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Journal of Service Research

Service Innovation Viewed Through a Service-Dominant Logic Lens: A Conceptual Framework and Empirical Analysis

Andrea Ordanini and A. Parasuraman Journal of Service Research 2011 14: 3 originally published online 7 November 2010 DOI: 10.1177/1094670510385332

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Service Innovation Viewed Through a Service-Dominant Logic Lens: A Conceptual Framework and Empirical Analysis

Andrea Ordanini 1 and A. Parasuraman 2

Abstract

Journal of Service Research 14(1) 3-23 ª The Author(s) 2011 Reprints and permission:

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Service Innovation Viewed Through a Service-Dominant Logic Lens: A Conceptual Framework and Empirical Analysis Andrea Ordaninijsr.sagepub.com at University of Southampton on March 3, 2011 " id="pdf-obj-1-19" src="pdf-obj-1-19.jpg">

Research to date on service innovation is rooted primarily in traditional new product development focusing on tangible goods. In this article, the authors invoke insights from the emerging service-dominant logic (SDL) perspective and propose a conceptual framework for investigating the antecedents and consequences of service innovation. They then develop a set of hypotheses per- taining to potential predictors of two distinct facets of service innovation (volume and radicalness) and the impact of the latter on two measures of firm performance (revenue growth and profit growth). They test their proposed model using data from a sample of luxury hotels and find that (a) collaborating with customers fosters innovation volume but not radicalness (and vice versa for collaborating with business partners); (b) a firm’s customer orientation—both directly and in interaction with innovative orientation—contributes to innovation radicalness; (c) collaborating with contact employees enhances both innovation volume and radicalness; (d) the use of knowledge integration mechanisms contributes to innovation radicalness (but not volume); and (e) both innovation outcomes have significant but somewhat different effects on the two performance measures. They discuss the theoretical and managerial implications of their findings and conclude with the study’s limitations and directions for further research.

Keywords

service innovation, service-dominant logic

Introduction

Despite the growing body of service-related scholarly research, the literature from marketing (Hauser, Griffin, and Tellis 2006), operations (Menor, Tatikonda, and Sampson 2002), management (Ford and Bowen 2002), and innovation (Drejer 2004) continues to call for research aimed at improving our understanding of service innovation. Innovation research to date, though insightful, has treated services merely as a special category of products—that is, ‘‘what goods are not’’—thereby employing ‘‘residual’’ conceptualizations of service innovation (Michel, Brown, and Gallan 2008; Vargo and Lusch 2006). Moreover, previous empirical investigations of innovation are based on narrow conceptual frameworks that may not fully cap- ture the complexities of service innovation (Baker and Sinkula 2007), prompting calls for broader frameworks that involve simultaneous examination of multiple innovation antecedents and consequences (Szymanski, Kroff, and Troy 2007). Empirical findings in the innovation literature are limited and inconclusive regarding service-innovation antecedents such as managers’ innovation and customer orientation (Kirca, Jayachandran, and Bearden 2005; Menguc and Auh 2006); the organizational choices concerning contact personnel (Gounaris 2006) and knowledge management mechanisms (De Luca and Atuahene-Gima 2007); and the approach toward external sources of innovation—for example, customers and business

partners (Alam 2002). Furthermore, the effects of service inno- vation phenomena have by and large been assessed through perceptual rather than actual measures of firm performance (Vincent, Bharadwaj, and Challagalla 2004). In this article, we build on and extend extant innovation research by proposing and empirically testing a framework explicating antecedents and consequences of service innova- tion based on the principles of the service-dominant logic (SDL; Vargo and Lusch 2004, 2008). The SDL, which proposes an overarching approach for analyzing economic exchanges, suggests a conceptualization of service innovation—based on the application of ‘‘competences’’ (i.e., knowledge and skills) 1 —that is not rooted in the traditional manufacturing-services dichotomy (Drejer 2004). It also facilitates integration of insights from various theoretical streams dealing with service innovation (Vargo and Lusch 2008), thereby leading to a broad nomological network for investigating it as called for in the literature

1 Department of Marketing, Bocconi University, Milan, Italy 2 Department of Marketing, University of Miami School of Business, Coral Gables, FL, USA

Corresponding Author:

Andrea Ordanini, Department of Marketing, Bocconi University, 20136 Milan, Italy Email: andrea.ordanini@unibocconi.it

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(Baker and Sinkula 2007). Because it is an overarching perspective guided by a set of foundational premises (FPs), rather than a new theory per se, SDL can leverage (instead of competing with) the various literature streams that have investigated service innovation. Invoking relevant FPs of SDL and integrating them with innovation-related insights from the literature, our framework posits three main sources of service innovation: collaborative competences, a dynamic capability of customer orientation, and knowledge interfaces. Then, for each source, we develop and test a set of hypotheses predicting the service innovation outcomes and their effects on observed firm performance in a specific service context (luxury hotels in Italy). Our study incorporates two different innovation outcomes (volume and radicalness) and employs actual, rather than perceptual, mea- sures of firm performance to assess their effects. Findings from our study make several contributions. First, contributing to the service management literature, our findings highlight the critical role of contact personnel—their collabora- tion in the service innovation process emerges as the most important innovation trigger, affecting both innovation volume and radicalness. Second, our findings raise some questions about a key tenet of the open-innovation literature—namely, that engaging outside stakeholders helps to increase innovation radicalness, which is hindered when only internal sources are involved (Chesbrough 2003). Specifically, our findings suggest that direct inputs from customers lead to more incremental than radical innovations; moreover, the customers’ influence becomes insignificant when other external business partners do not participate to the innovation process. Third, our study sheds new light on the contentious role of customer orienta-

and coproduction (Gronroos 2000). Some traditional manufacturing-context innovation drivers (e.g., R&D invest- ment and patents) may have low relevance for service innova- tion. Others (such as innovative orientation (Menguc and Auh [2006] and market orientation [Kirca, Jaychandaran, and Bearden 2005]), although they have been applied in service contexts, have produced mixed results. Moreover, some impor- tant innovation drivers studied in goods contexts (such as the role of outside stakeholders [i.e., customers and business part- ners; Alam 2002] and knowledge management mechanisms [De Luca and Atuahene-Gima 2007]) that are potentially rele- vant for service contexts have rarely been investigated in such contexts. Because of the supposed structural differences between goods and services, some scholars have advocated distinct fra- meworks for studying service innovation (e.g., Edvardsson and Olson 1996; Fitzsimmons and Fitzsimmons 2000). Proponents of this ‘‘demarcation’’ approach rely on the assumption that services are a special type of product (i.e., intangible goods), requiring structural modification of innovation models devel- oped for tangible goods. These studies are relatively few and, although representing a different vision for examining service innovation, have been criticized because they tend to overem- phasize services’ distinctive features, thus restricting the gener- ality of their findings (Drejer 2004). Moreover, features considered unique to services may apply to manufacturing as well (Rust 1998); and, findings from these studies (e.g., find- ings about contact personnel’s role in service innovation) have been inconclusive (Gounaris 2006). While seemingly opposite approaches, ‘‘assimilation’’ and ‘‘demarcation’’ are both inspired by a goods-dominant logic.

tion—that is, reactive versus proactive (Kirca, Jaychandaran, In both cases, services are conceptualized in relationship

and Bearden 2005; Rodriguez Cano, Carillat, and Jaramillo 2004), showing that customer orientation has both a main effect and an interactive effect (together with the innovative orienta- tion) on service innovation outcomes. Fourth, countering evi- dence from the goods-dominated innovation literature that volume and radicalness of innovations trade-off against each other (Atuahene-Gima, Slater, and Olson 2005), our findings suggest that the two types of innovation outcomes may have synergistic effects on service firm performance.

(i.e., are subordinated) to physical goods (Vargo and Lusch 2006) and the innovation process is analyzed by merely extend- ing or adapting some individual insights developed in manufac- turing contexts. The apparently piecemeal approach of focusing narrowly on just a few innovation drivers in previous ‘‘assimilation’’ and ‘‘demarcation’’ studies has led to incom- plete knowledge about the true nature and impact of service innovations (Szymanski, Kroff, and Troy 2007; Vincent, Bharadwaj, and Challagalla 2004).

Background

Service Innovation: ‘‘Assimilation’’ and ‘‘Demarcation’’ Approaches

An SDL-Based ‘‘Synthesis’’ Approach

The limitations of the ‘‘assimilation’’ and ‘‘demarcation’’ approaches have led to calls in the literature for more appropri- ate frames that incorporate important and understudied aspects

The mainstream view in the current literature is that innovation of service provision and that do not merely reflect the

drivers are similar in product and service contexts, at most differing in relative importance between the two (e.g., Atuahene-Gima 1996; Nijssen et al. 2006). Research anchored in this ‘‘assimilation’’ approach, while contributing insights concerning service innovation, has been criticized as being

manufacturing-service dichotomy (Drejer 2004). The SDL is appropriate for studying service innovation because it moves away from perspectives traditionally ‘‘rooted in technological product inventions’’ (Michel, Brown, and Gallan 2008, p. 54). The SDL proposes that service is the central mechanism

influenced by an excessive emphasis on technology-based of any economic exchange and conceptualizes it as the ‘‘pro-

innovations (Drazin and Schoonoven 1996), and for not consid- ering structural peculiarities of services, such as intangibility

cess of application of specialized competences (knowledge and skills) through deeds, processes, and performances for the

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Ordanini and Parasuraman

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Competences t–1 Customer collabora on Business partner collabora on

Collabora ve

Competences t –1 Customer collabora on Business partner collabora on Collabora ve Dynamic capability of customer

Dynamic capability of customer orienta on t–1

Innova ve Orienta on

Customer Orienta on

Innova on outcomes t–1 Volume
Innova on
outcomes t–1
Volume
Δ Revenues t/t–2 performance Δ Ebit t/t–2 Firm
Δ Revenues t/t–2
performance
Δ Ebit t/t–2
Firm
  • x Radicalness

    • Control variables

Competences t –1 Customer collabora on Business partner collabora on Collabora ve Dynamic capability of customer
Employee collabora on Knowledge integra on mechanisms interfaces t–1 Knowlegde
Employee collabora on
Knowledge integra on
mechanisms
interfaces t–1
Knowlegde

Figure 1. Antecedents and consequences of service innovation: an integrative framework.

benefit of another entity or the entity itself’’ (Vargo and Lusch innovation: collaborative competences, dynamic capability of 2004, p. 2). The process of competence application is copro- customer orientation, and knowledge interfaces. These drivers duced with customers and partners and can be provided directly are expected to affect service innovation outcomes along the through intangible services or indirectly through tangible arti- dimensions of volume (breadth) and radicalness (depth): the

facts (i.e., goods; Vargo and Lusch 2006). This feature allows former reflects the number of innovations, the latter the magni-

SDL to be applied to tangible goods as well.

tude of the change (Vincent, Bharadwaj, and Challagalla

The SDL perspective seems especially suitable for studying 2004). Since the fundamental purpose of any (new) service is service innovations because it nests both services and tangible ‘‘to contribute to a firm’s growth as a whole’’ (Johne and Storey

goods into an integrated, overarching service view (Vargo and 1998, p. 213), we also consider the terminal effects of service Lusch 2006) and is consistent with the synthesis approach innovation on observed measures of a firm’s financial perfor- advocated for examining service innovation (Drejer 2004). mance. Figure 1 summarizes our research framework. It offers an autonomous conceptualization of service as a

coproduced process that involves the application of compe- tences, which, in turn, supports a new perspective for thinking about service innovations. According to SDL, a service innova- tion can be considered as an offering not previously available to the firm’s customers—either an addition to the current service mix or a change in the service delivery process—that requires modifications in the sets of competences applied by service providers and/or customers (Menor and Roth 2007). The nature and magnitude of change in competences determine the extent of service innovation (Michel, Brown, and Gallan 2008). The focus on competences also facilitates the integration of different views of service innovation and the use of broader nomological networks to study the phenomenon (Baker and Sinkula 2007).

Research Model and Hypotheses

Invoking insights from the afore-described background litera-

Collaborative Competences

Customer collaboration. Two key FPs 2 of SDL are ‘‘The cus- tomer is always a co-creator of value’’ (FP6) and ‘‘The enter- prise cannot deliver value, but only offer value propositions’’ (FP7). These FPs imply that a service provider without custom- ers cannot produce anything of value; in other words, the cus- tomer always plays an active role in service offerings by integrating his or her own set of resources and competences into any service activity (Zeithaml, Bitner, and Gremler 2009). They also imply that customers potentially play an important role in the service innovation process as well. Specif- ically, new service provision could benefit from the collection and use of customer knowledge and skills. The SDL defines the capability to bring customers (and other external stakeholders such as business partners) into the process and use them as mechanisms to foster change as collaborative competence (Lusch, Vargo, and O’Brien 2007). 3 The idea of collaborating with customers during the innova-

ture, and using as building blocks some of SDL’s theoretical tion process is similar to suggestions from the Customer Active propositions, known as FPs, we develop a framework articulat- Paradigm (von Hippel 1986) and the open-innovation literature ing the antecedents and consequences of service innovation. (Chesbrough 2003). However, those suggestions pertain to new The most recent version (Vargo and Lusch 2008) of SDL’s FPs (tangible) product development in engineering contexts, (introduced later) suggests three drivers relevant for service wherein external stakeholders participate directly in the design

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and manufacturing stages. By contrast, in service innovation processes, customers act more as knowledge providers than direct executors of tasks, and customer collaboration refers to ‘‘information and feedback on specific issues’’ and ‘‘extensive consultation with users by means of interviews, focus group and team discussion’’ (Alam 2002, p. 255). According to SDL, the capability to collaborate with cus- tomers during service development transforms the customer into an operant resource on which the firm can draw to foster innovation and competitiveness (Vargo and Lusch 2004). Col- laborating with customers during the service innovation pro- cess taps into an often overlooked source of knowledge (Blazevic and Lievens 2008) and improves needs alignment through better customization of the service, thereby increasing the likelihood of market success (Lusch, Vargo, and O’Brien 2007). It can also reduce overall service development time, and facilitate rapid diffusion of service innovations (Alam 2002), thereby increasing the volume of service innovations. Although customer collaboration also facilitates better alignment between innovations and customer needs (Alam 2002), innova- tions stemming from such collaboration are likely to be more incremental than radical. The learning literature suggests that the capacity to generate knowledge is bounded by previous experience because individuals learn new concepts by invok- ing what they already know (Cohen and Levinthal 1990). Customers are thus unlikely to envision radically new ser- vices because they primarily rely on preexisting knowledge, thus reflecting ‘‘exploitative’’ rather than ‘‘generative’’ learn- ing (Baker and Sinkula 2007). Hence, while collaborating with customers can generate more new ideas and accelerate

competence) is at the core of effective service innovation processes (Lusch, Vargo, and O’Brien 2007). We expect business partner collaboration to influence primarily innovation radicalness rather than volume for two reasons. First, while customers associate services they receive with the focal firm’s brand (e.g., a hotel), the customers’ over- all experience often results from interactions with a network of providers (for instance, in the case of a hotel: booking agencies, restaurants, shuttle services, boutiques, etc.; Simonin and Ruth 1998). When the focal firm collaborates with business partners in the service innovation process, the potential for fundamental changes (i.e., greater innovation radicalness) is likely to be higher than in the absence of such collaboration because part- ners may stimulate different changes consistent with their own agendas in order to maintain/improve their relational positions (i.e., relative power) in the service network (Afuah 2000). Sec- ond, suppliers often have knowledge and perceptions about end users that are different from those of the focal firm (Groher 2003); as such, different perspectives enter into the innovation process, which, in turn, may lead to more radical changes (Atuahene-Gima, Slater, and Olson 2005). At the same time, the learning literature suggests that knowledge generation through interfirm collaborations is prone to significant coordi- nation costs especially when tacit knowledge is involved (Argote, McEvily, and Reagans 2003), which is the case in the domain of service innovations. Therefore, collaborating with business partners in service innovation projects is likely to occur only for major projects aimed at producing fundamental changes for which the expected payoff justifies the coordina- tion costs (Pittaway et al. 2004). Based on the above arguments,

their implementation (Urban et al. 1997), reliance on past we expect that business partner collaboration will enhance

experiences is likely to inhibit exploration of drastically new domains (Levinthal and March 1993). As such, customer col- laboration is unlikely to enhance the radicalness of service innovation. We therefore posit:

Hypothesis 1: Greater the extent of collaboration with cus- tomers in the service innovation process, greater will be the volume of innovation.

Business partner collaboration. Collaboration with business partners is a potential source of knowledge for service innova- tion, as implied by another of SDL’s fundamental premises:

‘‘All social and economic actors are resource integrators’’ (FP9; Vargo and Lusch 2008). This is especially true in con- texts where the focal service firm belongs to—and relies

innovation radicalness, but not volume:

Hypothesis 2: Greater the extent of collaboration with busi- ness partners in the service innovation process, greater will be the radicalness of service innovation.

A Dynamic Capability of Customer Orientation 4

Two of SDL’s fundamental premises—‘‘A service-centered view is inherently customer oriented and relational’’ (FP8) and ‘‘Operant resources (knowledge and knowledge renewal) are the fundamental source of competitive advantage’’ (FP4)— imply that an organization should be simultaneously customer- and learning-oriented (Vargo and Lusch 2004). One research stream affirms that customer orientation (a) is inherently entre-

on—a network of suppliers and other business partners to preneurial (Deshpande`, Farley, and Webster 1993), (b) advo- deliver its services. The open-innovation literature suggests cates a continuous proactive disposition (Han, Namwoon,

that the participation of network partners in the focal firm’s innovation process can enhance the process internally and expand external markets for the resulting innovations (Chesbrough 2003; Fang 2008). The SDL supports this network view of service innovation by suggesting that the capability to involve business partners and use them as mechanisms to

and Srivastava 1998), and (c) can be viewed as a form of inno- vative behavior (Kohli, Jaworski, and Kumar 1993). On the other hand, some scholars have questioned customer orienta- tion’s ability to generate truly innovative market offerings because it may not encourage sufficient willingness on the firms’ part to take risks (Narver and Slater 1995) and because

foster change (i.e., the previously described collaborative it focuses attention on current customers and their needs,

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Ordanini and Parasuraman

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thereby promoting adaptive, rather than new, organizational learning (Berthon, Hulbert, and Pitt 1999). Some research has also found that the link between customer orientation and inno- vation is especially weak for services, where customer orienta- tion is viewed as a failure-prevention approach (a ‘‘hygiene’’ factor) rather than a success-inducing approach (Kirca, Jaychandaran, and Bearden 2005; Rodriguez Cano, Carillat, and Jaramillo 2004). The SDL perspective offers a way to reconcile these con- trasting views by suggesting t hat effective new service development depends on the continuous renewal, creation, integration, and transformation of key information and knowledge (Ballantyne and Varey 2006). This implies that, without a proactive drive, customer orientation at best facil- itates preempting competitors in capturing an unmet service need that already exists, perhaps in latent form, but it does

Knowledge Interfaces

The SDL’s FP4, ‘‘Operant resources (knowledge and knowledge renewal) are the fundamental source of competitive advantage,’’ along with another key premise—‘‘Service (the application of specialized skills and knowledge) is the funda- mental unit of exchange’’ (FP1)—underscores the need for effective knowledge transfer mechanisms (i.e., knowledge interfaces) for activating innovation. Knowledge interfaces can be defined as ‘‘a set of social and physical conditions facilitat- ing the transference of knowledge within and among organiza- tions’’ (Sherwood and Covin 2008, p. 164). Such interfaces ensure knowledge gathering and absorption as well as knowl- edge integration and diffusion (Madhavan and Grover 1998).

Employee collaboration. In the service domain, customer-

not facilitate gaining firmer control of the market by caus- contact personnel are considered the most important

ing something significantly new to happen. At the same

knowledge interface for external knowledge transfer

time, simply being innovative-oriented, that is, inclined to (Atuahene-Gima 1996). However, scholarly investigations of

use new knowledge or insights to facilitate organizational contact personnel as a catalyst for service innovation are few

changes, does not ensure that the effort is properly chan-

(Gounaris 2006) and have been somewhat equivocal (Johne

neled to satisfy customer ne eds and cocreate value. The and Storey 1998). While some scholars suggest that contact imperative that firms should constantly explore innovative employee participation in new service development helps

ways of cocreating value with customers calls for a combi-

identify customer requirements, facilitates innovation imple-

nation of customer orientation and other firm resources to mentation, and prevents process-efficiency considerations enhance service innovation (Lusch, Vargo, and O’Brien from superseding customer needs (Schneider and Bowen

2007). Specifically, the blending of customer orientation 1984), others have pointed out that contact employees are often and innovative orientation should lead to the generation of reluctant to collaborate in new service development as it an operant resource capable of enhancing cocreation oppor- increases their workload (Johne and Storey 1998). The SDL

tunities. Based on this premise, we propose that customer

considers service employees as operant resources that could

orientation should be combined with innovative orientation serve as a critical source of innovation knowledge. For employ-

to create a dynamic capability of customer orientation ees to be effective as operant resources in this regard requires a

(Menguc and Auh 2006), which by avoiding the ‘‘tyranny

participative work environment—one that encourages and

of the served market’’ (Hamel and Prahalad 1994) while values employees’ ideas, without penalizing them for poten-

ensuring a customer-focused change (Hurley and Hult tially ineffective ones; in such an environment, employees feel

1998), will be conducive of service innovations.

empowered (Bowen and Lawler 1992) and are motivated to

Since customer orientation an d innovative orientation are develop new ways of providing service, facilitating the align-

firm-level traits that create the overall context wherein

ment of an organization’s internal capabilities and external

balanced innovative strategies can take place (Baker and Sin- objectives (Gounaris 2006). Organizations that genuinely ‘‘treat

kula 2007; Kyriakopoulos and Moorman 2004), we expect a

their employees as operant resources will be able to develop

dynamic capability of customer orientation to affect both vol- more innovative knowledge and skills and thus gain competitive

ume and radicalness of service innovation. Such a dynamic capability is likely to increa se innovation volume because it

advantage’’ (Lusch, Vargo, and O’Brien 2007, p. 15). Effective collaboration with service employees has been

infuses a culture of change within the entire organization that found to increase the speed of new service development (Johne

stimulates ongoing and systema tic analysis and revision of the and Storey 1998) and the amount of information collected

status quo vis-a`-vis market needs (Menguc and Auh 2006).

about customer problems (Kelley 1993). Therefore, employee

It also increases an organiza tion’s willingness to cannibalize collaboration is likely to have a positive effect on the volume

even its currently effective core competences, which has been of service innovation. At the same time, employees essentially

recognized as an important precursor of radical innovations in

learn from and reflect the needs of customers who, as previ-

both product (Chandy and Tellis 1998) and service (Nijssen ously noted, provide knowledge that pertains primarily to

et al. 2006) domains. Hence, we posit that:

Hypothesis 3: Greater the dynamic capability of customer

issues with which they are already familiar (Levinthal and March 1993). Moreover, individuals who learn through obser- vation, such as service employees, are capable of clearly articu-

orientation, greater will be the volume and the radical- lating their knowledge only when it pertains to ‘‘easy’’

ness of service innovation.

problems (Argote, McEvily, and Reagans 2003). We therefore

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Journal of Service Research 14(1)

expect employee collaboration to affect just service innovation volume and radicalness of service innovations and includes a

volume but not radicalness. Thus,

broader set of potential predictors of the two innovation facets.

An overarching tenet implied by the SDL is that a continuous Hypothesis 4: Higher the level of the collaboration with con- innovative effort that fosters both innovation breadth and

tact personnel in the service innovation process, greater depth, and that mobilizes a wide variety of competences, is

will be the volume of service innovation.

Knowledge integration mechanisms. Knowledge acquired from outside the organization (i.e., customers and business partners) and from employees often does not become available for innovation purposes due to inadequate mechanisms for inte- grating and sharing the information throughout the organiza- tion (Marinova 2004). Knowledge integration mechanisms (KIMs)—which are formal processes and structures that facil- itate the capture, analysis, and synthesis of various types of knowledge and the dissemination of that knowledge among dif- ferent functional units—facilitate combining firm capabilities with market knowledge to create successful new service offer- ings (De Luca and Atuahene-Gima 2007), reduce inefficiencies during the innovation process (Sheremata 2000), and help exploit the acquired knowledge for competitive advantage (Zahra and Nielsen 2002). The criticality of KIMs is also implied by SDL because it considers knowledge renewal as the fundamental source of sustainable competitive advantage through innovation (Lusch, Vargo, and O’Brien 2007). The influence of KIMs on service innovation is likely to be on radicalness rather than on volume. The learning literature suggests that formal processes such as KIMs are especially important for exploiting the potential of complex and tacit knowledge but not as critical for merely generating new ideas (Nonaka 1991). Moreover, prior research in product innovation has shown that KIMs mediate the link between a firm’s knowl- edge and innovation outcomes only for the depth dimension of knowledge (i.e., sophistication and complexity of knowledge) but not for the knowledge breadth dimension (i.e., variety of knowledge; De Luca and Atuahene-Gima 2007). The signifi- cant association between knowledge depth and KIMs (and lack thereof between knowledge breadth and KIMs) in influencing innovation effectiveness leads to:

Hypothesis 5: Greater the extent of use of knowledge inte- gration mechanisms in the innovation process, greater will be the radicalness of service innovation.

Innovation Outcomes and Performance

The link between a firm’s innovation output and observed mea- sures of performance (i.e., the right side of the model in Figure 1) is consistent with extant literature (e.g., Chandy and Tellis 1998; Han, Namwoon, and Srivastava 1998). However, there is scant evidence of this relationship in service contexts because the vast majority of empirical studies have focused on tangible products (Menor, Tatikonda, and Sampson 2002).

necessary for achieving and sustaining service success (Lusch, Vargo, and O’Brien 2007). Moreover, a meta-analysis of findings pertaining to the innovation-performance link revealed that both innovation volume and radicalness have positive impacts on financial outcomes (Vincent, Bharadwaj, and Challagalla 2004). Thus:

Hypothesis 6: Greater the service innovation (a) volume and (b) radicalness, higher will be firm performance.

Nonetheless, both marketing (Sorescu, Chandy, and Prabhu 2003) and management (Kleinschmidt and Cooper 1991) litera- tures generally consider radical innovations as contributing greater value to firms than incremental innovations. We there- fore expect radicalness to have a stronger impact on firm per- formance than does volume:

Hypothesis 7: The impact of innovation radicalness on per- formance will be stronger than that of innovation volume.

Method

Research Setting

Our study context was the Italian hotel industry; in particular, five-star luxury hotels. Though the choice of a single industry may limit generalizability, it also reduces potential problems when sampling firms from diverse industries (Han, Namwoon, and Srivastava 1998; Kyriakopoulos and Moorman 2004). To eliminate possible distortions due to interindustry structural differences, we followed the common practice of studying a single, but sufficiently robust, sector to test the proposed rela- tionships. We chose hospitality, generally considered a highly complex sector wherein customers experience and evaluate multiple services on multiple criteria (Verma, Plaschka, and Louviere 2002). Given the variety of services in an overall hos- pitality offering (restaurants, rooms, spas, fitness centers, etc.), innovation activities are at the forefront in determining the ‘‘best’’ configuration of services to appeal to target markets (Haugland, Myrtveit, and Nygaard 2007). Within the hospital- ity sector, luxury hotels contain the most complex configura- tions of services, both ‘‘high-touch’’ (i.e., interpersonal) and ‘‘high-tech’’ (i.e., mediated by technology), and, compared to mid-range hotels, compete more on the basis of creativity and innovation than on price and location (Harris and Watkins

1998).

Sampling and Data Collection

Moreover, the most recent service studies have employed per- ceived measures (Chen, Tsou, and Huang 2009). Our proposed Our sampling frame consisted of all 193 five-star luxury hotels model anchored in SDL is more comprehensive, considers both in Italy and provided by the Italian Hotel Industry Association

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Ordanini and Parasuraman

9

(Federalberghi). We included both independent and chain provider (Alam 2002) and given that collaboration with

hotels but eliminated eight chain hotels whose accounting information was available only at the chain level and not for individual hotels within the chain. Data on the independent variables (drivers of innovation) and mediators (innovation outcomes) were collected through a self-reported survey. We sent survey-participation invitations to general managers of all hotels in our sampling frame. We

external players to cocreate knowledge involves an interaction process (Blazevic and Lievens 2008; Faems, Van Looy, and Debackere 2005), our measure included 4 items reflecting the richness and intensity of customer interactions, the frequency of meetings, and the number of customers collaborating in the service innovation process. We used a similar scale to assess the extent of business partner collaboration. Respondents were

then set up appointments for telephone interviews with those told that business partners included suppliers and other external

who accepted. Given the strategic nature of the questions, the type of survey procedure used, and the type of firms in our sample, we designated the general manager of each hotel as the key informant, consistent with previous hospitality studies (Haugland, Myrtveit, and Nygaard 2007). Using computer-aided telephone interviewing (CATI), we collected data during 2007, but the questions asked for infor- mation about activities in 2006. To increase the response rate, and because our respondents were senior executives, we lim- ited the interviews to around 10 minutes. Ninety-one hotels participated in the study (47% response rate). Early respon- dents (41 hotels that responded in the first 3 months) and late respondents (50 hotels that responded after 3 months) did not differ significantly in their responses to the study variables.

service providers who contributed to the bundle of services offered by luxury hotels. To measure customer orientation , we employed a 9-item scale developed by Deshpande`, Farley, and Webster (1993), which captures key elements of cultural and decisional traits related to customer orientation, which is especially relevant in service contexts (Atuahene-Gima 1996). Innovative orientation was measured through the 5-item scale of Hurley and Hult (1998) for assessing innovativeness as a firm’s cultural trait. We measured employee collaboration through a 3-item scale adapted from Li and Calantone (1998). We modified the original scale to reflect the extent to which contact personnel are engaged in the service innovation process. To assess

Thirty-five hotels (38%) were independent organizations the presence of knowledge integration mechanisms, we used a

while the rest were chain hotels. Sixty-two hotels (61%) were in large cities, while the rest were in small towns. The average

5-item scale measuring the extent to which a set of formal pro- cesses are used to capture, interpret, and integrate knowledge in

hotel had 107 rooms and 99 employees. The average annual the service innovation process (De Luca and Atuahene-Gima

revenue turnover was 7.7 million, of which 74% came from leisure customers and the rest from business customers. Our sample did not differ significantly from the population of Ita- lian luxury hotels on key characteristics. 5 The respondents’ mean age and tenure as hotel manager were, respectively, 51 and 5.2 years. Data on the dependent variables (i.e., performance mea- sures), were obtained from the AIDA Bureau Van Djick data- base, which contains income statements and other accounting

2007). We measured all constructs using 5-point Likert-type scales (1 ¼ strongly disagree; 5 ¼ strongly agree).

Innovation Outcomes

We operationalized innovation volume as the number of service innovations implemented during 2006 by each hotel (Han, Namwoon, and Srivastava 1998). Consistent with the SDL-based conceptualization of service innovation, we asked

data for Italian firms with more than 10 employees. The use of respondents to list all innovations that required a change in the

objective measures of performance in innovation research is

application of competences. We also asked for a brief descrip-

rare, but highly recommended, because perceived- tion of each implemented innovation as well as some examples

performance measures tend to inflate the effects of innovation activities (Szymanski, Kroff, and Troy 2007). Consistent with

of the consequent changes in competences. We used the latter information to ensure that our analyses only included service

prior literature (Han, Namwoon, and Srivastava 1998), we col- innovations that were accompanied by changes in the

lected year-end performance measures for 2005 and 2007 to allow a minimum time lag of 1 year between innovation activi-

application of competences (Michel, Brown, and Gallan 2008). Table 1 contains examples of service innovations intro-

ties during 2006 (about which our cross-sectional survey col- duced by hotels in our sample, together with the changes in the

lected data) and their likely impact on firm performance at the end of 2007.

Measures

Independent Variables

application of competences. Our sample hotels introduced an average of 2.9 service inno- vations in 2006 (min ¼ 0, max ¼ 9; SD ¼ 2.8). In our analysis, we used the square root of the number of innovations to correct for non-normality and possible heteroscedasticity. We opera- tionalized radicalness as the extent to which a firm’s new ser- vices differ drastically from current offerings and require major

We measured customer collaboration by adapting for a service changes in the application of competences. We measured this

setting a scale developed by Gruner and Homburg (2000) in a product-innovation context. Because the primary role of cus-

construct at the firm level (i.e., as an overall measure of service-innovation radicalness) with a 3-item scale, by adapt-

tomers in new service development is that of a knowledge ing a firm-level radical-product-innovation scale developed

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10

Journal of Service Research 14(1)

Table 1. Illustrative Service Innovations in Our Sample With Associated Changes in the Application of Competences

New Services

Changes in the Applied Competences

‘‘Journey through the arts:’’ painting and sculpture courses and museum experiences

Heating system that reuses the hot water from the thermal unit

Rental of electric cars for customers’ short trips and travels Fully automated central reservation system, with high personalization of the service

Personal life style consultant/ shopper

Transfer by helicopter to restaurants, shops, etc.

‘‘Never say no:’’ customer claim management by employees

New personnel, external partnership (museums), customer willingness/capacity to personalize the service Technology (plants), new skills (training) of personnel for assistance, external partnership for maintenance (different manufacturer) Technology (new cars), skills and relations with external provider (rental company) Interactive capabilities of customers, technology resources (information systems) New personnel, customer willingness/capacity to personalize the service New personnel, new technology, customer willingness/capacity to personalize the service New organizational routines, training of personnel, training of customers

by Chandy and Tellis (1998). 6 Tables 2 and 3 contain the scale items for the multiple-item constructs in our study (Tables 2 and 3).

Validation of Survey Measures

We took several steps to minimize and to check for the pres- ence of common method bias, a potential concern because our data on the innovation antecedents and outcomes come from the same source. First, we took various procedural precautions recommended by Podsakoff et al. (2003; e.g., guaranteeing respondent anonymity; counterbalancing question order, and rotating items in using the CATI technique). Second, we per- formed Harmon’s one factor test by conducting principal com- ponent factor analysis of all antecedent and outcome variables:

the results revealed multiple distinct factors with the first unro- tated factor accounting for just 29% of the total variance, sug- gesting that common method bias was not a serious concern. Third, we employed the marker-variable approach (Lindell and Whitney 2001) to check whether common method bias was an issue. An appropriate marker variable is one that is theoreti- cally unrelated to the criterion variables and not employed in the focal analyses, but on which data are gathered on the same survey. A variable that satisfied the preceding criteria in our

important than international customers’’ and ‘‘international customers are much more important than domestic customers.’’ The pattern, relative magnitudes, and statistical significance of the correlations between the various predictor variables and the two criterion variables (innovation volume and radicalness) after partialling out the marker variable were similar to those of the unadjusted correlations (shown in Table 4), thereby sup- porting the inference that common method bias was not an issue in our data set. We also assessed the factorial validity of the innovation- antecedent and innovation-outcome variables through confir- matory factor analysis (CFA). Due to limited sample size, and the conventional requirement that the ratio of sample size to number of estimated parameters be at least 5:1 (Shook et al. 2004), we ran two separate CFAs: one with customer orienta- tion, innovative orientation, and radicalness and the other with customer collaboration, partner collaboration, employee colla- boration, and knowledge integration mechanisms. The results of the two CFAs, summarized in Tables 2 and 3, show satisfac- tory overall model fit. Moreover, for each latent construct, composite reliability and average variance measures indicate good convergent validity. Finally, discriminant validity of the constructs is supported since the lowest level of average var- iance extracted is .51 and the highest correlation between latent constructs is .4.

Dependent Variables

We employed two terminal performance measures frequently used in the hotel industry (Verma, Plaschka, and Louviere 2002): growth in revenues per room (during the period 2005- 2007), which reflects the marketing or ‘‘top line’’ impact of innovation efforts, and growth in the EBIT-to-sales ratio (dur- ing the same period), which captures the net effect on profits after accounting for costs associated with innovation efforts. Data on both measures were derived from the hotels’ income statements as mentioned previously. 7

Control Variables

Since both innovation outcomes and performance were mea- sured at the firm level, we included relevant firm-level control variables in our analyses to account for the effects of potential performance determinants not included in our model. First, we considered the effect of slack resources due to firm size by employing the logarithm of the number of hotel rooms (Harris and Watkins 1998). Second, we included a dummy variable representing whether each hotel was independent or part of a chain, because belonging to an international chain could influ- ence a hotel’s capabilities (Haugland, Myrtveit, and Nygaard 2007). Third, we included year-end sales revenue and return on sales (i.e., EBIT-to-sales ratio) for 2005 to make our estima-

study was perceived relative importance of international cus- tions robust against potential ‘‘halo effect.’’ We obtained

tomers for market success, measured on a 5-point ( 2 to þ2) scale with end anchors ‘‘domestic customers are much more

objective measures of all control variables from the secondary data set to which we had access.

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Ordanini and Parasuraman

11

Table 2. Measurement Instrument: CFA for the First Set of Constructs a

CMIN/df ¼ 1.20; CFI ¼ 0.97; IFI ¼ 0.97; RMSEA ¼ 0.047

Customer Collaboration [CUST] (adapted from Gruner and Homburg 2000) Indicate your extent of agreement about how well these statements describe what happens in your firm during the innovation process:

Std. items

CR ¼ 0.81

AVE ¼ 0.52

We interact with customers beyond the standards of market research

We interact with business partners beyond the standards of market research

0.67

The perceived intensity of customer interaction is high

0.73

The frequency of meetings with customers is high

0.73

The number of customers with whom we interact is high Business-Partner Collaboration [PART] (adapted from Gruner and Homburg 2000)

0.76

Indicate your extent of agreement about how well these statements

Std. items

CR ¼ 0.86

AVE ¼ 0.60

describe what happens in your firm during the innovation process:

0.90

The perceived intensity of business-partner interaction is high

0.70

The frequency of meetings with business partners is high

0.85

The number of business partners with whom we interact is high Employee Collaboration [EMP] (adapted from Li and Calantone 1998)

0.63

To what extent are contact personnel engaged in the processes

Std. items

CR ¼ 0.86

AVE ¼ 0.67

of service innovation? Contact personnel are actively engaged in generating and screening ideas for

0.83

new services Contact personnel are actively engaged in establishing goals and priorities for

0.82

our strategies Contact personnel are adequately represented on project teams and other strategic activities Knowledge Integration Mechanisms [KIM] (De Luca and Atuahene-Gima 2007)

0.80

To what extent does your firm use each of the following activities to capture,

Std. items

CR ¼ 0.84

AVE ¼ 0.51

interpret and integrate knowledge and information about market and technology conditions? Regular formal reports and memos that summarize learning

0.65

Information sharing meetings

0.68

Face-to-face discussions by cross-functional teams

0.90

Formal analysis of failing service development projects

0.54

Formal analysis of successful service development projects

0.74

a All constructs were measured using 5-point Likert-type scales (1 ¼ strongly disagree; 5 ¼ strongly agree).

Table 4 contains means, standard deviations, and correlations for the study variables.

Model Specification

We used three-stage least squares (3SLS) to test the pro- posed framework. This procedure is ideal for dealing with the simultaneous effects in o ur model because it handles both the endogeneity of the innovation variables and the possibility of correlated errors between variables (Aiken and West 1991). We modeled customer collaboration (CUST), partner collaboration (PART), customer orientation (COR), innovative orientation (INNOR), the interactive term between the two (COR INNOR), employee collaboration (EMPL), and knowledge integration mechanisms (KIM) as determinants of the two innovation outcomes: volume (VOL) and radicalness (RAD). The two outcomes were in turn modeled as determinants of the growth in revenues per room (D REV) and the growth in the EBIT-to-sales ratio

(D EBIT), the two endogenous variables. Our model speci- fication, including time lags, 8 was as follows (control variables are shown in lower case):

VOL t 1 ¼ b 0 þ b 1 ðCUSTÞ t 1 þb 2 ðPARTÞ t 1 þ b 3 ðCOR Þ t 1 þb 4 ðINNOR Þ t 1 þ b 5 ðCOR INNOR Þ t 1 þb 6 ðEMPLÞ t 1 þ b 7 ðKIMÞ t 1 þb 8 ðsizeÞ t 1 þb 9 ðchainÞ t 1 þ b 10 ðrevenuesÞ t 2 þb 11 ðebitÞ t 2 þe 1

ð1Þ

RAD t 1 ¼ b 12 þ b 13 ðCUSTÞ t 1 þb 14 ðPARTÞ t 1 þ b 15 ðCOR Þ t 1 þb 16 ðINNOR Þ t 1 þ b 17 ðCOR INNOR Þ t 1 þ b 18 ðEMPLÞ t 1 þb 19 ðKIMÞ t 1 þ b 20 ðsizeÞ t 1 þb 21 ðchainÞ t 1 þ b 22 ðrevenuesÞ t 2 þb 23 ðebitÞ t 2 þe 2

ð2Þ

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12

Journal of Service Research 14(1)

Table 3. Measurement Instrument: CFA for the Second Set of Constructs a

CMIN/df ¼ 1.42; CFI ¼ 0.90; IFI ¼ 0.90; RMSEA ¼ 0.068

Radicalness [RAD] (adapted from Chandy and Tellis 1998)

To what extent do the following statements represent your organization? Std. items

CR ¼ 0.77

AVE ¼ 0.53

We are renowned in the industry for our breakthrough new services

We have routine or regular measures of customer service

Technical innovation, based on research results, is readily accepted

0.64

We lead the way in introducing service innovations that require

0.83

brand new competences We constantly consider introducing new services that satisfy future market needs Customer Orientation [COR] (Deshpande` , Farley, and Webster 1993)

0.71

Indicate your extent of agreement about how well the statements below

Std. items

CR ¼ 0.91

AVE ¼ 0.52

describe the traits of your organization:

0.69

Our service development is based on good customer information

0.71

We know our customers well

0.61

We have a good sense of how our customers value our services

0.77

We are more customer-focused than our competitors

0.78

We compete primarily on the basis of service differentiation

0.77

We believe the customer’s interest should always come first ahead

0.68

of the company’s interest Our services are oriented to the best customers in the business

0.74

We believe our business exists primarily to serve customers Innovative Orientation [INNOR] (adapted from Hurley and Hult 1998)

0.68

Indicate your extent of agreement about how well the statements below

Std. items

CR ¼ 0.84

AVE ¼ 0.51

describe the culture for innovation in your organization:

0.68

Management actively seeks innovative ideas

0.73

Innovation is readily accepted in program/project management

0.74

People are penalized for new ideas that don’t work (R)

0.71

Innovation is perceived as too risky and is resisted (R)

0.72

a All constructs were measured using 5-point Likert-type scales (1 ¼ strongly disagree; 5 ¼ strongly agree).

DREV t 2=t ¼ b 24 þ b 1 ðCUSTÞ t 1 þb 25 ðPARTÞ t 1 þ b 26 ðCOR Þ t 1 þb 27 ðINNOR Þ t 1 þ b 28 ðCOR INNOR Þ t 1 þ b 29 ðEMPLÞ t 1 þb 30 ðKIMÞ t 1 þ b 31 ðVOLÞ t 1 þb 32 ðRADÞ t 1 þb 33 ðsizeÞ t 1 þ b 34 ðchainÞ t 1 þb 35 ðrevÞ t 2 þe 3

ð3Þ

DEBIT t 2=t ¼ b 36 þ b 37 ðCUSTÞ t 1 þb 38 ðPARTÞ t 1 þ b 39 ðCOR Þ t 1 þb 40 ðINNOR Þ t 1 þ b 41 ðCOR INNOR Þ t 1 þ b 42 ðEMPLÞ t 1 þb 43 ðKIMÞ t 1 þb 44 ðVOLÞ t 1 þ b 45 ðRADÞ t 1 þb 46 ðsizeÞ t 1 þb 47 ðchainÞ t 1 þ b 48 ðebitÞ t 2 þe 4 :

Findings

ð4Þ

Table 5 summarizes the 3SLS model estimation results. Because of the presence of interaction effects, we centered each

predictor so that simple effects represent the impact of a variable when the others are set to their means. Due to space constraints, we only present results for the full model. Hypotheses 1 and 2, postulating a positive effect of colla- borative competences on innovation outcomes, are supported. Customer collaboration (Hypothesis 1) has a positive effect on innovation volume (i.e., the number of new services; b ¼ .32; p < .05) but does not have a significant effect on innovation radicalness. Hence, collaborating with customers enhances the capacity to generate new service ideas, although those ideas may not represent radical departures from current offerings. Onthe other hand, business-partner collaboration (Hypothesis 2) has no effect on innovation volume but is positively associ- ated with innovation radicalness ( b ¼ .25; p < .05). There- fore, collaborating with business partners in service innovation enhances a firm’s likelihood of being a radical innovator, although it may not necessarily contribute to the volume of new services. Although we did not formally hypothesize differences between the effects of customer and business-partner co llaboration, we conduc ted Wald tests, the results from which showed the differences to be significant for both innovation volume (w 2 ¼ 5.51; p < .02) and radicalness (w 2 ¼ 4.62; p < .03). Hypothesis 3, relating to the joint effect of customer orien- tation and innovative orientation on innovation outcomes, is

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14

Note: CHAIN ¼ Hotel Belonging to a Chain; CUST ¼ Customer Collaboration; COR ¼ Customer Orientation; EBIT ¼ Ebit-to-sales Ratio; D_EBIT ¼ EBIT-to-sales Ratio Growth; EMPL¼ Employee Collabora-

tion; INNOR ¼ Innovative Orientation; KIM ¼ Knowledge Integration Mechanisms; PART ¼ Partner Collaboration; RAD ¼ Innovation Radicalness; and Revenues ¼ Revenues per Room; D_REV ¼ Revenues per Room Growth; SIZE ¼ Logarithm of the Number of Rooms; VOL ¼ Square Root of the no. of Innovations. a Correlations greater than .23 are significant at p < .05.

1

0.31

13

1

0.05

0.15

12

1

0.20

0.05

0.05

11

1

0.30

0.09

0.05

0.21

10

1

0.07

0.28

0.08

0.22

0.21

9

1

0.40

0.08

0.29

0.25

0.03

0.03

8

1

0.04

0.04

0.20

0.42

0.32

0.26

0.26

7

1

0.14

0.24

0.28

0.06

0.06

0.36

0.09

0.25

6

1

0.14

0.20

0.26

0.26

0.09

0.05

0.05

0.35

0.15

5

1

0.04

0.12

0.12

0.06

0.06

0.19

0.25

0.01

0.11

0.21

4

1

0.07

0.04

0.24

0.00

0.38

0.12

0.02

0.09

0.03

0.03

0.03

3

1

Table 4. Means, Standard Deviations, and Correlations a

0.17

0.14

0.30

0.08

0.38

0.28

0.12

0.22

0.16

0.15

0.03

0.23

2

1

0.24

0.04

0.38

0.22

0.06

0.26

0.26

0.16

0.19

0.35

0.25

0.03

0.51

1

1

1.17

0.08

60.10

0.02

0.92

1.12

1.16

0.76

1.06

0.96

0.49

0.79

0.23

1.01

SD

3.57

3.40

4.40

1.70

0.08

0.62

3.02

3.22

74.48

3.16

0.09

0.19

3.61

3.51

M

1. D_EBIT 2. D_REV 3. CHAIN 4. SIZE (ln) 5. CUST 6. PART 7. COR 8. INNOR 9. EMPL 10. KIM 11. VOL (sqrt) 12. RAD 13. Ebit 14. Revenues

14

Journal of Service Research 14(1)

Table 5. Three-Stage Least Squares Estimation for Hypotheses Testing

 

VOL R 2 ¼ .26; w 2 ¼ 31.12

 

RAD R 2 ¼ .56; w 2 ¼ 116.58

 

D_REV R 2 ¼ .38; w 2 ¼ 54.60

 

D_EBIT R 2 ¼ .24; w 2 ¼ 27.67

 

Coef.

SE

p > z

Coef.

SE

p > z

Coef.

SE

p > z

Coef.

SE

p > z

 

Constant

3.35

2.15

.12

1.13

1.67

.50

0.25

0.12

.04*

0.65

0.53

.22

Chain

0.22

0.33

.51

0.41

0.25

.11

0.02

0.02

.21

0.09

0.10

.34

Size

0.63

0.41

.12

0.36

0.32

.26

0.04

0.02

.05

0.04

0.07

.58

H1

CUST

0.32

0.12

.01*

0.06

0.09

.49

0.01

0.01

.03*

0.02

0.04

.67

H2

PART

0.09

0.14

.49

0.25

0.11

.02*

0.01

0.01

.48

0.01

0.04

.90

COR

0.17

0.16

.29

0.37

0.12

.00**

0.00

0.01

.77

0.06

0.05

.22

INNOR

0.05

0.16

.75

0.02

0.13

.85

0.02

0.01

.01*

0.00

0.05

.98

H3

COR INNOR

0.11

0.10

.25

0.16

0.08

.04*

0.01

0.01

.09

0.04

0.03

.21

H4

EMPL

0.41

0.14

.00**

0.51

0.11

.00**

0.00

0.01

.84

0.02

0.05

.68

H5

KIM

0.04

0.16

.79

0.30

0.12

.01*

0.01

0.01

.53

0.02

0.05

.69

Revenue

1.23

3.09

.69

0.13

2.40

.96

0.06

0.16

.73

Ebit

3.36

2.36

.15

2.09

1.82

.25

0.07

0.66

.91

H6 and H7

VOL

0.01

0.01

.04*

0.01

0.03

.68

H6 and H7

RAD

0.02

0.01

.01*

0.11

0.04

.01*

Note: CHAIN ¼ Hotel Belonging to a Chain; COR ¼ Customer Orientation; CUST ¼ Customer Collaboration; Ebit ¼ Ebit-to-sales Ratio; D_EBIT ¼ Ebit-to-sales Ratio Growth; EMPL¼ Employee Collaboration; INNOR ¼ Innovative Orientation; KIM ¼ Knowledge Integration Mechanisms; PART ¼ Partner Collaboration; RAD ¼ Innovation Radicalness; and Revenues ¼ Revenues per Room; D_REV ¼ Revenues per Room Growth; SIZE ¼ Logarithm of the Number of Rooms; VOL ¼ Square Root of the no. of Innovations. *p < .05. **p < .01.

only partially supported. Customer and innovative orientations second block of equations (the latter two sets of columns have no effect (either individually or interactively) on the vol- in Table 5) show that radicalness has a positive effect on ume of innovations, while they show the expected joint effect both change in revenues (b ¼ .02; p < .05) and change in

on the radicalness (b ¼ .16; p < .05). 9 Customer orientation EBIT ( b ¼ .11; p < .05), while innovation volume has a

also has a positive main effect on radicalness (b ¼ .37; p < positive effect only

on change in revenues (b ¼ .01;

.05). Thus, a firm’s cultural trait of innovative orientation p < .05), but not on change in EBIT (b ¼ .01; ns). Thus,

apparently does not have much to do with innovation volume, three of the four relationship s implied by Hypothesis 6 are while customer orientation, both directly and in interaction supported. The postulated stronger effect of radicalness with innovative orientation, has an enhancing effect on innova- (relative to volume) on performance (Hypothesis 7) is tion radicalness. Figure 2 graphically shows the interaction partially supported. The Wald test does not reject the null

effect by plotting the relationship between customer orientation hypothesis of no difference between coefficients

for the

and radicalness at different levels of innovative orientation revenue measure (w 2 ¼ .92; ns), while it detects a slightly

(‘‘high’’ and ‘‘low’’ are operationalized as the mean level +

stronger effect of radicalness for the EBIT measure w 2 ¼

one standard deviation). The effect of customer orientation 3.86; p < .05). In short, volume and radicalness of service

on radicalness increases from b ¼ .19 to b ¼ .55 when innova- innovation have similar effects on revenue growth, while tive orientation shifts from low and high levels. Moreover, the effect of radicalness is stronger than the (nonsignificant) when innovative orientation is low, the impact of customer effect of volume on EBIT growth.

orientation is not statistically significant.

Overall, the proposed model has good explanatory power,

Hypotheses 4 and 5 deal with the role of knowledge interfaces. especially with respect to radicalness. Among the two control The posited positiveimpact of employee collaboration oninnova- variables, the type of the hotel (i.e., chain vs. independent) has tion outcomes (Hypothesis 4) is partially supported: the effect on no effect on the two innovation outcomes nor does it have a sig-

innovation volume is positive (b ¼ .41; p < .05); surprisingly, nificant effect on the two performance measures. Likewise,

employee collaboration also has a positive effect on radicalness hotel size has no significant effects. The initial levels of perfor- (b ¼ .51; p < .01). As such, the participation of contact personnel mance (Revenue and Ebit) have no effect on either the innova- seems to be a consistent and robust driver of service innovation. tion outcomes or the final performance measures (D REV and The expected positive effect of knowledge integration mechan- D EBIT). isms on innovation radicalness (Hypothesis 5) is supported (b ¼ .30; p < .05), while no significant effect of knowledge integra-

tion mechanisms on innovation volume is detected.

Post Hoc Analyses

Hypotheses 6 and 7 pertain to relationships between Given some unexpected findings, and to explore further the innovation outcomes and performance. Findings from our links among the model constructs, we examined four

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Ordanini and Parasuraman

15

5 4 3 2 1 Predicted RAD –4 –2 0 2 COR (centered) INNOR_high INNOR_low
5
4
3
2
1
Predicted RAD
–4
–2
0
2
COR (centered)
INNOR_high
INNOR_low

Figure 2. Customer orientation and radicalness at different levels of innovative orientation. Simple effect of COR on RAD when INNOR is high ¼ .55 (p < .01). Simple effect of COR on RAD when INNOR is low ¼ .19 (ns). COR ¼ customer orientation; INNOR ¼ innovative orientation; RAD ¼ radicalness.

additional interaction effects (by adding corresponding interaction terms to the appro priate blocks of equations in our model): (a) the interactiv e effect of the two external col- laborative competences (CUST PART) on the two inno- vation outcomes (VOL and RAD); (b) the interactive

low (b ¼ .03; ns), while it is magnified when partner colla- boration is high (b ¼ .51; p < .01). The interaction between customer collaboration and customer

orientation on innovation outcomes has no significant effect (b ¼ .13; ns and b ¼ .06; ns, for volume and radicalness, respec-

effect of customer collaboration and customer orientation tively). Likewise, theinteraction between employee collaboration

(CUST COR) on the two innovation outcomes; (c) the

and knowledge integration mechanisms has no significant effect

interactive effect of employee orientation and knowledge on either volume (b ¼ .13; ns) or radicalness (b ¼ .01; ns).

integration mechanisms (EMPL KIM) on the two innova- tion outcomes; and (d) the interactive effect of the two inno- vation outcomes (VOL RAD) on the two performance measures (D REV and D EBIT). Table 6 presents the find- ings from these analyses (the last four rows pertain to the four interaction effects). The interaction between the two external collaborative com- petences has a significant effect on innovation volume (b ¼ .27; p < .05) but not radicalness. These and previously dis- cussed findings collectively suggest that if the primary goal of a service firm is to generate radical innovations, business partner collaboration is what matters the most and customer collaboration is secondary. On the other hand, if the goal is to increase innovation volume, customer collaboration is rele- vant; moreover, business partner collaboration is likely to enhance the contribution of customer collaboration. Figure 3

The fourth interaction effect we explored (the impact of VOL RAD on the two financial performance measures) was motivated by the debate in the literature regarding whether simultaneously pursuing exploitation and exploration strategies may help or hurt firm performance (Baker and Sinkula 2007; Kyriakopoulos and Moorman 2004;). Because strategies focus- ing on volume versus radicalness of innovation are akin to exploitation versus exploration strategies, investigating the interactive effect of the two innovation outcomes on firm per- formance could offer insights pertaining to the debate. The results (last row in Table 6) show that there is a positive inter- active effect on EBIT change (b ¼ .05; p < .05) but not on rev- enue change (b ¼ .00; ns). The findings in Table 6 suggest that (a) the effects of service innovation volume and radicalness on revenue growth are distinct and additive (the two innovation facets have significant main effects but no interactive effect)

graphically shows the interaction effect by plotting the relation- and (b) volume, although it has no direct effect on EBIT

ship between customer collaboration and number of new ser- vices at high and low levels of business partner collaboration. It is noteworthy that the effect of customer collaboration on innovation volume disappears when partner collaboration is

growth, plays a moderating role by strengthening the positive effect of radicalness on EBIT growth. Figure 4 graphically demonstrates this moderating effect by plotting the relationship between radicalness and EBIT growth under high and low

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16

Journal of Service Research 14(1)

Table 6. Three-Stage Least Squares Estimation for Post Hoc Analyses

VOL R 2 ¼ .33; w2 ¼ 45.84 RAD R 2 ¼ .57; w 2 ¼ 119.78 D_REV R 2 ¼ .38; w 2 ¼ 55.72 D_EBIT R 2 ¼ .30; w 2 ¼ 40.58

 

Coef.

SE

p > z

Coef.

SE

p > z

Coef.

SE

p > z

Coef.

SE

p > z

Constant

0.65

1.88

.73

3.79

1.53

.01

0.25

0.12

.04*

0.71

0.50

.16

Chain

0.24

0.32

.45

0.41

0.26

.12

0.02

0.02

.24

0.13

0.09

.15

Size

0.54

0.39

.17

0.34

0.32

.30

0.04

0.02

.05

0.07

0.07

.30

CUST

0.15

0.13

.27

0.01

0.11

.95

0.01

0.01

.04*

0.01

0.04

.75

PART

0.15

0.14

.31

0.22

0.12

.06

0.01

0.01

.38

0.05

0.04

.25

COR

0.22

0.17

.19

0.37

0.13

.01*

0.00

0.01

.86

0.04

0.05

.44

INNOR

0.19

0.16

.22

0.02

0.13

.89

0.02

0.01

.01*

0.02

0.05

.67

COR x INNOR

0.01

0.11

.96

0.20

0.09

.03*

0.01

0.01

.08

0.03

0.03

.27

EMPL

0.35

0.14

.01*

0.50

0.12

.00**

0.00

0.01

.81

0.01

0.05

.77

KIM

0.05

0.15

.72

0.31

0.12

.01*

0.01

0.01

.54

0.02

0.05

.69

Revenue

1.41

3.04

.64

0.30

2.47

.90

0.06

0.16

.69

Ebit

3.24

2.24

.15

1.99

1.82

.28

0.11

0.63

.86

VOL

0.01

0.01

.02*

0.03

0.03

.23

RAD

0.02

0.01

.00**

0.12

0.04

.00**

CUST PART

0.27

0.09

.00**

0.06

0.07

.38

CUST COR

0.13

0.10

.18

0.06

0.08

.49

EMPL KIM

0.13

0.10

.17

0.01

0.08

.94

VOL RAD

0.00

0.00

.52

0.05

0.02

.00**

Note: CHAIN ¼ Hotel Belonging to a Chain; CUST ¼ Customer Collaboration; COR ¼ Customer Orientation; Ebit ¼ Ebit-to-sales Ratio; D_EBIT ¼ Ebit-to-sales Ratio Growth; EMPL¼ Employee Collaboration; INNOR ¼ Innovative Orientation; KIM ¼ Knowledge Integration Mechanisms; PART ¼ Partner Collaboration; RAD ¼ Innovation Radicalness; Revenues ¼ Revenues per Room; D_REV ¼ Revenues per Room Growth; SIZE ¼ Logarithm of the Number of Rooms; VOL ¼ Square Root of the no. of Innovations. *p < .05. **p < .01.

CUST (centered)

–1 1 2 0 Predicted VOL –2 –4 4 2 0
–1
1
2
0
Predicted VOL
–2
–4
4
2
0
PART_low PART_high
PART_low
PART_high

Figure 3. Customer collaboration and volume of innovation at different levels of business partner collaboration. Simple effect of CUST on VOL when PART is high ¼ .51 (p < .01). Simple effect of CUST on VOL when PART is low ¼ .03 (ns). CUST ¼ customer collaboration; PART ¼ partner collaboration; VOL ¼ volume.

innovation-volume conditions. Interestingly, the effect of radi- calness on EBIT growth virtually disappears when innovation volume is low (b ¼ .03; ns), while it is magnified when

innovation volume is high (b ¼ .19; p < .01). This means that below a certain volume of innovation, radicalness has negligi- ble effect on profit growth. 10

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Ordanini and Parasuraman

17

.5 0 –.5 Pred VAR_EBIT –2 –4 2 0
.5
0
–.5
Pred VAR_EBIT
–2
–4
2
0

RAD (centered)

VOL_high VOL_low
VOL_high
VOL_low

Figure 4. Radicalness and EBIT at different levels of innovation volume. Simple effect of RAD on EBIT when VOL is high ¼ .19 (p < .01). Simple effect of RAD on EBIT when VOL is low ¼ .03 (ns). RAD ¼ radicalness; VOL ¼ volume. Note. EBIT = earnings before interests and taxes.

Discussion

Theoretical Implications

Our framework represents an inaugural attempt at developing a

contribution by itself is unlikely to foster radical innovation. In contrast, business-partner collaboration contributes to innovation radicalness but not volume. However, there is an intriguing syner- gistic effect between customer and business partner collabora-

comprehensive and theoretically informed basis for under- tion—namely, the effect of customer collaboration on

standing the sources and consequences of service innovation. Our simultaneous investigation of multiple potential drivers of two different types of innovation outcomes (volume and radicalness) and their effects of two types of firm performance (revenue growth and change in EBIT) facilitates a finer grained understanding of service innovation than has been possible so far. Our findings contribute to several literature streams. First, contact-employee participation emerges as the most

innovation volume is only significant when business-partner col- laboration is high; when the latter is low, the contribution of cus- tomer collaboration to innovation volume virtually vanishes (Figure 2). Our findings thus reveal a complex set of relationships between collaborative competences and innovation. Third, our study also contributes to the extant market- orientation literature. Various meta-analyses and reviews have produced somewhat equivocal empirical evidence regarding

robust driver of service innovation, contributing to both customer orientation’s links to innovation and performance,

innovation volume and radicalness. In addition to their well- recognized role as the ‘‘face of service firms,’’ contact employees are a critical operant resource because oftheir potential to contrib- ute to firm performance via innovation outcomes. This adds to the service management literature, which thus far has been limited and inconclusive regarding contact personnel’s role in service research (Gounaris 2006). Second, our study augments, and in part challenges, conven- tional theoretical approaches that advocate more open systems (Chesbrough 2003) and customer-active processes (von Hippel 1986) to foster innovations. Specifically, by shifting the focus from product innovation in manufacturing contexts (where these approaches originated and have been tested) to services, we find that customer collaboration contributes to innovation volume, serving as a source of new service ideas, although such

especially in the service domain (Kirca, Jaychandaran, and Bearden 2005; Rodriguez Cano, Carillat, and Jaramillo 2004). Our study offers a clearer understanding of the effects of customer orientation. Insights from our study extend the findings of Menguc and Auh (2006) on the links between cus- tomer orientation, innovativeness, and performance and reveal that customer orientation—in interaction with innovative orientation as well as directly—fosters radical innovation. Yet, a firm’s customer orientation apparently does not influence its innovation volume. Collectively, these findings offer insights that challenge traditional beliefs that an emphasis on customer orientation is likely to suppress radical innovation and result in more incremental innovations. Fourth, the differential effects of the two types of innovation outcomes on different performance facets contribute to the

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18

Journal of Service Research 14(1)

service innovation literature. Specifically, they disconfirm the innovation success only when there is business-partner colla- evidence—detected in manufacturing contexts—that there is boration as well.

apparently a trade-off between radical and incremental innova-

Follow-up interviews we had with a small sample of manag-

tions and that the simultaneous pursuit of both types tends to be ers of hotels that had introduced major innovations revealed a

problematic (Atuahene-Gima, Slater, and Olson 2005). Our good example of the importance of the interplay between cus- analysis shows that both volume and radicalness of service tomer and partner collaboration for service-innovation success. innovation are important contributors to performance improve- A hotel manager told us that a long-standing customer had ment, although in different ways. Their effect is positive and repeatedly suggested that the hotel should offer painting additive on the revenue growth measure, while radicalness is courses to their guests because this hotel was in a town with apparently much more important for profit growth, with the a huge artistic endowment and many guests were likely to direct effect of volume being nonsignificant. However, innova- appreciate the courses. In 2004, the hotel added such courses

tion volume moderates the effect of radicalness on profit as part of a special service package. For 2 years, this new ser- growth in that when the former is low, the latter’s effect virtu- vice did not produce any measurable benefits. But then in 2006, ally disappears (Figure 4). Thus, on one hand, a steady flow of the directors of the two main museums in the town became innovations might sustain revenue growth independently of the aware of it and initiated discussions with the hotel’s manage- degree of radicalness and also boost the impact of the latter on ment. These discussions led to the two museum directors profit growth. On the other hand, since the main difference becoming involved in more radical innovation projects that between the two performance measures is the level of costs, resulted in the introduction of thematic exhibitions in the hotel, and given the strong direct impact of radicalness on profit modular courses on artistic skills (i.e., painting and sculpture) growth, our findings imply that radicalness contributes to more and on history of the arts, and customized visits to both efficient use of a firm’s operant resources (i.e., competences) museums. The hotel manager told us that it was only at that

and is therefore critical for sustaining profit growth.

stage—when partner collaboration was coupled with customer

Finally, our study contributes to the evolving literature on collaboration—did a truly innovative and profitable set of ser- SDL. Our analysis suggests that this new perspective offers a vices emerge.

potentially useful platform for integrating insights from differ-

Second, benefits from innovation activity also accrue from

ent literature streams, by examining them through a different ‘‘looking inside’’ the service organization (i.e., through conceptual lens, thus either reinforcing or challenging existing employee collaboration). Our findings suggest a strong impact findings. In particular, our findings offer empirical support for of employee collaboration on both innovation volume and radi- the suggestion in the current SDL literature that employees, calness. This pervasive influence of contact personnel is appar- business partners, and customers are all operant resources in ently due to their proximity to and frequent interactions with the innovation process (Lusch, Vargo, and O’Brien 2007). service customers, coupled with their latent knowledge (gained However, our findings also reveal differences in the nature and through experience) about how things could/should be done extent of the impact of these operant resources, in conjunction differently to improve customer service. Building on the SDL

with a firm’s overall orientation and knowledge integration perspective that knowledge is the very essence of service pro- mechanisms, on the firm’s service innovation outcomes and vision, and based on the empirical findings from the current

hence performance.

Managerial Implications

Our findings, although subject to confirmation and refinement in future studies, offer several preliminary insights for manag-

study, service executives can foster innovation by providing appropriate incentives to customer-contact employees and put- ting in place formal or informal mechanisms for capturing and sharing employee knowledge. Based on another anecdote from our follow-up interviews, in 2005, a major international hotel introduced a service inno- vation whereby customers could lodge a complaint with any

ing service innovation, particularly in complex, multiplayer employee, who would then have complete authority to handle

service contexts such as the luxury hotel sector that was our and resolve it. Management had designed and implemented this study context. First, to improve performance via innovation new service without any employee collaboration. During the

outcomes, service managers would do well to ‘‘look outside’’ the core organization (i.e., collaborate with business partners and customers). Our findings underscore the critical role of business-partner collaboration in developing radical innova- tions, which in turn are a prime source of profit growth as the

first year after its implementation, neither customers nor employees were particularly satisfied with it—customer con- tact personnel were not always clear about what their roles were, what authority they had, how to deal with the wide vari- ety of complaints/claims, and so on. In response to growing

study results also demonstrate. Moreover, collaborating with customer and employee frustration, the hotel formed three business partners can benefit service firms in another important teams of contact employees during the first half of 2006 and

way—namely, by enhancing the salutary effect of customer charged them with critically examining different aspects of this

collaboration on innovation volume, an important contributor to sales revenue growth. In fact, our findings show that cus- tomer collaboration is likely to contribute to service

new service and making appropriate recommendations. Based on suggestions from the teams, the hotel made major revisions (e.g., complaint procedures were streamlined and clarified,

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Ordanini and Parasuraman

19

contact-employee training procedures were modified, etc.). In

the second half of 2006 and in 2007, the number of customer complaints increased (because of the streamlining of the pro- cess); more importantly, customer satisfaction also increased significantly—from 64% in 2005 to 75% in 2006 and 79% in

2007.

Third, a firm’s dynamic capability (i.e., a continuous focus on both customer and innovative orientations) is necessary for the success of innovation efforts, particularly in terms of their leading to radical innovations. As such, senior service manag- ers also have to ‘‘look at themselves’’ in that a firm’s cultural orientation in terms of whether it emphasizes customer or inno- vative orientations (or both) is a reflection of the types of cul- tural traits top management encourages and facilitates. By appropriately managing the signals and incentives it communi- cates to the rest of the organization, top management can pro-

self-service activity is more pronounced or the role of technol- ogy is dominant). Moreover, replicating and extending our study by investigating a diverse set of services (e.g., custo- mized vs. standardized, high-tech vs. high-touch, and B-to-C vs. B-to-B) within the same study has the potential to add sig- nificantly to our understanding of the service innovation pro- cess. Given the overarching nature of the SDL perspective, it would also be instructive to replicate and extend our model to understand better innovation issues in manufacturing con- texts, where goods dominate the offering. As already acknowledged, ours is an inaugural attempt to invoke some basic tenets of the SDL perspective to develop a parsimonious model for studying service innovation. Incorpor- ating other potential drivers of service innovation may be nec- essary and may lead to a more complete—even if more complex—picture of the service innovation process. Develop-

mote a balanced dynamic capability that transforms a merely ing and testing more comprehensive models of service innova-

market-driven organization into a market-driving one as well (Jaworski, Kohli, and Sahay 2000) and enables it to become ‘‘ambidextrous’’ by balancing exploration and exploitation activities (Tay and Lusch 2007). The quote from the manager of a highly innovative and suc- cessful hotel in our follow-up sample emphasizes the need for a

tion is a potentially fruitful avenue for future research. Also needed is more in-depth qualitative and empirical work to uncover the reasons and mechanisms underlying the current study’s findings, especially some of the more intriguing ones. For instance, why is the positive impact of customer collabora- tion on innovation volume only significant when business-

dual customer-innovation orientation: ‘‘We spend a lot of partner collaboration is high and vanishes when it is low? What money on surveying customers’ sentiments, requirements, might explain the weakening of the effect of innovation

satisfaction, etc. [While such information is useful] I have to

radicalness on EBIT growth when innovation volume is low

say that when I read reports from such surveys I am often relative to when it is high? Research aimed at better under-

tempted to go in a different direction than what is suggested standing the nature and extent of the interplay between

in the report. Though customers are quite committed to provid- ing useful information and interesting suggestions, they tend to

customer and business-partner collaboration, and between innovation volume and radicalness, can enrich extant knowl-

focus on current issues. In my experience, managers who rely edge about the service-innovation process. Moreover, research

too much on customer knowledge are the ones that contribute is needed to explore the associations between service innova-

less in the initial phases of service-innovation projects.’’ Fourth, managers should promote both innovation volume and radicalness, while being cognizant of the complex links among these innovation outcomes, their determinants, and their performance consequences. While both volume and radicalness of service innovation contribute to revenue growth, radicalness has a stronger impact; moreover, only radicalness drives profit growth. On the other hand, a large number of incremental inno-

tion outcomes and other performance measures (e.g., cash flows and stock market value). Also needed are studies employing true longitudinal designs to investigate the long- term effects of service innovation on a firm’s future perfor- mance, as well as to investigate whether—and if so to what extent and how—a firm’s past performance results influence its service innovation activity and outcomes in the future. Because some of our study constructs (e.g., employee colla-

vations, in addition to contributing to revenue growth, are boration and extent of knowledge transfer) may be affected by

essential for enhancing the impact of more radical initiatives on profit growth. Thus, depending on a firm’s performance priorities in terms of revenue versus profit growth, it should place a commensurately balanced emphasis on innovation vol- ume versus radicalness.

Limitations and Future Research

As in the case of any single-context study, our findings should

national culture traits (apart from organizational culture traits) and because the hospitality market can be structurally different across national contexts, it would be interesting to extend and investigate our proposed framework in other distinct geocul- tural contexts (e.g., the United States and countries in the Far East). Replicating and extending the current work from a cross-country perspective is especially important in light of the increasing number of service organizations that are operating in multiple countries and across different cultures. Finally, we

be generalized with caution. Our choice of the luxury hotel sec- measured customer collaboration in service innovation as per-

tor was motivated by several characteristics (service complex- ity, need for customization, and multiplayer collaboration) that made it especially appropriate for investigating service innova- tion. Nevertheless, there is a need and an opportunity to verify and build on our findings in other service contexts (e.g., where

ceived by managers rather than by customers. Though the sur- vey instructions explicitly asked for managers’ assessment of customer participation during the innovation process, future researchers might consider obtaining a more direct measure of this construct from customers themselves. Another potential

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20

Journal of Service Research 14(1)

measurement-related improvement in future research is to assess the radicalness of each service innovation and then aggregate across innovations to obtain an overall firm-level measure of radicalness.

Acknowledgments

The authors gratefully acknowledge the constructive comments from three anonymous reviewers and the editor, which were valuable in strengthening the article. They also acknowledge the participants to the 2008 ‘‘Frontiers in Service Conference’’ for their feedback and suggestions.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interests with respect to the authorship and/or publication of this article.

Funding

Financial support for this study was provided by The ’’Customer and Service Science Lab’’ at Bocconi University.

Notes

  • 1. ‘‘Competence’’ has the same meaning as ‘‘competency,’’ but we use the former term throughout to be consistent with the SDL literature.

  • 2. The most recent version of the SDL framework contains 10 FPs that support a different view of economic exchanges (Vargo and Lusch 2008). In our analysis, we employ 6 of the 10 FPs that have a direct bearing on service innovation phenomena. The remaining four FPs, although related to the ones we employ, are more gen- eral statements.

  • 3. Ideally, the extent of customer and other stakeholder collabora- tion should be assessed through measures obtained directly from the respective stakeholders. However, due to practical constraints, our empirical study (discussed later) measured the extent of such collaboration from the perspective of the service firm.

  • 4. Although a firm’s being customer oriented can facilitate customer participation or collaboration in the innovation process, customer orientation and customer collaboration are different constructs because while customer orientation plays at the organizational level and represents how much the firm relies on customers to gain general insights into its markets, customer collaboration plays at the process level, and reflects how much firms coproduce knowledge with the customers during the innovation process (Fang 2008).

  • 5. In the population of 193 hotels, 43% were independent hotels; 67% were in large cities; and the average hotel size in terms of number of rooms and employees was, respectively, 98 and 90.

  • 6. We measured degree of radicalness at the firm level (rather than at the individual-innovation level) for several reasons. First, the measure of innovation volume (i.e., number of innovations) was also a firm-level measure (as were measures of all other constructs in the proposed model). Second, the number of innovations was expected to vary considerably across the sample of hotels (the actual range was 0 to 9), and it was impractical to measure the degree of radicalness of each innovation; moreover, there are other potential problems with self-assessment of the incremental

versus radical nature of each individual innovation (Vincent, Bharadwaj, and Challagalla 2004). Third, because radical innova- tion involves pervasive change affecting multiple dimensions of the service system (Menor, Tatikonda, and Sampson 2002) and multiple competences (Gallouj and Weinstein 1997), it seemed appropriate to treat radicalness as a firm-level trait. We also con- ducted the following post hoc analysis to verify the soundness of our measure of radicalness. We asked two doctoral students who were knowledgeable about service innovations to (a) examine the descriptions of the service innovations introduced by each hotel, as well as the competence changes required for the implementa- tion of those innovations and (b) classify the hotel as either a rad- ical innovator or an incremental innovator. Based on this classification, we partitioned the sample of hotels into two groups and compared their mean radicalness scores (obtained from our survey data). The means for the two groups were significantly different, thereby supporting the soundness of the measure (Mean RAD ¼ 3.91 [n ¼ 39] and Mean INC ¼ 3.03 [n ¼ 52], with F ¼ 3.42 and p < .00).

  • 7. We avoided using more specific measures like average occupancy rate or average daily rate because they have been found to be biased measures, especially in the context of luxury and upscale hotels (Haugland, Myrtveit, and Nygaard 2007).

  • 8. Concerning time lags, firm performance variables are collected at time ‘‘t’’ and controlled for their initial values at time ‘‘t 2;’’ data on service-innovation predictors and outcomes pertain to time ‘‘t 1.’’ This facilitates incorporating time-lagged measures of our two dependent variables in our 3SLS model (Aiken and West 1991).

  • 9. For this interaction analysis, we also included in the equation the quadratic effects of the variables of interest, because this reduces the probability of Type I and Type II errors and makes linear interactions robust against possible curvilinear effects that may mask the true relationship between data (Ganzach 1997). Such a test shows that the COR INNOR interaction remains significant even in the presence of potential curvilinear effects. Because all curvilinear effects are nonsignificant, they are excluded from the tables in the body of the article (details of these tests are available from the authors).

  • 10. Even in this case, the two significant interactions detected in the post hoc analyses (i.e., CUST PART on VOL and VOL RAD on EBIT growth) remain significant even when the corre- sponding quadratic terms are included in the equations (see foot- note no. 9).

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Bios

Andrea Ordanini, PhD, is an associate professor with the Department of Marketing at the Bocconi University of Milan, Italy. He is the codirector of the Customer and Service Science

Lab (CSSlab) at the same university and international faculty fellow at the Center for Service Leadership (CSL) at the Arizona State University. His research interests are focused on service innovation, service marketing, and creativity. His works on services and innovation have been published on Decision Sciences Journal, Journal of Product Innovation Management, Marketing Letters, and Journal of Service Management.

A. Parasuraman is a professor and holder of the James W. McLamore Chair in Marketing at the School of Business, University of Miami. He has received many distinguished teaching and research awards and has published over one hundred scholarly articles in journals such as Journal of Marketing , Journal of Marketing Research, Marketing Science, Journal of the Academy of Marketing Science, Journal of Service Research, Journal of Retailing, Decision Sciences Journal, and Sloan Management Review. He has served as editor of the Journal of the Academy of Marketing Science (1997-2000) and the Journal of Service Research (2005-2009).

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