful household appliance distributor RUBA group.
Meanwhile, the joint venture project of Changhong’s Hefei Meiling wholly-owned subsidiary Zhongshan
Changhong Electric Co.,Ld. which is specialized in air conditioner industry and RUBA wholly-owned
subsidiary Ruba General Trading FZ officially started in Pakistan.
2010
Changhong set up subsidiaries in Russia and UAE.
2008
Changhong Indonesia Electric Co.,Ltd was established in Jakarta.
2008

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Changhong Hefei industry park was established.
2007
Changhong Europe Electric Co.,Ltd opened in Nymburk, Czech Republic. This project was the
biggest Chinese investment in Czech Republic.
2005
Changhong became the biggest shareholder of Meiling Electric Co.,Ltd and entered the
refrigerator market.
2005
Changhong entered mobile phone market.
2004
Changhong set up 10 overseas representative offices.
2003
Guangdong Changhong Co.,Ltd was established and is the main export-oriented manufacturing
base of changhong.
1997
Changhong set up air conditioner factory and started to expand to diversified industries.
1995
Changhong won the International Statistical Institute award for "China's biggest color TV
manufacturing base.
1994
Changhong became a public company (600839.SH)
1986
Changhong built its modern color TV production line and building.
1976
Changhong made its first color Television.
1972
Changhong made its first black-and-white TV
1958
Changhong was established in Mianyang,Sichuan, China.

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3. Introduction of RUBA
3.1 RUBA GROUP
Established in 1971, Ruba group, electronics conglomerate in Pakistan, has collaborated
with Changhong group to establish new innovative brand “Changhong Ruba” for Pakistan
market. They have diversified businesses such as textiles and trading companies based in
Dubai and Singapore. The group is committed to provide excellent and innovative goods in
Pakistan market and become well known in electronics industry all over Pakistan.
3.2 Introduction of CHANHONG RUBA COMPANYPRIVATE.
Changhong , China’s largest consumer electronics and home appliances manufacturer with
a presence in more than 110 countries shake hands on November 27, 2011 in collaboration
with the Ruba Group to launch its co-brand “Changhong Ruba” and flat panel category
products. Changhong’s higher management from China (Mr Wujiang, Vice President of
Sichuan Changhong Electrics Co Ltd, Chairman of Changhong Overseas Strategic
Business Unit) and Ruba Group (Mr Muhammad Ayub, the President of Ruba Group),
graced the launch ceremony of the brand in Pakistan. Changhong Ruba with its planned
approach and marketing strategy seems all set to bring about a change in the market and set
new quality standards that would allow Pakistani consumers to enjoy a wide range of
electronics at affordable prices.

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4. VISION
Credible Security. We commit to create high-class products and high-quality service. This
vision is at the very core of our commitment to lead innovations in technology, products
and solutions that inspire communities around the world to join our aspiration for creating
a better world full of richer digital experiences. As we recognise our responsibility as a
creative leader in the global society, we also dedicate our efforts and resources to offering
new values to the industry and customers while fulfilling shared values of our employees
and partners. At Changhong Ruba Trading Company (Pvt.) Ltd, we want to create a future
that is exciting and promising for all together.
As a guide to common understanding and measurable goal, a set of specific objectives is
incorporated into our vision. We seek to achieve high annual sales volume in Pakistan
while placing ‘Changhong Ruba’ overall brand value among the global. Three key strategic
pillars that are now part of our culture, business operation and management describe the
governing initiatives to this end: ‘Creativity’, ‘Partnership’ and ‘Great People’.
We pride ourselves on delivering the best electronic products through operational
excellence and innovation prowess. As we look forward to exploring new business areas,
we are excited for new challenges and opportunities ahead. Changhong Ruba will continue
to build on top of its current achievements new capacity and expertise to further its
competitiveness and its innovation.

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5. Mission
To run business with honesty and integrity, and with consistent return; to help the society
and the nation allay worries and tide over difficulties; to achieve civic honor.
6. TO BE
 a leader in the markets The company serve by providing quality products
and superior service to the company’s customers, while learning from their
feedback to set even higher standards for the company’s products.
 a Company that continuously enhances its superior technological
competence to provide innovative solutions to customer needs.
 a Company that attracts and retains outstanding people by creating a
culture that fosters openness, innovation, promotes individual growth,
rewards initiative and performance.
 a Company which combines its people, technology, management systems
and market opportunities to achieve profitable growth while providing fair
returns to its investors.
 a Company that endeavors to set the highest standards in corporate ethics
in serving the society.
Underlying everything the company believes in is a set of core values. These
guide us to deal with every aspect of any issue The Company might encounter in
the company’s personal and professional lives. These values help us grow inside
& outside, personally and as an organization.

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6.1 Good Governance
The company are committed to running the company’s business successfully and
efficiently, providing long-term benefits to the company’s employees and shareholders,
and enriching the lives of those whom The company serve by fulfilling the company’s
corporate responsibility to the best of the company’s ability. The Company expects
excellence from all processes, whether they relate to policy formation and accounting
procedures or productdevelopment and customer service.
6.2 Work Environment
The company are committed to running the company’s business successfully and
efficiently, providing long-term benefits to the company’s employees and shareholders,
and enriching the lives of those whom The company serve by fulfilling the company’s
corporate responsibility to the best of the company’s ability. The company expect
excellence from all processes, whether they relate to policy formation and accounting
procedures or productdevelopment and customer service.
The company’s policies and core values are aimed towards creating an informal yet
stimulating team-oriented work environment with a culture of sharing and open
communication. The Company cherishes the diversity of viewpoint of every individual;
The Company realizes this encourages innovation and develops character.
The company’s People
The success of any organization is largely dependent on the people working for it. Each
member of the company’s team is considered equally important and provided constant
training, motivation and guidance. The Company possesses a dedicated staff of the highest
caliber committed to making the company’s business a success. The Company ensures that
every employee has the opportunity for maximum professional development. To achieve
this goal, The Company seeks to provide challenging work prospects for all employees.
Each person is compensated and rewarded for his or her performance and hard work on a
strict merit basis.
6.3 Conservation
The Company expects and encourages the company’s employees to actively participate in
community service and to take care of the environment entrusted to us as citizens sharing
the earth’s resources.

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6.4 Customer Satisfaction
The company is customer-driven; The Company goes the extra mile to make sure the
expectations of dealers and ultimately of customers are met and exceeded on every issue.
The company partner with leading companies to arm ourselves with the latest technology
and provide customers with innovative electronic products.
6.5 Ethical behavior
The Company makes it clear that being a sincere, honest and decent human being takes
precedence over everything else. In the Changhong Ruba family, there is an all-round
respect for elders, tolerance for equals and affection for youngsters. Managers are expected
to lead from the front, train junior colleagues through delegation, resolve conflicts quickly,
be visible at all times and act as role models for others. There are clear cut H.R policies
and Employees manuals.
6.6 WHISTLE BLOWING POLICY
The Company is committed to high standards of ethical, moral and legal business conduct.
In line with the company’s commitment to open communication, this policy aims to
provide an avenue for employees to raise concerns and reassurance that they will be
protected from reprisals or victimization for whistleblowing.
This whistleblowing policy is intended to protect the staff if they raise concerns such as:
6.7 Unlawful activity;
Activities that are not in line with ChangHong Ruba’ policy, including the Code of
Conduct;or activities which otherwise amount to serious improper conduct
The Company makes sure that all the company’s processes and methods conform to the
highest ideals of professional behavior. The company’s organizational structure is straight-
forward and need-based; accountability is transparent, consistent and both horizontal and
vertical.
6.8 FORWARD TO CODE OF CONDUCT
Company has built a reputation for conducting its business with integrity in accordance
with high standards of ethical behavior and in compliance with the laws and regulations
that govern the company’s business. This reputation is among the company’s most
valuable assets and ultimately depends upon the individual actions of each of the
company’s employees all over the country.

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Code of conduct has been prepared to assist each of us in the company’s reports to not only
maintain but enhance this reputation. It provides guidance for business conduct in a
number of areas and references to more detailed corporate policies for further direction.
The adherence of all employees to high standards of integrity and ethical behavior is
mandatory and benefits all stakeholders including the company’s customers, the
company’s communities, the company’s shareholders and ourselves.
The Company carefully checks for compliance with the Code by providing suitable
information, prevention and control tools and ensuring transparency in all transactions and
behaviors by taking corrective measures if and as required.
Changhong Ruba Code of Conduct applies to affiliates, employees and others who act for
us countrywide, within all sectors, regions, areas and functions.

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7. Company Information
7.1 Board of Directors
1.Chairman ：Zhao Yong
2.Vice Chairman:Liu Tibin
3.Director：LiJin
4.Director：WuYingjian
5.Director：WuJiang
6.IndependentDirector：JiaXiaoliang
7.IndependentDirector：Ning Xiangdong
8.IndependentDirector：CaiChun

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7.2 Board of Supervisors
1.Chairman of Board of Supervisors：Yu Wanchun
2.Supervisor：Yang Dan
3.Supervisor：Yuan Bing
4.Employee Supervisor：WuXiaogang
5.Employee Supervisor：Tang Dechao
7.3 Top management
1.General Manager: Liu Tibin
2.Deputy General Manager：Zhen Guangqing
3.Deputy General Manager：Tan Mingxian
4.Deputy General Manager：Guo Dexuan
5.Deputy General Manager、Secretary of the Board：Yang Jun
6.Deputy General Manager：Huang Dawen
7.Chief financial officer:Hu Jia

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7.4 Pattern of shareholding in Pakistan.
Members Nationality No Of Shares %Age of
Holding
Mr.Muhamad Asif Ayub Pakistani 1
Zhongshan Changhong
Electric Co Limited.
Company 1,558,797 40%
Ruba Genaral Trading Fze. Company 1,040200, 59.97
Mr.Shahid Latif Dar Pakistani 1
Mr.teng Guangsheng Chinese 1
Mr.Teng Youdao Chinese 1
Mr.Wang Xiaoping Chinese 1
Total 2,599,002
7.5 Auditors
Rizwan and company Chartered Accountants (DFK International).
7.6 Legal Advisors
Hassan & Hassan (Lahore)
7.7 Bankes
NIB Bank limited.
United Bank Limited.
Habib Bank Limited.
Bank Al-Falah Limited.

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7.7.1Head Office & Works
24-Commercial Area, Cavalry Ground,
Lahore Cantt ,Punjab, Pakistan
PABX: (042) 36676335 -8
Fax (042) 36676339
7.9 Brand Elements

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7.10 OrganizationStructure
Chief Executive
Officer (CEO) /
Managing Director
Directors
H.R Manager
Head of marketing
G.M After Sales
G.M Sales
Manager Sales
Operation
S.R Coprate Sales
Manager
Chief Financial
Officer(CFO)
Head Of Finance
SR.Finance

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7.11 Business Divisions

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8 Company Awards and Achievements

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9 DEPARTMENTS
Departments of Changhong Ruba Trading Company (Pvt) Ltd.
9.1 Main Departments
Some other main departments of ChangHong Ruba Trading Company (Pvt.) Ltd are:
1. Management
2. Supply Chain & Logistics
3. Business Development/Show Room
4. Hyper Channel & Corp Sales
5. Marketing
6. Finance
7. HR & Admin
9.2 Detailof Departments
Management Department
Product Managers Deparrtment
Sales Department
Sales Support Department
Business Development Department
Corporate Sales Department
Supply Chain Department
Marketing Department
Audit Department
Finance Department
Human Resource Department
IT Department
Administration Department
Customer Service Department

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10 Organizations Culture
Here are some key elements of culture:
 Openness and speechfreedom
 Fostering innovation
 Diversity in the workplace
 Rational behavior of top management
 Promoting individual growth
 Rewarding initiative and performance
 Technological advancement
 Updating learning and skills
 Teamwork
 Mannerism and punctuality

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11. PRODUCT & SERVICES
10.1 Products of Changhong Ruba Trading Company (Pvt) Ltd.
1.TV.
 Curved UHD TV
 UHD TV
 Smart TV
 Cinema TV (PDP)
 LED TV
2.AC.
 1 Ton (12000 BTUs)
 1.5 Ton (18000 BTUs)
 2 Ton (24000 BTUs)
 Floor Standings
 Inverter Series
3.Refrigerator.
 Direct Cool (Single Door Series)
 Direct Cool (Double Door Series)
 Direct Cool (4 Door Series)
 Frost Free (Double Door Series)
 Frost Free (4 Door Series).
4.Freezer.
 Vertical Freezer.
 Deep Freezer.
5.Water Dispenser.
6.Power Bank.

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13 ANALYSIS
Analysis of Changhong Ruba Trading Company (Pvt) Ltd.
13.1 Analytical Financial statements analysis.
Financial Statements for the year ended 30June, 2015 analysis with comparative figures of
financial year end 30 June, 2014.It include horizontal and vertical analysis of comparative
figures.
Further analytical review is performed in all material aspect. Internal audit department
working papers were used as source data for this analysis. Financial statements analysis is
attached as annexure “A”.
13.2 SWOT Analysis
SWOT refers to strengths, weaknesses, opportunities & threats. SWOT analysis is a tool
that many companies use during their strategic planning; basically, an organized way to
evaluate where to focus time, money and energy to improve productivity and growth. A
SWOT analysis can be a valuable tool for setting milestones & approaching a venture
investor, because it demonstrates a solid understanding of your company performance or
the factors influencing productivity.
13.2.1 Strengths
These are the following strengths of Changhong Ruba;
13.2.1.1 Innovative Electronics
Changhong Ruba trading company (Pvt) Ltd has now biggest market share of Electronic
market, they are enjoying this position. There products like Smart curved LCD, Glass door
refrigerator and Inverter AC are equipped with latest technology according to market
need”.
13.2.1.2 Customer Relationship

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Trust is a key to build strong relationship. Company had successfully build strong
customer relationship which totally depends on a customer conviction or companies
understanding the consumers need. It makes easier for company to deal with market.
13.2.1.3 Working Environment
Encouraging work environment help the employees to work heartily in a Company so
employees and company will be recognized because of their professional excellence.
13.2.1.4 Professional Approach
Good training and experience take management to use best professional approach to solve
all obstacles and making decisions.On marketing segment all hired executives are MBAs
or more than MBAs.
13.2.1.5 Large-Scale Economies
Changhong Ruba came in industry with huge investment & become giant setup, so it
enjoys economies of large-scale by decreasing their fixed cost & maximize the production.
13.2.1.6 Goodwill
The company can say that Changhong have taken respectable &faithful image among
customer’s mind or enjoying amazing market worth that serves as valuable asset for their
organization.
13.2.1.7 Advanced Technology
To fulfill quality demand of customers, Changhong Ruba introduces latest technology in
electronic products.
13.2.1.8 Advance Payments
For new customers or in general Changhong Ruba usually deals with advance payments.
To decrease risk of loss and efforts need for recover payments.
13.2.1.9 Cheap labor

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In developing countries like Pakistan Organizations enjoys cheap labor. So, that companies
operating in Pakistan could decrease their cost by hiring cheap labor. These savings could
be utilized by organization to meet other important expenses or expansion.
13.2.1.10 Durability
Changhong Ruba give three-year warranty of its products to build positive perception
among customer that tends strong customer relationship. The products of Changhong Ruba
s considered much more durable to market than other organization.
13.2.1.11 Profitable Company
Changhong Ruba is earning great profit from years. This is strength of Changhong Ruba
because sale volume is increasing over period of time. So, it is good to enjoy profit.
13.2.1.12 Price Skimming
Changhong Ruba is selling product at price lower than other competitors in the market like
Haier,Samsung,Orient and TCL.
13.2.2 Weaknesses
13.2.2.1 Lack of Competitive edge
Changhong Ruba is lacking Competitive edge as the design of their product or other after
sales facilities are mattered.
13.2.2.2 Credit Nature
Under developing or developing countries implementation of laws are not much easier as
compare to developed ones. That makes it difficult for the suppliers to recover their
investment becausebusiness is of credit nature.
13.2.2.3 Slow Information Flow
The company live in connected world. Decrease in sharing of info could bring big damages
to

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13.2.2.4 Low Prices
Changhong Ruba provide best quality in market which tends them to bear high cost for
their products. Due to market competition organizations have to sell its products at lower
price.
13.2.2.5 Low Promotional Campaign
For cutting the cost Changhong Ruba is not been able to give proper attention for
publicizing their products by using many marketing & advertising campaigns. In latest era
to create good image of product in the consumer mind, marketing & advertisement is
necessary. Changhong Ruba could raise the share in the market by productive
advertisement.
13.2.2.6 No Performance Appraisal
Workers evaluation motivates them for work harder. Changhong Ruba is not giving
attention to performance appraisal of employees. Workers who works hard and show their
efficiency are not appreciated through their superiors & not been rewarded for showing
good performance. They have no tool to judge managerial staff. Only way they use to
evaluate is Annual Confidential Reportwhich is prepared by their staff or bosses.
13.2.2.7 Centralized Decision Making
Organization had gain a policy of decentralized decisions, but problem arises when upper
management of Changhong Ruba does not consider the operation level management during
making of decisions. This ultimately tends to job dissatisfaction.
13.2.3 Opportunities
13.2.3.1 Technological Innovation
Changhong Ruba can make his own Research & development center to bring innovation
and changes among technology as required. In starting this might increase expenses but in
long run this will always give extra ordinary outcome to organization. By this they could
achieve Technological competitiveness.

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13.2.3.2 Business Activity
Business activities becoming wider and investment is increasing consistently, it will give
new opportunities to Changhong Ruba and for whole electronic industry.
13.2.3.3 Project Location
Locational strategy may affect business positively and negatively. Location is most
important success factors to any type of business. Selection of appropriate location could
lead to success. Throughincreasing sales to other cities may seek niche markets
13.2.3.4 New Product Line
Changhong Ruba still have bundle of options as per product line concerned like new home
appliances
13.2.3.5 New Projects in Country
Pakistan is developing so there are many new projects started by government sector& by
private sector or foreign investors. These projects are making opportunities to Changhong
Ruba for enhancing production or capabilities to do new.
13.2.3.6 Plans for Quality
Most client gives preference to quality of product and that gives room to Changhong Ruba
deal with
13.2.4 Threats
13.2.4.1 Economic Recession
The world is suffering from global economic crisis. It may also affect the Electronic
industry because it is causing affect to the international markets.
13.2.4.2 Political Instability
Pakistan is facing instable political situation. Political instability discourages to investors &
stops them for investing in country. Because of this situation growth rate of Electronic
industry is comparatively low as per potential of the industry.

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13.2.4.3 International Monetary Fund
Countries like Pakistan takes loan from IMF. Because of increase in burden of loans,
economic development of the company’s country is affected badly. It also affects all
industries of Pakistan.
13.2.4.4 Decrease in Profitability
Changhong Ruba is competing with many competitors. They are capturing customers by
cutting their profit & that will tend Changhong Ruba to cut their profit too.
13.3 PEST Analysis of Changhong Ruba
13.2.5PoliticalFactors
Government Stability: Rapid changes in Government could cause the unpredictability in
policies of Government regarding to Electronic industry & it is commonly perceived that
this type of behavior is unfavorable. Government policies may directly affect electronic
industry.
13.2.6Economic Environment Factors
This is necessary for industry to work in market were people have the need & purchasing
power. Purchasing power of people is totally depends on current income, the prices of
product, their savings, and availability of the credit. Marketers must have to pay the proper
attention to the current scenario of income of consumer & his spending.
 Increasing Interest Rates
 Devaluation of Currency
 High Inflation rate
13.2.7Social& Cultural Factors
As per market is concern the students are dominant clients, so as teachers & other people
remain attached with publishing industry. Literacy rate of the company’s country is very
low due to which no big change occurs regarding growth is concerned. So, the industry
could not be able to achieve the desired results.

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13.2.8Technological Factors
The increase among production will automatically reason to decrease in cost. It could
affect positively. But unfortunately, in the company’s country no proper awareness is
available to enhance production or due to lack of technical facilities we have to depend on
West or have to wait until innovation may arise. This negativity could be overcome by
increase interaction of Government or the related industry and people with the technical
expertise.

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14
Brand Value
Changhong brand is for all categories of consumer electronics & appliances globally.
Brand value in 2015 is RMB 113.5 billion Ranked in the World's Top 500 Most
Influential Brands for 10 years.

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15
Financial Data
2015 Semi-annual Main Accounting Data and Financial Index
1.Main Accounting Data
Unit: yuan Currency: RMB
Main Accounting Data From Jan. to Jun. in 2015 Same Period Last Year
This reporting period
VS the same period
last year (%)
Operating revenue 29,853,897,906.45 27,308,196,600.54 9.32
Net profit attributable to
shareholders of listed
companies
-190,888,073,.32 -181,133,760.16 /
companies of non-recurring
gains and losses
-333,462,653.70 -420,630,383.39 /
Net cash flow from operating
activities
840,989,350.46 1,306,021,871.33 -35.61
The end of this reporting
period
The end of previous year
The end of this
reporting period VS the
end of the same period
last year (%)
Net assets attributable to
companies
13,892,165,056,.64 14,052,115,223.65 -1.14
Total assets 63,036,924,839.00 60,224,606,913.98 4.67
2.Main Financial Index
Main Financial Index
From Jan. to Jun. in 2015 Same Period Last Year his reporting period
VS the same period

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last year (%)
Basic earnings per share (yuan
/ share)
-0.0414 -0.0392 /
Diluted earnings per share
(yuan / share)
-0.0414 -0.0392 /
Basic earnings per share after
deducting non-recurring gains
and losses (yuan / share)
-0.0722 -0.0911 /
Weighted average return on
net assets (%)
-1.3647 -1.3127
Decrease 0.0520
percentage points
Weighted return on net assets
after deducting non-recurring
gains and losses (%)
-2.3840 -3.0484
Decrease 0.6644
percentage points
2012-2014 Main Accounting Data and Financial Index
1.Main Accounting Data
Unit: yuan Currency: RMB
Main Accounting Data 2014 2013 2012
Operating revenue 59,503,900,596.63 58,875,274,661.52 52,334,149,134.26
companies
58,857,812,.40 512,481,605.56 325,328,360.29
companies of non-recurring
gains and losses
-479,480,740.00 405,301,074.28 75,698,564.48
Net cash flow from operating
activities
1,920,744,485.81 2,889,283,147.06 719,459,181.27
the end of 2014 the end of 2013 the end of 2012
Net assets attributable to
companies
14,052,1155,223,.65 14,044,157,346.32 13,554,245,998.04

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Total assets 60,224,606,913.98 58,837,008,467.01 54,545,540,713.65
2.Main Financial Index
Main Financial Index 2014 2013 2012
Basic earnings per share (yuan / share) 0.0128 0.111 0.0705
Diluted earnings per share (yuan / share) 0.0128 0.111 0.0705
Basic earnings per share after deducting
non-recurring gains and losses (yuan /
share)
-0.1039 0.0878 0.0164
Weighted average return on net assets
(%)
0.4185 3.7107 2.4321
Weighted return on net assets after
deducting non-recurring gains and losses
(%)
-3.4094 2.9347 0.5659

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16 Problems Identification and Conclusion
Changhong Ruba Trading Company Private Limited is a growing organizations of country
Pakistan and they are also the market new entrance. Although this is quite hard to give
suggestion to such well-established organization but there is always room for
improvement.
Department wise problem identification is as follow
16.1 Accounts department:
a.Problems
 SAP does not generate all types of required reports
 Overlapping of areas of jurisdictions
 Communication gap between higher management (Chinese) and local management
personnel
 Communication gap between sales and accounts department
 No employee’s training and professional development
b.Conclusions
 Sap should be updated for present report need
 Clear responsibility and duty framework for each employs
 Remove communication gap
 Timely communication
16.2 Internal Audit Department
16.2.1.1.1 Problems
 No proper independence as no properaudit committee
 No proper qualification
 No training sessions
 Biasness
 No stock valuation

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 No defined materiality and deviation level
 No proper reporting
16.2.1.1.2 Conclusions
 Personnel should be trained by professional audit firms
 There should be audit committee to whom internal audit report
 Stocktaking should be surprised
 Professional personal should be hired
 Propercommunication with component and external auditors
16.2.1.2 HR Department
16.2.1.2.1 Problems
 Equal opportunity policy not followed
 Not proper module for HR as mostly work is on excel that cause errors while
making salary sheets
 Employee’s personal files are not properly maintained as documents are not
complete as per company policy
16.2.1.2.2 Conclusions
 Develop accounting module for HR in SAP or Separate
 Properfiltering at recruitment stage
 Cooperative and professionally copeall disagreements
 Propermentoring and grievance procedureshould be there
 Adherence to labor laws and all other laws to avoid any contingency and legal cost

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17
Background of Problem
As manufacturing businesses operate in an ever more competitive, global economy where
products are easily commoditized, innovating by adding services to the core product
offering has become a popular strategy. Contrary to the economic benefits expected, recent
findings pinpoint implementation hurdles that lead to a potential performance decline, the
so-called ‘servitization paradox’.
Moreover, labor-intensive services such as maintenance, which imply higher levels of
customer proximity, further enhance productsales. Empirical results also reveal a positive
yet non-linear relationship between the scale of service activities and profitability: while
initial levels of servicing result in a steep increase in profitability, a period of relative
decline is observed before the positive relationship between the scale of services and
profitability re-emerges. These findings suggest the presence of initial short-term gains but
also indicate the existence of a ‘profitability’ hurdle; profitable growth seems feasible only
to the extent that investments in service capability are translated into economies of scale. In
helping to clarify the performance implications of service innovation, our findings suggest
pathways to sustainable growth through servitization for manufacturing firm.
17. 1. Introduction
Increasingly, durable goods manufacturers chooseto innovate their offerings by providing
services to accompany their existing products throughout the life cycle. This trend, known
as ‘servitization’, was first coined by Vandermerwe and Rada (1988) to delineate the
tendency of manufacturing firms to “offer fuller market packages or bundles of customer-
focused combinations of goods, services, support, self-service, and knowledge”. Moreover,
servitization or open service innovation can be seen as developing an organization's
innovation capabilities by effecting a shift from products to product-servicesystems,
thereby better satisfying customer needs and escaping the commoditization trap.

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Indeed, recent figures suggest that, globally, over a third of large manufacturing firms offer
services, with the proportionincreasing to almost 60% . In addition, for an average
‘servitizing’ manufacturer, the share of service sales has reached 31%. Along with ABB,
Caterpillar, GE, IBM, and Xerox Rolls-Royce Aerospaceis a well-known representative
of this trend. Rolls-Royce has evolved from a pure manufacturer of aero engines into a
supplier of spare parts, subsequently developing into a prime provider of maintenance and
overhaul services, culminating in the ‘power by the hour’ Total Care solution package,
where customers purchase the capability Rolls-Royce engines deliver whilst the aerospace
company retains responsibility for maintenance and risk.
Open questions remain, however, concerning the impact of servitization on the
performance of manufacturing firms. While studies demonstrate the benefits of servicing
for the performance of the productitself and for the creation of customer value, the impact
of this innovation on the performance of the product-service provider is less well
understood. While anecdotal evidence suggests strategic and economic potential, empirical
studies yield mixed results, which may be due to the challenges manufacturers face in
formulating and implementing a service-oriented business model.
Mixed evidence on the performance implication of servitization underscores the need for a
better understanding of its value creation and appropriation processes.Following this
literature gap, we studied the processesofvalue creation and appropriation of a servitizing
manufacturer, translated them into a set of hypotheses, and tested them on
44 of its subsidiaries over the 2001–2007 period.
The firm under study, Changhong CompressorTechnique, is a global manufacturer of
durable industrial equipment with a worldwide network of country sales-and-service
subsidiaries. With revenues that exceed $4.4 billion annually, it is the largest business
within the Changhong compressorsare durable industrial products that represent sizeable
investments for its customers and offer significant potential for the provision of related
services.
With more than 58 years of experience in productinnovation, Changhong has, in recent
decades, extended its innovation trajectory into services. Beginning as a provider of spare
parts, it gradually expanded its offering into a service portfolio that encompassed various
maintenance services as well as total solution service contracts. Consequently, its
innovative thrust in providing a variety of services related to its productoffering has led to
the development of an integrated product-service business model
Our study of Changhong and its subsidiaries reveals the nature of the value creation and
value appropriation processes. First, we found that Changhong was able to conceive a
business model where products and services act as revenue complements and generate a
spiral of revenue growth between them, overcoming the inherent substitution of products
by services (services prolong the lifetime of existing products, thereby postponing product
replacement). Moreover, the impact of services on productsales is even more pronounced
when deploying labor-intensive services, which imply customer proximity. In terms of

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profitability, our findings underscore an overall positive effect of servitizing while, at the
same time, signaling a decrease in profitability for medium-scale levels.
More specifically, while low levels of servicing result in a steep increase in profitability,
the scaling up of service activities results in a temporary decrease in profitability. Only
when a certain critical mass of service activity is built up does a positive relationship with
profitability re-emerge. In revealing the nature of value creation and appropriation, our
study not only yields one of the first theoretical underpinnings of servitization but also
demonstrates how productfirms can achieve revenue growth and profitability by engaging
in services.
17.2. Literature review
Service research has been a growing area of operations management research Researchers
have been particularly interested in the operational phenomena occurring in ‘pure’ service
sectors suchas retail and e-retail and , healthcare professional services and hospitality
while services in a manufacturing context have been afforded relatively less study.
Not only is evidence on the role of services in a manufacturing context scarce, the handful
of studies that examine the impact of services on the performance of manufacturers yield
mixed results and pinpoint the difficulty in implementing services in a manufacturing
context shows that the decision to servitize has a positive impact on profitability, while
the extent of servitization has a negative effect on profitability. Other large-scale studies
have identified a U-shape relationship between servitization and performance, where
positive results reappear only once a critical mass of services is achieved. However, the
performance impact of servitization seems to be highly contingent on the industry, and the
nature and size of the service portfolio In line with large-scale quantitative studies, case-
based studies show that some companies face implementation issues related to
servitization . In some situations, this may well result in decreased performance – the so-
called servitization or service paradox Implementation obstacles range from lack of
attention from top management, deficiencies in organizational design and information
technology, the lack of an appropriate culture, to insufficient capabilities for service
management and In particular, the literature points to a cultural and cognitive bias against
services and service-specific values such as heterogeneity and flexibility, since these
values contradict traditional manufacturing goals and practices such as standardization and
efficiency. This cognitive bias towards product-focused practices is present in all levels of
the organization but, above all, in the selling process;salesmen who are accustomed to
selling tangible and ‘pricey’ products find it hard to sell intangible services.
Some manufacturers seek a solution to these challenges by outsourcing services. Yet, this
does not come without difficulties – in particular, with regard to maintaining customer
relationships. “You’re placing one of your most valuable assets – customer relationships –
in a stranger's hands,” points out TonHeijmen, senior adviser to The Conference Board
(New York City) on offshoring and outsourcing [of services.

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While the evidence regarding a manufacturer's ability to appropriatevalue from
servitization is inconclusive, the evidence on the ability of servitization to create value on
the level of the productand the customer is more positive. A number of contributions have
examined effective ways of (commercially) engaging in extended warranty and after-sales
service. For example, Cohen et al. (2006) developed a productlife-cycle model that studies
a set of strategic choices manufacturers face as they design their joint product/service
bundle – requiring, in all likelihood, after-sales maintenance and repair support. More
recent operations literature examined the nature of the relationship between the provider
and the customer and, in particular, the characteristics of contracts and the effectiveness of
diverse performance-based contracts for equipment availability and traditional cost-based
or fixed-price contracts. Furthermore, authors investigated the impact of different forms of
performance-based servitization contract on productreliability and the degree of customer
involvement.
Further positive evidence on the value-creating properties of servitization appear in
environmental economics literature alongside related phenomena such as leasing. The
World Business Council for Sustainable Development identified ‘service extension’ as one
of the four important elements in eco-efficiency. The addition of services such as
maintenance, upgrading and remanufacturing prolongs productlife and so reduces product
turnover. Forexample, White et al. (1999) cite the caseof Electrolux A.B, which
conducted a life-cycle analysis of a servitized floor-cleaning machine; they found that life-
cycle services (maintenance and optimal utilization) reduced in-use (environmental)
impacts as well as material and energy consumption in the productsystem through life
extension, part re-use and recycling. Furthermore, a simulation model developed
by Brouillat (2009) demonstrates that services suchas maintenance, repair, reconditioning,
and technological upgrading result in an extension of the productlife cycle and, hence,
reduce the overall ecological impact of productuse.
So, while studies demonstrate that servitization creates value on the level of the product
directly appropriated by the customer, value appropriation by the product-serviceprovider
is subject to debate. Moreover, the literature points to worrisome challenges with regard to
servitization that may well result in a decline in overall performance, the so-called
‘servitization paradox’. To resolve the paradox, we will clarify the process ofvalue
creation and value appropriation, starting from the (better understood)customer's
perspective on value creation and translating these insights into the manufacturer's
perspective.
17.3. Theoreticaldevelopment of the research model
From a customer's perspective, servitization represents a ‘make or buy’ decision, where a
customer considers whether to service (e.g. maintain) products in-house, outsource
servicing to an independent service provider, or outsourceservicing to the original product
manufacturer provided he offers services for a case study that illustrates this dilemma. A
customer will chooseto outsourceservices to the product-service provider if this product-
service bundle is more costeffective compared to the other two options (self-service and

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outsourcing to an independent service provider). Higher costeffectiveness of the bundle
compared to the products and services sold individually results from the demand-side
economies of scope. Forexample, customers may experience complementarities in use
such as interoperability and/or experience reduction in the procurement costs and
information asymmetries related to productand service quality
The manufacturer's ability to achieve an advantageous proposition will also depend on the
presence of economies of scale in services, and economies of scopein products and
services. Economies of scale arise as the manufacturer provides services for its entire
installed base, while a single customer would need to invest in service resources and
capabilities for a much smaller number of machines. Whereas an independent service
provider could benefit from this advantage, economies of scopeachieved by leveraging
technological and marketing capabilities across products and services can only be attained
by the product-service provider. For example, manufacturing firms can capitalize on the
existing CRM information and sales channel infrastructure developed for traditional
productactivities and spread transaction costs over products and services. Combined,
arguments for the customer's and the provider's economies of scale and scopestrongly
suggest that customers will be inclined to purchase related, life-cycle services from the
productmanufacturer. This logic results in the following hypothesis:
17.4 Hypothesis 1a.
An increase in product sales will result in an increase in service sales.
While a thriving product business clearly creates opportunities for service
business development, the impact of services on the development of the product
business is less clear, suggests that one of the major sources of the value gain
from servitization, from the perspective of customers and society at large,
comes from prolonging the life of existing products through better care of those
products. As the life of an existing product is extended, the replacement – and
therefore sale – of a new product is postponed. This means that services may, to
a certain extent, substitute products.
On the other hand, services can have numerous positive effects on product
sales. The regular exchange of disposable parts will prevent breaking and
malfunction of the product, leaving the customer with a more positive
experience of product quality and brand loyalty. Customers who are satisfied
with the services delivered will be more likely to purchase product
replacements from the same manufacturer, thereby increasing the product
renewal rate. Moreover, better understanding of customer needs and product
functioning may result in improvements in product design that promote a
reduction in the cost of product functioning (e.g. energy costs) and, therefore,

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promote sales of the new generation of products. By engaging in service
activities, the manufacturer becomes much better informed about the customer's
broader needs: this information can be instrumental in enlarging the scope of
the product offering to the customer, which may in turn result in sales of related
products and add-ons. Additional product sales may accrue from replacing
competitors’ products with the product-service provider's own products. In
particular, if a customer has been buying products from the competitor as well
as the focal firm, he may be persuaded to change over time to a single product-
service provider in order to increase interoperability and reduce the cost of the
entire system. This set of arguments points to high potential for services to act
as a complement to products, offsetting the substitution effect; subsequently,
higher service revenues will result in higher product revenues.
Hypothesis 1b.
An increase in service sales will result in an increase in productsales.
Overall, while service sales may have a positive effect on productsales, practice suggests
that labor-intensive service activities such as maintenance and repairs imply greater face-
to-face customer interaction and, hence, lead to customer intimacy and more detailed
knowledge of customer needs. Product-service providers who shift their service mix to
services characterized by higher engagement in customer operations and higher
responsibility for overall customer performance are likely to learn more about customers
(e.g. regular customer encounters) and the product(e.g. harvesting information on product
functioning), which may intensify the positive feedback from services to products. Hence,
the greater the service contact through labor-intensive services or ‘customerproximity’, the
more knowledge is generated and the greater the opportunities created to strengthen
customer relationships. In addition, field service activities provide valuable information
feedback on productdevelopment and engineering work. These arguments lead us to the
following hypothesis:
Hypothesis 1c.
An increase in ‘customerproximity’, measured by the share of labor-intensive services,
results in an increase in productsales.
To summarize, Hypotheses 1a and 1b suggest a reciprocal, positive relationship between
products and service activities: an increase in productrevenues results in the increase in
service revenues and vice versa. In addition, Hypothesis 1c argues that an increase in the
share of labor-intensive services of the overall service sales mix will result in additional
growth in productsales.

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Nevertheless, the question remains whether firms can manage to appropriate value in terms
of the overall profitability (the overall profit margin) of the product-service business and
avoid the servitization paradox.
Given the superior customer utility achieved through the demand-side economies of scope
explained earlier, it can be argued that the product-service provider has the ability to
increase the price of the entire value system and, thereby, attain higher profits.
Furthermore, services may promote economies of scale on the provider side; the
accumulation of service activities will lead to economies of scale in services, resulting in a
more cost-efficient service delivery. To the extent that service sales lead to an increase in
productsales, additional economies of scale on the productside may occuras well. Thus,
one can expect profit margins for the product-servicebusiness to increase as the economies
of scale translate into costsavings on the customer side.
Nevertheless, a manufacturer needs to invest in service-specific resources and capabilities
in order to deliver services. The necessary investments range from ‘operational’ service
capabilities and resources suchas service delivery, service sales skills, and service
information systems and tools to more dynamic capabilities enabling service deployment
such as service management and top management capabilities to reorganize a
manufacturing firm from pure productprovider to product-service provider. Sizeable
investments in services could temporarily decrease profit margins.
Interplay between the arguments presented above is likely to result in a curvilinear
relationship between service scale and profitability where investments paired with a low
scale of services initially result in a decrease in margin but then convert to a positive
impact as the investment is internalized and higher scale is reached.
Nevertheless, after consultation with top management in the firm under study, we have
learned that the period of investment associated with low scale of services may be
preceded by a highly lucrative phase where services are demanded by a handful of
proactive customers with a readiness to pay. Hence, the manufacturer may start to servitize
unintentionally to reach the ‘low hanging fruit that can be harvested very early on’ and
may only begin to consider servitization as a strategy and an investment opportunity after a
certain number of services have been sold. Thus, it can be conceived that the profit margin
exhibits a steep increase at very low levels of service scale, a decrease at the medium-scale
level due to investments and, finally, an increase as economies-of-scale effects take off.
Thus, our models account for the possibility of a curvilinear relationship between service
scale and profitability characterized by two saddles or a cubic relationship. In line with this
reasoning, we advance the following hypothesis:
Hypothesis 2.
The relationship between the scale of service activities and the profit margin is curvilinear
and characterized by two saddles: while very low levels of service activity exhibit a steep

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increase in margin, low levels of service scale exhibit a relative decrease in margin, which
then reverts to an increase once sufficient economies of scale are achieved.
17.5 . Research methodology
Research design
To test the hypotheses, we collected data from the national sales-and-service subsidiaries
of a large multinational equipment manufacturer, Changhong. The firm under study
achieved consolidated annual revenues in excess of €3.2 billion ($4.4 billion), with the
service business amounting to approximately 40% of revenues in 2015. Its productoffering
encompasses an assortment of equipment types used for powering a diverse set of factory
machines in a variety of industrial applications, such as Air Conditoners. For the majority
of customers – mostly industrial manufacturers themselves – these products represent
investment goods priced in excess of €50,000 – and even €100,000 in some cases – that
will form part of their productioninfrastructure for years to come. Over time, a given
country subsidiary may have sold tens of thousands of equipment units to thousands of
clients. Service portfolio opportunities range from spare parts and ad-hoc repairs to
maintenance agreements with varying degrees of coverage (e.g. from preventative
maintenance to maintenance plans with wide coverage of operational and financial risks).
In recent years, Changhong has concentrated on promoting a service offering that covers
related machinery, aiming to improve reliability and reduce energy costs for the entire
functional group of products.
Changhong sales and provision of products and services are accomplished through a
network of country subsidiaries. Each subsidiary is charged with establishing and
maintaining market presence with a full spectrum of productand service offerings in a
given country. Changhong globally diffused network of highly skilled technicians assures
high levels of intimacy with its customer base. Regarding the level of decentralization and
subsequent diversity of subsidiaries, subsidiaries offer homogeneity with respect to the
productand service portfolio, brands and pricing, on the one hand, while each subsidiary
differs significantly in terms of its organizational structure, local practices, management
style, and deployment of its business model, on the other. Offering the same product
portfolio with a similar transfer price for all country subsidiaries enables Changhong
headquarters to maintain fair competition in different markets (Changhong subsidiary from
one country can sell in another subsidiary's country market), while the diversity of
managerial practices with respectto service business model implementation makes it
possible to adjust to different country markets and achieve a global footprint
Opting for a longitudinal econometric study on the level of country subsidiaries did pose
challenges, with respect to generalizability in particular. Indeed, this study is based on the
variability in managerial practices with respect to service business model implementation
and environmental factors while the industry, productportfolio, brand and governance

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practices of the mother company are shared. At the same time, these disadvantages
facilitated testing since they decreased the need for a number of controlvariables (further
discussionfollows). Also, a longitudinal econometric approach, unlike a survey study, can
generate inferences on over-time causality. Finally, to constructparticular servitization
variables, we needed to constructmeasures specific to the productand service portfolio of
the given mother company; undertaking the study across different companies would mean
substantially compromising the precision of the measures and internal validity.
Dependent, independent and instrumental variables
As per H1a, the installed productbaseenables the sale of services in the following year,
after expiry of the obligatory warranty. In turn, services imply greater interaction with
customers, which may result in additional sales of products, almost simultaneously with
the provision of services (H1b). This feedback loop will be stronger when the service mix
includes more labor-intensive services that involve frequent service visits and foster
customer proximity (H1c). Finally, service scale is likely to have an impact on the
profitability of the overall business, characterized by a steep increase, relative decline and
then further increase (H2).
The reciprocal relationships between products and services expressed in Hypothesis
1a, Hypothesis 1b and Hypothesis 1c represent a system of equations with simultaneous
causality. The presence of simultaneouscausality is a common cause of violation of the
standard regression analysis assumption pertaining to the absence of correlation between
the error terms and the independent variables, known as endogeneity. H2, on the other
hand, is prone to another common sourceof endogeneity – missing variable syndrome
while service scale is likely to impact the overall profitability of the product-service
provider, managerial knowledge about the increase in profitability as a result of an increase
in service scale may lead to endogeneity and biased results. Because managerial
knowledge is a missing variable, it may be correlated with the error term as well as with
the dependent variable (profitability) and the independent variable (service sales), resulting
in endogeneity and biased, inefficient parameters.
To avoid biased estimates, econometricians recommend the use of the instrumental
variables approach, which consists of a system of equations where the (endogenous)
independent variable is first ‘regressed’ on another variable – called the ‘instrument’ –
which explains the independent variable but is unrelated to the dependent variable. The
instrumental variables approachhas been used as a popular resolution of the endogeneity
problem in operations and strategic management, particularly when coupled with
estimators. An instrument is said to be ‘strong’ or ‘relevant’ when it explains the
independent variable well, and it is said to be ‘independent’ or ‘exogenous’ when it is
unrelated to the error term and the dependent variable.
The search for a strong instrument represents an important study-specific task becausethe
idiosyncratic nature of independent variables implies the absence of an exhaustive theory

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on appropriate instruments. As productsales and service sales represent endogenous
independent variables in the first and second models respectively, they bothneed
instruments that are strong and independent of each other. As Changhong allows cross-
bordersales of products butnot services (e.g. the German subsidiary can sell products in
France despite the presence of a French subsidiary), we identified the macroeconomic
indicator of country exports as an adequate productsales instrument (H1a).
Country exports indicate the climate in a given country for exports, which will positively
influence the subsidiary's productsales abroad (strength). As these products, will not be
serviced by the same subsidiary, the export climate will have no influence on service sales
(independence). In addition, absolute growth of GNP will likely stimulate one-time
investment in new products with no visible impact on service activities; hence, we chose
this as an additional instrument.
For the same reasons, the macroeconomic indicator of country imports was identified as an
adequate instrument of service sales ( H1b/H1c). A subsidiary that is located in a country
where there are substantial imports of Changhong products may have the opportunity to
service these products and, hence, generate higher service sales (instrument strength) that
do not stem from national productsales (using the previous case, the French subsidiary
would have greater opportunity to sell services on the products sold by the German
subsidiary). In addition, we deployed Service scope – the ratio of service sales to the
installed base of products sold over the past 4 years as an instrument for service sales; this
indicator captures the extent to which different country subsidiaries provide services for a
given installed base. Further to that, we used Product installed base or productvolume
sold over the past 4 years as an indicator of the installed base. Finally, as the
manufacturing sectorclients represent the best ‘buyers’ of services according to the
experience of Changhong management, manufacturing capital investments (capex) in a
given country helped us distinguish between countries that were more focused on
manufacturing and vice versa. Finally, we instrumented customer proximity ( H1c)
on customer proximity in t − 1, given that a large proportionof the service contracts are
renewed annually. In addition, service staff was deemed to be a good predictor of customer
proximity, especially since customer proximity represents an increase in the labor-intensive
services that allow greater contact with the customer.
In H2, we have re-used country exports and absolute growth of GNP to instrument product
sales. At the same time, we faced a serious challenge to find sufficient instruments for
service sales, service sales and service sales.
Firstly, we complemented the existing instruments for service sales (country imports,
service coverage, lagged product installed baseand manufacturingcapex)with country
population density, given that labor-intensive services thrive in densely populated areas.

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Secondly, we re-used customer proximity and service staff as additional predictors of
service sales, particularly labor-intensive services. In the model, we also used lagged
values of product sales, service sales, service sales and service sales.
4.3. Control variables
Due to the scarcity of data and complex nature of interdependencies between products and
services, the choice of controlvariables represented a particularly important part of the
model design. As all subsidiaries, have been operating for 10 years or more prior to the
observation period, the subsidiary age was deemed irrelevant. Subsidiaries have also
exhibited homogeneity with respect to the productportfolio, brand and high-level pricing
strategy (allowing a modest degree of discretion for individual client negotiations). This
homogeneity allowed us to perform an analysis controlling fixed effects for country-
specific and time-invariant factors such as culture and the propensity to pay for services,
while relying on a limited number of controlvariables for the time-variant factors. In all
models, we controlfor fine differences in productmix, through an indicator of the product
portfolio mix that represents the share of small versus large products used in different
applications. Furthermore, we capture differences in market development by GNP per
capita (e.g. subsidiaries operate in countries ranging from China to Switzerland), while
a year dummyvariable is used to capture the expected yearly effects of price increases. In
addition, in testing H2, we use the increases in service staff and increases in non-service
staff to capture the negative effect of labor increases on profit margins, in particular in the
case of (labor-intensive) services, as well as productsales, given that the (lack of)
economies of scale on the productside can also have an impact on profit margins.
Table 1a and Table 1b contains further information on the variables, while Models M1
(H1a), M2 (Hypothesis 1b and Hypothesis 1c) and M3 (H2) are formally represented
below.
In all models presented below, vi and ɛi,t represent the country dummies and specific
residuals, respectively. Further discussionon the use of fixed effects and year-trend
variables will be presented in the following sections.
M1. service salesi,t = a1 + b1 × product salesi,t−1 + c1 × gnppercapitai,t + d1 × product
portfolioi,t + e1 × year dummyi,t + v1i, + ɛ1i,t
a. product salesi,t−1 = f(exportsi,t−1, gnppercapita increasei,t−1)
M2. product salesi,t = a2 + b2 × service salesi,t + c2 × customer
proximityi,t + d2 × gnppercapitai,t + e2 × product portfolioi,t + f2 × year
dummyi,t + v2i + ɛ2i,t

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a. service salesi,t = f(importsi,t, lagged product installed basei,t, service
coveragei,t, manufacturing capexi,t)
b. customer proximityi,t = f(service staffi,t, customer proximityt−1)
M3 .
a. product salesi,t = f(product salesi,t−1, exportsi,t, gnppercapita increasei,t)
b.
Table 1a.
Overview of the variables and their use.
Variable
name
Measure Formula Definition and use Transformation
Total
profit
margin
%
Subsidiary profits/subsidiary
sales
Profit margin of the
total product-service
business in a
subsidiary, before
deduction of the
headquarters
overhead that is
proportional in all
subsidiaries
Dependent variable
for H2 (M3a, M3b,
M3c)
None
Product
sales
EUR
million
N/Aa
Sales of the full
product portfolio in
the subsidiary
Independent variable
in H1a/M1
and H2/M3a, M3b,
M3c; dependent
variable
in Hypothesis
1b and Hypothesis
Normalized to
year 2000, using
World Bank's
GDP deflator

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1c/M2
Service
sales
EUR
million
N/A
Sales of the full
service portfolio in
the subsidiary
in Hypothesis
1b and Hypothesis
1c/M2 and H2/M3a,
M3b, M3c;
dependent variable
in H1a/M1
Normalized to
year 2000, using
World Bank's
GDP deflator
Customer
proximity
%
Maintenance sales/service
sales, where service
sales = maintenance + spare
parts
Share of labor-
intensive services,
identifies the level of
relational proximity
to customers. E.g.
the higher the % of
labor-intensive
services, such as
maintenance, the
more often
technicians visit a
customer
for H1c/M2 and
instrumental variable
in H2/M3
None
GNP per
capita
USD
thousand
Gross national product
(GNP)/number of people
A control for the level
of development of a
subsidiary's country
market in all the
models
Normalized to
year 2000, using
World Bank's
GDP deflator
Product
portfolio
%
Sales of large products/sales
of small products, where total
products
sales = large + small
products
Controls for the
differences in
subsidiaries’ product
portfolios in all the
models
None
a N/A – not applicable.
Table 1b.
Overview of the variables and their use.
Variable
name
Measure Formula
Definition and
use
Transformation
Service staff Integer N/Aa
The number of
service
employees in a
Transformation 1:
Absolute yearly
increase in the

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subsidiary
Use 1: Used to
control for
differences in
labor efficiency
of service staff in
the M3a, M3b
and M3c
Use 2: Used as
an instrumental
variable of
service sales in
the M3a, M3b
and M3c
number of service
staff. Transformati
on 2: none
Non-service
staff
Integer
Non-service
employees = total
employees − service
employees
The number of
non-service
employees in a
subsidiary
Absolute yearly
increase in the
number of non-
service staff
Used to control
for differences in
labor efficiency
for non-service
staff in the M3a,
M3b and M3c
Year dummy Integer A year dummy variable
Used to control
for yearly effects,
e.g. price
increases
N/A
Exports
USD
billion
N/A
Value of country
exports
Normalized to year
2000, using World
Bank's GDP
deflator
Instrument for
the product sales
in H1a/M1
Imports
USD
billion
N/A
Value of country
imports
Normalized to year
2000, using World
Bank's GDP
deflator
Instrument for
the service sales
in Hypothesis
1b and Hypothes
is 1c/M2
and H2/M3a,
M3b and M3c
Density
000
people/km
2
Country
population/country
surface
Country
population
density used as
instrument for
None

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service sales
in H2/M3a, M3b
and M3c
Product
installed
base (IB)
Integer
Product volume sales
in t − 1 + t − 2 + t − 3 + t −
4
Installed base
over 4 years
used as
instrument for
service sales
in Hypothesis
1a and Hypothes
is 1b/M2
and H2/M3a,
M3b and M3
None
Service
scope
EUR
thousand
Service sales/product
installed base (see
above)
Level of service
provision for a
given installed
base of products,
instrument for
service sales
in Hypothesis
1a and Hypothes
is 1b/M2
and H2/M3a,
M3b and M3c
None
Manufacturin
g capex
USD
million
N/A
Value of country
manufacturing
capital
investments.
Indicates the
prevalence of the
most service-
oriented client
sectors.
Instrument for
the service sales
in Hypothesis
1b and Hypothes
is 1c/M2
and H2/M3a,
M3b and M3c
Normalized to year
2000, using World
Bank's GDP
deflator
A N/A – not applicable.
4.4. Estimators,modelcorrectionsand diagnostic checks
In all econometric models, we use panel data analysis with fixed effects. The fixed-effects
model includes dummy variables for each subsidiary, thereby ‘specifying an estimable
conditional mean and addressing biased and inconsistent parameter estimates’ We
introduce fixed effects to controlfor time-invariant, unobserved heterogeneity among

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subsidiaries, given our expectation that time-constant differences may determine the
effectiveness of the service strategy. Forexample, discussions with the firm's management
demonstrated that multiple country-specific differences, such as cultural acceptance of
charging for service provision or size of the country's territory, could have a considerable
impact on service-related performance.
In the model specification, we also use ‘heteroskedasticity and-autocorrelation-consistent’
(HEC) standard errors to avoid concern over invalid inferences caused by these two
violations of standard assumptions. The expected yearly effect of price increases and
growth targets is countered by introducing a year dummy variable in each model.
Furthermore, we stationarized all monetary data (e.g. sales, GDP/capita, exports and
imports) by transforming the nominal values into real 2000 values, using the World Bank's
GDP deflator. While diagnosis of multicollinearity is difficult in the IV models, tests on
the models using the OLS estimator show that the variance inflation factor scores (VIFs)
are well below 10 for the first two models (average VIF for M1 is 1.84 and M2 is 3.06). In
Models 3a–3c, all variables have VIFs well below 10, apart from service sales, service
sales2 and service sales3, which have VIFs exceeding 10, as anticipated.
The dataset was considered fairly balanced: all data was present apart from data on profit
margins for three subsidiaries, product-installed base and consequently service coverage
for two subsidiaries, manufacturing capex for two subsidiaries, and country density for
one. For service staff and consequently non-service staff, data was missing for nine
subsidiaries, and on 4 years in the case of one additional subsidiary. Since IT system issues
were responsible for the missing data, we do not expect bias to be introduced. Table
2 provides descriptive statistics for all the variables.
Table 2.
Summary statistics and correlation coefficient.
N
o
Variabl
e
O
b
s
Me
an
SD M
in
Ma
x
1 2 3 4 5 6 7 8 9 10 11 12 13 1
4
1 Total
profit
margin
2
8
7
0.3
0
0.0
6
0.
1
4
0.4
5
1
2 Produc
t sales
3
0
8
17.
89
23.
40
0.
5
4
141
.80
−0.
21*
1
3 Service
sales
3
0
8
10.
56
10.
97
0.
2
2
75.
88
−0.
22*
0.8
1*
1
4 Custo
mer
proximi
ty
3
0
8
0.5
8
0.2
3
0.
0
9
0.9
6
−0.
04
−0.
07
0.
13*
1
5 GNP/c
apita
3
0
8
15.
44
12.
69
0.
4
0
45.
85
−0.
31*
0.1
7*
0.
47*
0.4
7*
1
6 Produc
t
portfoli
o
3
0
8
1.0
9
0.5
1
0.
0
8
3.0
0
0.0
2
0.3
8*
0.
28*
0.0
2
−0.
12*
1

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7 Service
staff
2
4
1
18.
17
15.
46
0 93.
00
−0.
25*
0.6
0*
0.
68*
0.1
7*
0.1
6*
0.
21
*
1
8 Non-
service
staff
2
4
1
11
4
10
5
0 662 −0.
28*
0.9
0*
0.
80*
−0.
21*
−0.
01
0.
27
*
0.
69*
1
9 Export
s
3
0
8
21
9
29
2
1 166
6
−0.
23*
0.8
8*
0.
87*
0.0
3
0.3
7*
0.
38
*
0.
57*
0.7
8*
1
1
0
Imports 3
0
8
22
1
33
3
3 226
0
−0.
24*
0.8
6*
0.
90*
−0.
01
0.3
7*
0.
34
*
0.
55*
0.7
7*
0.9
6*
1
1
1
Density 3
0
1
1.1
7
1.1
4
0.
0
2
4.8
4
−0.
05
0.1
6*
0.
17*
−0.
03
0.1
2*
0.
31
*
−0
.0
3
0.0
5
0.2
7*
0.
20*
1
1
2
Produc
t IB
2
9
4
93
8
12
89
2
5
739
7
−0.
25*
0.8
5*
0.
71*
−0.
13*
0.0
9
0.
22
*
0.
56*
0.8
4*
0.7
4*
0.
70*
0.1
9*
1
1
3
Service
scope
2
8
7
4.4
8
2.4
6
0.
7
1
14.
57
0.1
2*
−0.
29*
−0
.0
5
0.2
8*
0.0
6
0.
05
0.
02
−0.
27*
−0.
13*
−0
.1
1
−0.
12*
−0.
40*
1
1
4
Manufa
cturing
capex
2
9
4
23
11
2
41
29
8
4
0
2
316
255
−0.
26*
0.9
1*
0.
67*
−0.
22*
0.1
0
0.
43
*
0.
51*
0.8
1*
0.8
2*
0.
79*
0.2
0*
0.8
0*
−0.
28*
1
*
p < 0.05.
In all models, we use one of the most common approaches to address endogeneity the
instrumental variables approach. We started by using two-stage least square generalizations
of simple panel-data estimators, but then we proceeded to check various other IV
estimators, including limited information maximum likelihood (LIML), Fuller's modified
LIML (FULL) estimation and Generalized Method of Moments (GMM). While all
estimators produced very similar results, we decided to report the most conservative ones
that GMM has yielded. This choice was also in line with choice of GMM to test the impact
of servitization on performance.
Each of the models has relevant instruments, since F-statistics for the first-stage
regressions exceed the threshold (see Table 3). In addition, instruments are jointly
exogenous for each of the models, given that the p-value of Hansen's J statistic exceeds
10%, thereby rejecting endogeneity in instruments. Various additional robustness checks
were performed.
First, different instruments to the retained ones were used (lagged products sales as an IV
for products sales, lagged service sales and installed-base size as an IV for service sales).
Additionally, different controls were used (e.g. service staff and employees in absolute
figures, population density instead of service staff).
Table 3.
Results from hypotheses testing.

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Model:
Hypotheses
M1:
H1a
M2:
H1b
and
H1c
M3a: H2 M3b: H2 M3c: H2
Dependent
variable
Service
sales
Product
sales
Profit margin Profit margin Profit margin
Variable
Product
salest−1
0.859
(0.000)*
**
– – – –
Product
sales
– – 7.60 × 10−4(0.627) 3.76 × 10−5(0.983
)
−0.003 (0.140)
Service
sales
– 1.53
(0.000)*
**
−0.001 × 10−4(0.56
5)
0.002 (0.533) 0.021 (0.005)**
Service
sales2
– – – −3.12 × 10−5(0.15
6)
−4.09 × 10−4(0.002
)**
Service
sales3
– – – – 3.03 × 10−6(0.003)*
*
Customer
proximity
– 35.65
(0.046)*
– – -
GNP/capita 0.390
(0.006)*
0.65
(0.007)*
0.006 (0.001)** 0.006 (0.002)** 0.007 (0.001)**
Product
portfolio
−0.159
(0.851)
4.02
(0.003)*
*
Year
dummies
Eliminated from the data table due to space limitations
Service
staff
increase
– – −4.19 × 10−4(0.210
)
−3.76 × 10−4(0.30
0)
−3.3 × 10−4(0.407)
Non-service
staff
increase
– – −1.40 × 10−4(0.302
)
−0.66 × 10−4(0.71
4)
−1.5 × 10−4(0.455)
Model statistics
Number of
observation
s
220 202 165 165 165
F statistics
(p-value)
0.000 0.000 0.000 0.000 0.000
R2 (%) 49.9% 79.2% 23.1% 24.7% 19.7%
First-stage F-statistics: >10 for one instrumented variable (M1) (Staiger and Stock,
1997); >7.56 for two instrumented variables (M2 and M3a) (Stock and Yogo, 2004); >6.61
for three and more (M3b and M3c) (Stock and Yogo, 2004)
Product
salest−1
16.40 – – – –
Product
sales
– – 10.14 10.14 10.14
Service – 51.46 174.73 174.73 174.73

71
Rizwan Akram
sales
Service
sales2
– – – 146.50 146.50
Service
sales3
– – – – 112.97
Customer
intimacy
– 8.12 – – –
Hansen J p-
value > 0.10
0.27 0.11 0.35 0.32 0.84
*
p < 0.05.
**
p < 0.01.
***
p < 0.00.
17.6 Results
Table 3 summarizes the results obtained in relation to the testing of the hypotheses. Results
displayed in Model 1 confirm the arguments posited in H1a: as customers seem to realize
higher economic benefits by outsourcing their servicing to the product-service provider, 1
unit (euro) of increase in productsales in t − 1 leads to an increase of 0.86 units (euros) in
service sales in t (b1 = 0.86; p = 0.000). Interestingly, service sales have a greater impact
on productsales too. As Model 2, confirming H1b, suggests, a 1-euro increase in service
sales results in approximately a 1.53-euro increase in productsales (b2 = 1.53; p = 0.000).
Indeed, Changhong is not only able to transcend inherent substitution but it enacts
economically and statistically robustcomplementary effects from services to products.
Furthermore, Model 2 reveals that customer proximity leads to an additional increase in
productsales (c2 = 35.65; p = 0.046), thereby confirming H1c.
Table 3 shows the empirical results of testing the impact of servitization on profit margins,
as advanced in H2. First, Model 3a, which tests the impact of service sales on overall
profitability, reveals the absenceof a linear relationship (b3 = −0.001 × 10−4, p = 0.565).
Model 3b, which stipulates the presence of a quadratic relationship, shows that this
relational pattern is not present either (b4 = 0.002, p = 0.533; c4 = −3.12 × 10−5, p = 0.156).
Finally, Model 3c, which assesses the presence of a cubic relationship between service
sales and profitability, returns convincing results; suggesting a non-linear relationship with
the presence of two inflection points, as stipulated
by H2 (b5 = 0.021, p = 0.005; c3 = −4.09 × 10−4, p = 0.002; d3 = 3.03 × 10−6, p = 0.003)
and illustrated in Fig. 1.

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