Business solutions as signals

Many manufacturing firms today claim to be solution providers. By means of highly customized and integrated, product-service offerings, these firms address complex business problems of customers in a holistic way. However, the extent to which manufacturers derive financial returns from investments made into this advanced form of service provision remains debatable. Prior research shows that the further the manufacturer moves from the established basis in selling equipment and related, product-oriented services, the more difficult it is to generate profits (Fang et al., 2008; Neely, 2008). While failure stories in the scientific literature are scarce, practitioners report figures on unsuccessful transformation projects: Krishnamurthy (2003) estimate that 75 % of the companies that want to offer solutions fail to return the associated costs. According to Roegner and Gobbi (2001), only about 20% of all solution sellers finally recapture their capital costs, and even fewer achieve the 20 to 25% increase in profitability that McKinsey expects from successfully implementing business solutions. At the same time, despite the reported challenges, any large-scale transition away from solution business cannot be witnessed. This leads to the assumption that managers persist with solution business at least partly for strategic reasons. However, beyond broadly based arguments stressing managerial beliefs of the differentiating role of customer solutions, it is unknown what the specific and measurable market effects are that help to explain why engaging in solution business is strategically important for the manufacturer. To contribute to this gap in extant understanding, the purpose of this study is to examine solution business as a market signal (Spence, 1973, 2002). We assume that irrespective of the direct revenues generated by solution business, manufacturers benefit strategically from the positive spillover effects of solution business on the firm’s underlying product business through a signaling mechanism: Credibly signaling the capabilities associated with solution selling, such as understanding of the customer’s business, designing and implementing solutions that generate superior value-in-use, and commitment to supporting the customer during the full life cycle of the provided solution (Tuli et al., 2007; Ulaga & Reinartz, 2011; Macdonald et al., 2016) lower the customer’s risk perception