As relative newcomers to the service economy, many product companies have yet to make money there. Until recently, brisk sales growth, buoyed by a rising tide of demand for services, kept trouble from view. But as the estimated $500 billion "embedded" service sector (Exhibit 1) becomes more competitive, too many companies find themselves grappling with strategic questions they should have resolved when first entering the market: are they offering embedded services for offensive or defensive purposes? Are they playing a skill- or a scale-based game? Confusion about fundamental issues of strategic intent and the source of competitive advantage now seriously hampers the profitable pricing and delivery of embedded services and the effective management and governance of product and service organizations alike.

That strategy must precede structure has been a tenet of good management since Alfred Chandler published his seminal studies in the field of business history, in 1962.¹ But product companies in the embedded service sector lack the strategic clarity needed to make sensible decisions about how to design businesses. Some view internal service businesses as a growth platform but structure and run them as...