Firm Strategy in Shifting to Service-Oriented Manufacturing - the Case of Japan's Electrical Machinery Industry

By Watanabe, Chihiro; Hur, Jae Yong | Journal of Services Research, April-September 2004 | Go to article overview

Firm Strategy in Shifting to Service-Oriented Manufacturing - the Case of Japan's Electrical Machinery Industry


Watanabe, Chihiro, Hur, Jae Yong, Journal of Services Research


Shifting to service-oriented manufacturing is a potential survival strategy for manufacturing industry firms facing a paradigm shift from an industrial society to an information society. However, due to the intangible nature of the gross value of firm, the development of such a strategy is rather complicated, often leading to an unsatisfactory performance trajectory. Technological knowledge stock is considered a significant contributor to the gross value of firm, and is proportional to the level of R&D investment. However, due to economic stagnation, R&D investment has declined in recent years, leading to a greater need for effective utilization of potential resources in innovation. In this regard, a strategy that contributes to increased marginal productivity of technology has become a crucial issue for firm strategy in a business environment increasingly characterized by megacompetition. In light of the above, this paper attempts to identify a suitable strategy for shifting to service-oriented manufacturing by examining Japan's electrical machinery industry over the last two decades. First, a new approach for measuring the gross value of firm based on investor/customer evaluations in the marketplace is introduced. Second, the correlation between the value of services ratio and marginal productivity of technology is analyzed. Finally, a new trajectory to increase marginal productivity is identified to explore the potential of a shift to service-oriented manufacturing.

(ProQuest Information and Learning: ... denotes formulae omitted.)

INTRODUCTION

In line with the paradigm shift from an industrial society to an information society, it is generally anticipated that the value of the firm has been shifting from tangible assets to intangible assets as demonstrated in Figure 1 (Sullivan, 2000; Watanabe, 2002). Looking at Figure 1, we note that the share of intangible assets has shown dramatic increase from 30% in 1978 to 55% in 1998 and to 70% in 1998.

Consequently, the value of manufacturing industry has shifted from the value of manufactured goods to that of services. However, due to the complexity of the measurement of the gross value of firm, identification of such shifting trajectory has still remained in a black box (Barth and Clinch, 1998).

Provided that the market is competitive and investors/customers are clever enough to choose higher gross value of firm, their evaluations in the marketplace can reflect substantial value of services in firms (Grossman and Helpman, 1991).

To date, a number of studies have attempted to identify this value by tracing a firm's stock price that can be considered as a result of evaluations of firm value in the marketplace (Watanabe, 2002). While stock price generally represents investor/customer evaluations of the gross value of firm, it is subject to the value of liabilities. Therefore, in order to evaluate the gross value of firm, the value of liabilities should be taken into account. However, the existing work primarily focuses on market value of stock alone and lacks comprehensive perspective measuring the gross value of firm. Thus, it is necessary to develop more systematic approach taking account of the value of liabilities simultaneously to avoid misled evaluations of the gross value of firm.

At the same time, as an information society advances, knowledge based economy is playing a decisive role in a firm's competitiveness which inevitably entails effective increase in firm's knowledge stock, particularly their technological knowledge stock (Lehman, 1996; Alic, 1997).

While technological knowledge stock is proportional to R&D investment1 as a number of preceding works have discussed (Griliches, 1980), due to economic stagnation, the increase of such investment has become toilsome task. Therefore, efficient and effective ways of increasing such technological knowledge stock, i.e., how to maximize the productivity of this stock, has become crucial for firm's survival strategy (Watanabe et al. …

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