the relationship

The relationship betweenstrategic orientation, serviceinnovation, and performance

Scott J. GraweDivision of Marketing & Supply Chain Management,

Michael F. Price College of Business, The University of Oklahoma,Norman, Oklahoma, USA

Haozhe ChenDepartment of Marketing & Supply Chain Management,

College of Business, East Carolina University,Greenville, North Carolina, USA, and

Patricia J. DaughertyDivision of Marketing & Supply Chain Management,

Michael F. Price College of Business, The University of Oklahoma,Norman, Oklahoma, USA

Abstract

Purpose – The purpose of this paper is to determine how a firm’s strategic orientation affects serviceinnovation capability and the resulting impact on market performance.

Design/methodology/approach – A survey was administered to supply chain executives. Structuralequation modeling was used to analyze the relationships among the following constructs: customerorientation, competitor orientation, cost orientation, service innovation, and market performance.

Findings – Although the relationship between cost orientation and service innovation is notsupported, the relationships between customer orientation and competitor orientation and serviceinnovation are supported. Additionally, the relationship between service innovation and marketperformance is supported.

Research limitations/implications – This study is one of a limited number of studies which hasempirically addressed service innovation. Additional research is needed to address the impact of afirm’s strategic orientation on product innovation capability.

Practical implications – The study found that firms seeking to develop a service innovationcapability should employ customer orientation, competitor orientation, or a combination of the twodifferent types of strategic orientation.

Originality/value – Service innovation has received very little empirical attention in the currentinnovation literature. This paper fills in some of the gaps in the literature.

Keywords Service levels, Innovation, Customer orientation, Competitive strategy,Resource management, Electronics industry, China

Paper type Research paper

IntroductionFirm managers place different emphases on strategic behaviors and select strategicorientations dependent upon what they wish to accomplish (Olson et al., 2005).

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0960-0035.htm

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Received 2 October 2008Revised 23 January 2009Accepted 9 February 2009

International Journal of PhysicalDistribution & Logistics ManagementVol. 39 No. 4, 2009pp. 282-300q Emerald Group Publishing Limited0960-0035DOI 10.1108/09600030910962249

For example, firms with a strong customer orientation emphasize the creation andmaintenance of customer value. More competitor-oriented firms encourage in-depthassessment of targeted competitors and cost-oriented firms pursue efficiencythroughout their value chain (Day, 1990; Porter, 1985). The different types ofstrategic orientations are not mutually exclusive; firms commonly engage in multiplesets of behaviors at the same time (Gatignon and Xuereb, 1997).

Strategic orientations are aspects of corporate culture (Deshpande et al., 1993; Hurleyand Hult, 1998; Narver and Slater, 1990). Corporate or organizational culture representsintangible resources for firms (Barney, 1991; Grant, 1991). The deployment of thoseresources, i.e. orientations, will have different relative impacts (Day, 1994). Strategicorientation focuses resources to achieve desired outcomes. In the current context, weexamine how resources impact one type of capability development – service innovation.

Innovation has been empirically linked with superior performance (Damanpour andEvan, 1984; Khan and Manopichetwattana, 1989). However, while much of the previousresearch has centered on product innovation, our research focuses on serviceinnovation. Service innovation is a “hot topic” warranting greater attention (Berry et al.,2006). Service innovation represents an additional means by which firms can improvetheir market performance and efficiency (Chapman et al., 2003), which in turn maycontribute to competitive advantages in today’s business environment. Many firmselect to compete on the basis of service rather than on physical products (Gronroos,2000; Kandampully, 2002).

We will propose and empirically test a conceptual model linking strategicorientation, service innovation, and market performance. In the next sections, relevantliterature is reviewed and a theoretical framework is introduced along with researchhypotheses. This is followed by research methodology and analysis. Managerialimplications, study limitations, and research opportunities are then discussed.

BackgroundInnovationInnovation plays a critical role in the increasingly competitive business environment inwhich firms operate. As a result, researchers have provided insights as to how firmsinnovate and how innovations spread to other firms and individuals (Damanpour,1991). However, much of the existing literature is centered on product innovation.Service innovation has been discussed from a conceptual perspective, but has receivedlittle empirical study. Defined broadly, innovation is an idea, practice, or object that isperceived as new by an individual or organization (Rogers, 2003). While the definitionset forth by Rogers can be applied to the service context, a distinct definition for serviceinnovation is warranted to recognize its unique nature. Service innovation is thedevelopment of a new service that is perceived as new and helpful to a particular focalaudience (Flint et al., 2005; Grant, 1991).

Service enhancements can add value for organizations. Firms often race to marketwith new product offerings, displaying the latest technologies and capabilities, andalmost immediately encounter direct competition. In such instances, service-basedcompetition may be the best response. For example, logistics services can providefirms with a competitive advantage by demonstrating greater speed, reliability,flexibility, and cost-effectiveness in distribution (Daugherty et al., 1998; Richey et al.,2004; Sinkovics and Roath, 2004; Sahin et al., 2007). Service impacts all areas of the firm

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and has become integral to firm strategies and operations (Kandampully, 2002). Serviceinnovation has been linked to the creation of customer value, which is a customer’sperceived preference for a product’s attributes, performances, and consequences of use(Woodruff, 1997). As market environments change, the components of customer valueare likely to change (Flint and Mentzer, 2000). As a result, creating value throughservice innovation often requires that firms anticipate future customer needs. In orderfor firms to offer superior value to their customers, they need to anticipateenvironmental changes as they develop new services (Kandampully, 2002). This oftenrequires that new knowledge supplements the existing firm knowledge (Benner andTushman, 2002). The following sections highlight organizational characteristics thatmay be relevant to the generation of new knowledge and subsequent serviceinnovation of an organization.

Strategic orientation as organizational cultureStrategic orientation is defined as the “strategic directions implemented by a firm tocreate the proper behaviors for the continuous superior performance of the business”(Gatignon and Xuereb, 1997; Menguc and Auh, 2005; Narver and Slater, 1990).Previous studies examining strategic orientations have pointed specifically to thebehaviors associated with the organization-wide generation, dissemination, and use ofmarket intelligence as being the key ingredients of a strategic orientation (Baker andSinkula, 1999; Kohli and Jaworski, 1990; Narver and Slater, 1990; Sinkula, 1994). Animportant aspect of a strategic orientation is the creation of shared values andbehaviors throughout the entire organization. When strategic orientation extends to alllevels of an organization, it becomes an organizational culture. Organizational cultureis defined as the pattern of shared values and beliefs that provide norms for behaviorwithin an organization (Deshpande and Webster, 1989). As suggested by Day (1994),culture can unify an organization’s capabilities into a “cohesive whole”.

Organizational culture is reinforced through the continuous sharing of information andintelligence among employees. Organizational cultures will vary among firms; the types ofinformation and intelligence shared within firms will also vary. While later sections willhighlight specific differences in the intelligence sought by firms, it is also important todiscuss the general intelligence characteristics. The type of intelligence that is shared isdriven by the strategic orientation of the firm. In order to effectively share informationthroughout the organization, it is essential that organizations capture and codifyintelligence for dissemination and use (Argote and Ingram, 2000; Spender, 1996; Turnerand Makhija, 2006). Intelligence is often codified in information systems, organizationalprocesses, and other communication mechanisms (Slater and Narver, 1995). Access tothese systems and methods of communication throughout organizational levels reinforcesthe orientation of the firm as employees are able to quickly access and share newinformation with others in the firm. The following sections discuss three relevant strategicorientations, along with the type of intelligence required by each.

The marketing literature has focused extensive attention on two orientations:customer orientation and competitor orientation (Gatignon and Xuereb, 1997; Mengucand Auh, 2005; Narver and Slater, 1990). The current research not only examines bothcustomer and competitor orientations, but also adds cost orientation. As suggested byPorter (1985), competing with low costs is a common strategy. However, cost orientationhas not received much empirical attention in the strategic orientation literature.

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Customer orientationCustomer orientation is an organizational culture that facilitates the understanding oftargeted buyers and allows for the continuous creation of customer value (Narver andSlater, 1990). Firms with a customer orientation generate intelligence about the currentand future needs of targeted customers and disseminate the new intelligencethroughout the organization. Employees within a customer-oriented organization areaware of who the customers are and how they should be served. As they learn aboutthe needs of their customers, they are quick to share the new information with otherindividuals and departments within the organization to ensure that the firm cancontinue to keep pace with customer needs, and anticipate future needs. A criticalcomponent of customer orientation is the emphasis on seeing supply chainopportunities and constraints from the perspective of the customer (Deshpande et al.,1993; Narver and Slater, 1990). This allows the firm to identify potential new customersalong with opportunities to create value for the customer.

Competitor orientationCompetitor orientation is an organizational culture that stresses the understanding ofthe short-term strengths and weaknesses and long-term capabilities and strategies ofthe current and potential key competitors (Deshpande et al., 1993; Narver and Slater,1990). Firms adopting a competitor orientation develop an in-depth assessment oftargeted competitors and potential competitors and use the resulting knowledge tomatch or exceed competitors’ strengths (Kohli and Jaworski, 1990; Olson et al., 2005). Ina competitor-oriented firm, competitive assessment is not solely the responsibility ofsenior management. Employees throughout the organization participate in thedevelopment of intelligence regarding competitors’ new products and services, as wellas products and services offered by companies not considered to be direct competitors.The competitor-oriented firm is concerned with all sources customers could use to meettheir needs.

Cost orientationCost orientation refers to the pursuit of efficiency throughout all parts of a firm’s valuechain (Olson et al., 2005; Porter, 1985). Cost orientation differs from customer andcompetitor orientation, as its focus is primarily internal. A cost-orientated firm places ahigh level of importance on in-depth knowledge regarding the costs of providingproducts and services to the market. Lowering average and marginal costs are typicalbenefits to this type of strategic orientation (Dickson, 1992). Firms that are activelyengaged in the reduction of costs associated with the development of product andservice offerings can benefit when competing for new business, as they are able to offerattractive pricing or additional features for potential customers. Employees withincost-oriented firms seek opportunities to eliminate waste associated with all areas ofthe firm. For example, a cost-oriented culture focuses on reducing non-value-addedservices, identifying cost-saving sourcing options, and developing lower costalternative product and service delivery methods.

Theoretical framework and hypothesis developmentThe resource-based view of the firm provides the theoretical framework for the currentresearch. According to this view, effective use of a firm’s unique resources can lead to a


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sustained competitive advantage (Barney, 1991). This framework has been used inprevious empirical studies to demonstrate positive relationships between firmresources, capabilities, and performance (Autry et al., 2005; Closs and Xu, 2000;Daugherty et al., 2005). Resources have generally been defined as the assets, processes,information, skills, knowledge, etc. of a firm which enable the firm to develop andimplement strategies to improve efficiency and effectiveness (Barney, 1991, Grant,1991). As such, resources can be tangible or intangible. The current research isspecifically concerned with intangible resources: organizational culture as evidencedby customer orientation, competitor orientation, and cost orientation. Resources are thesource of firm capabilities (Grant, 1991). Capabilities are defined as complex routinesthat determine the efficiency with which firms transform inputs to outputs (Collis,1994). Service innovation capability is the capability examined in our research.

Firms with a strong customer orientation pursue competitive advantage by placingthe highest priority on the creation and maintenance of customer value (Olson et al.,2005). Market intelligence is an important element of strategic orientation. A firm’ssustained ability to compete is due, in large, to the uniqueness of a firm’s intelligence(Grant, 1996; Turner and Makhija, 2006; Zander and Kogut, 1995). Customerorientation is a culture in which the needs and values of the customers arecommunicated formally within the organization between departments and managersand informally among all employees of the organization. The communication exchangesupports the development of organizational capabilities (Teece, 1998). As a result, thesefirms should be well positioned to anticipate changes in needs and develop newproducts and services (Day, 1994). In particular, previous researchers have argued thatservice innovation may result from a firm’s ability to focus on thinking on behalf of thecustomer to achieve an outcome beyond the customer’s expectations (Kandampully,2002). Leaders in service industries introduce cutting-edge services in advance ofcustomer expectations and set the pace in the market (Kandampully, 2002). Therefore,in line with Deshpande et al. (1993), we propose the following based on theresource-based view of the firm:

H1. Customer orientation is positively related to service innovation capability.

Firms with a competitor orientation are concerned with intelligence regarding theexisting and potential competitors. The presence or threat of competition may be theimpetus for innovative service offerings and more efficient utilization of resources(Dickson, 1992). The goal is to match, if not exceed, the competitors’ strengths (Olsonet al., 2005). In order to identify the strengths of competitors, it is important for a firm tocollectively develop and share competitive intelligence among its employees. Firmswill seek information about the resources and offerings of competing firms and developinnovations to gain or maintain a competitive advantage (Hunt and Morgan, 1996).While a firm’s service innovation capability depends heavily on the development of abase of knowledge (Chapman et al., 2003), Han et al. (1998) argued that acompetitor-centered culture contributes to competitor-related intelligence andfacilitates service innovations. The second hypothesis is as follows:

H2. Competitor orientation is positively related to service innovation capability.

A cost-oriented firm will actively seek cost reductions throughout the organization.Research has shown that a cost orientation can contribute to process improvement

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through cost reductions and increased performance (Yasin et al., 2005). Morespecifically, a cost orientation can encourage firms to implement innovations inprocesses and service offerings with the expectation of cutting costs (Bayus, 1995;Lederer and Rhee, 1995). The returns associated with cost-oriented innovations aregenerally more predictable than innovations aimed at creating or enhancing products,which are subject to unknown market reactions (Dickson, 1992; He and Wong, 2004).Cost-oriented innovations are also attractive as they can be difficult for competingfirms to detect and imitate (Dickson, 1992), suggesting that cost orientation candevelop distinctive capabilities. For example, a firm can offer a new service comparableto the previous service, but at a reduction in costs to the firm and the customer.Because the output does not change, competing firms may not easily detect that thereis a change. The third hypothesis is proposed as follows:

H3. Cost orientation is positively related to service innovation capability.

Innovation capability has been shown to positively impact firm performance (Hult et al.,2004; Panayides, 2006). One way in which service innovations can benefit firms is bybreathing new life into existing products. This can be done by offering a new servicerelated to the firm’s existing products. The value-added nature of service innovationscan allow a firm to break into new markets and reach new customers (Persson, 1991).The development of entirely new services can also allow firms to reach new marketsegments. An example of this is uninterruptible power supply (UPS) Service PartsLogistics. Recognizing that there were limited opportunities for growth in the smallpackage delivery industry, UPS developed a new service aimed at transporting goodsquickly on a short notice (Laurie et al., 2006). The new service was aimed at firmsneeding to move service parts and medical products and offered a new source ofgrowth for the firm. Firms displaying innovation capabilities can achieve marketleadership positions (Keskin, 2006). Therefore, the final hypothesis is as follows:

H4. Service innovation capability is positively related to a firm’s market performance.

Research methodologyData collectionData were collected in China using Dillman’s (1978) approach to survey design andquestionnaire administration. Multi-item reflective measures were adapted or developedas necessary to evaluate the proposed constructs (Churchill, 1979). Reflective measuresinclude indicators that are all viewed to be caused by a common underlying construct(Churchill, 1979). A preliminary questionnaire draft was reviewed by six US supplychain management educators familiar with the topics of interest. The questionnaire wasalso submitted to 15 industry experts for further evaluation. The measures weredeveloped in English and then translated to Chinese using five Chinese-native experts(all hold either a PhD in business or an MBA from the USA). The input from all of theexperts was consolidated to create one questionnaire, which was then translated back toEnglish. The revised English version was compared with the original version to ensureequivalency of the questionnaires in different languages.

The Chinese electronics industry was selected for examination as it represents topmanagement practices in the region and is on par with international counterparts interms of its developmental level. Limiting the targeted demographic to a single industryalso improves the internal validity of the study as specific industry factors are controlled.


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Supply chain, logistics, marketing, operations, and manufacturing executives weretargeted as these respondents were assumed to have sufficient knowledge of their firms’strategic orientation and innovation practices.

An initial list of potential survey participants was randomly generated usingelectronics industry directories. The questionnaire was made available to respondentsin two different formats. In addition to the traditional paper-based format, the surveywas available online using the web site www.zoomerang.com. Potential participantswere contacted first by telephone to confirm contact information for mail delivery andto provide the link to the web-based survey. Surveys were sent to 900 individuals andfollow-up telephone calls were made to potential participants at two-week intervals.During the three-month data-collection period, a total of 362 completed surveys werereturned. Of the completed surveys, 304 were deemed usable, resulting in a responserate of 33.8 percent and 58 responses were excluded for the following reasons:

. too much missing data;

. the participating firm was not part of the electronics manufacturing industry; and

. the participant’s position within the firm was deemed inappropriate for thepurposes of the study.

Additionally, participants were asked the following question at the end of the survey:“I had enough information to answer all of the questions (1 ¼ strongly disagree,4 ¼ neutral, and 7 ¼ strongly agree).” Responses of 4 or lower were also eliminatedfrom the analysis base. Table I highlights the respondent demographics.

Category Number of firms Percentage

Firm typeState-owned 51 16.8Private 140 46.1Foreign-invested 82 27.0Unidentified 31 10.2Total 304 100.0Number of employees100-500 72 23.7501-1,000 69 22.71,000-5,000 83 27.3.5,000 38 12.5Unidentified 42 13.8Total 304 100.0Annual sales (2006) (in million RMB*)10-100 71 23.4101- 1,000 89 29.31,001 – 10,000 68 22.4.10,000 35 11.5Unidentified 41 13.5Total 304 100.0

Notes: *Ren Min Bi (RMB) is the Chinese currency unit. During the data collection, the exchange ratebetween the US dollar and the RMB was about 1:7.8

Table I.Respondentdemographics

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Additional analysis was done to test for potential differences in the responses of thoseusing the paper-based surveys and those using the online surveys. Respondents weregrouped according to the format used to submit the surveys. The between-groupvariances were then tested using t-tests and no significant differences were found. Thisis in line with previous research, which has also shown no differences in the nature ofdata gathered using these two formats (Griffis et al., 2003).

Non-response bias was measured in two ways. First, early responses werecompared with late responses for all items using ANOVA (Armstrong and Overton,1977). Second, all participants were compared with 30 randomly selectednon-participants on ten non-demographic questions in the survey using ANOVA(Lohr, 1999; Mentzer and Flint, 1997). Neither method indicated significant differences,suggesting that non-response bias threat was minimal.

Measurement item developmentLikert-type scale items were used for all scale items. Customer orientation wasassessed using items adapted from Deshpande and Farley (1998). The Likert-typeitems were anchored at 1 ¼ strongly disagree, 4 ¼ neutral, and 7 ¼ strongly agree.The range of means for the five measurement items of customer orientation was4.67-5.28, reflecting moderate levels of customer orientation within their firms.

Competitor orientation was assessed using items adapted from Narver and Slater(1990); Olson et al. (2005); and Porter (1980). Respondents were asked to indicate theirlevel of agreement with statements regarding competitor orientation within their firms.The means for the five items ranged from 5.05 to 5.46 (1 ¼ strongly disagree,4 ¼ neutral, and 7 ¼ strongly agree), indicating slightly higher levels of competitororientation within the firms (when compared with customer orientation).

The measures for cost orientation were adapted from Olson et al. (2005) and Homburget al. (1999). Respondents were asked to indicate their level of agreement with statementsregarding their firms’ cost orientation. Five measurement items were used and the meanresponses ranged from 5.36 to 5.69 (1 ¼ strongly disagree, 4 ¼ neutral, and7 ¼ strongly agree), indicating somewhat higher levels of cost orientation within firms.

Service innovation capability was measured using a new scale developed for thisstudy. While no existing measurement was available, extant literature on innovationand customer service was consulted first to capture the essence of service innovation.The steps suggested by Churchill (1979) were followed in the scale development.Interviews with industry experts also provided the basis for item generation andmodification. The final survey included five items related to service innovation;exploratory factor analysis indicates that they load on one factor. Respondents wereasked to indicate their agreement with statements regarding service innovationcapability at their firms. The means for the five items ranged from 4.72 to 5.21(1 ¼ strongly disagree, 4 ¼ neutral, and 7 ¼ strongly agree), indicating moderatelevels of service innovation capability within firms.

Market performance was measured using items adapted from Claycomb et al. (1999)and Jaworski and Kohli (1993). Respondents were asked to indicate the performance oftheir firms in the past year compared to the performance of their major competitors incertain areas (1 ¼ much worse, 4 ¼ about the same, 7 ¼ much better). The meanvalues for the four items ranged from 4.65 to 4.89, indicating a slightly better marketperformance for the respondents relative to their major competitors.


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AnalysisThe data were analyzed using the CALIS procedure in SAS 9.1. A basic univariateanalysis of the data was conducted first to evaluate the integrity of the coding, itemsnormality (skewness and kurtosis), means, standard deviations, and outliers assuggested by Mentzer et al. (1999). The univariate analysis yielded acceptable results.The means and standard deviations for measurement items are shown in Table II.

The model analysis used a two-step procedure as recommended by Gerbing andAnderson (1988). First, a measurement model was examined with confirmatory factoranalysis using maximum likelihood estimation. The theoretical model was then tested.

The measurement modelThe measurement model consisted of five latent variables, corresponding to the constructspresented earlier: customer orientation, competitor orientation, cost orientation, serviceinnovation capability, and market performance. Market performance was measured usingfour manifest indicator variables, while the remaining latent constructs were measuredusing five manifest indicator variables. All five latent variables were allowed to covary witheach other. The results of the confirmatory factor analysis (CFA) measurement model arepresented in Table III. The major fit indices utilized include chi-square (x 2),chi-square/degrees of freedom ratio (x 2/df ), comparative fit index (CFI), and root meansquare error of approximation (RMSEA). The resulting x 2 for the measurement model was485.893 (df ¼ 242, p, 0.001). The measurement model also yielded a relative x 2 (x 2/df )value of 2.008, which is within the recommended range of 1 and 3 (Bollen and Long, 1993;Carmines and McIver, 1981). CFI has been noted to account for sample size and themeasurement model and is preferred by many scholars (Bentler, 1990; Hatcher, 1994). Themeasurement model produced a CFI value of 0.940, within the acceptable range proposed byBentler (1990). The model also produced a RMSEA value of 0.058, which is within thesuggested range (less than 0.08) for good model fit (Browne and Cudeck, 1993). These criticalfit indices suggested satisfactory fit between the data and the proposed measurement model.

The CALIS procedure in SAS was also used to examine construct validity.Standardized factor loadings for all measurement items are presented in Table III. Thet-values for these coefficients are also included in Table III and range from 11.41 to18.53, indicating that all factor loadings are significant ( p , 0.001). These resultsprovide evidence in support of convergent validity of the measurement items for eachconstruct (Gerbing and Anderson, 1988). Table III also includes the variance extractedestimate for each construct. This is a measure of the amount of variance captured byeach construct, relative to the error variance (Fornell and Larcker, 1981; Hatcher, 1994).All of the constructs had variance extracted estimates in excess of 0.50, which isthe level recommended by Fornell and Larcker (1981). However, a review of thecorrelations among the constructs yielded a relatively high correlation estimate for thecorrelation between customer orientation and cost orientation (0.747). As a result, amore stringent chi-square difference test was conducted in which the correlation forthese constructs was fixed at 1. The x 2 difference between the measurement modelswas significant ( p , 0.001), which provides evidence of support for discriminantvalidity of the constructs. These correlations are presented in Table IV.

The reliabilities of the measurement items (square of the factor loadings), alongwith the composite reliability of each construct are also included in Table III.Composite reliability is a measure of internal consistency of the construct, comparable

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Constructs and scale items Mean SD

Customer orientation(Deshpande and Farley, 1998)Please indicate your level of agreement with the following statements about your firm’sCustomer orientationa

CUST1 Our business objectives are driven primarily by customer satisfaction 4.67 1.51CUST2 We communicate information about our customer experiences across all

business functions 4.84 1.45CUST3 Our strategy for gaining a competitive advantage is based on our

understanding of customer needs 5.28 1.50CUST4 We measure customer satisfaction frequently 5.23 1.39CUST5 We regularly survey end customers to assess the quality of our products

and service 5.18 1.40Competitor orientation(Narver and Slater, 1990; Olsen et al., 2005; Porter, 1980)Please indicate your level of agreement with the following statements about your firm’sCompetitor orientationa

COMP1 Our salespeople regularly collect information concerning competitors’ activities 5.30 1.44COMP2 Top management regularly discusses competitors’ actions 5.26 1.53COMP3 We frequently track the market performance of key competitors 5.46 1.45COMP4 We frequently evaluate the strengths of key competitors 5.30 1.57COMP5 We attempt to identify competitors’ strategies 5.05 1.61Cost orientation(Olsen et al., 2005 and Homburg et al., 1999)Please indicate your level of agreement with the following statements about your firm’sCost orientationa

COST1 Improving operating efficiency is a top priority in our firm 5.45 1.49COST2 Achieving economies of scale is an important element of our strategy 5.39 1.48COST3 Achieving cost advantage is very important to our firm 5.69 1.41COST4 Cost is the most critical component in our firm’s performance measures 5.36 1.41COST5 Consideration of cost always comes first in any decision making process

in our firm 5.47 1.36Service innovation capability (new scale)Please indicate your level of agreement with the following statements about your firm’sInnovationa

SVIN1 Innovation is readily accepted in program/project management 4.72 1.44SVIN2 Our firm’s top management gives special emphasis to service innovation 4.89 1.37SVIN3 Our firm constantly seeks new ways to better service our customers 5.21 1.29SVIN4 Our firm is able to change/modify our current service approaches to meet

special requirements from customers 5.10 1.28SVIN5 Compared to our competition, our firm is able to come up with new service offerings 5.01 1.36Market performanceClaycomb et al., 1999; Jaworski; Kohli, 1993)Please indicate your firm’s financial and market performance in the last year comparing to majorcompetitors in the following areasb

MPER1 Sales volume growth 4.89 1.20MPER2 Profit margin growth 4.65 1.39MPER3 Market share growth 4.73 1.34MPER4 Overall competitive position 4.87 1.18

Notes: aItems were measured using a seven-point Likert-type scale, where 1 ¼ strongly disagree and7 ¼ strongly agree; bitems were measured using a seven-point Likert-type scale, where 1 ¼ muchworse and 7 ¼ much better

Table II.Measurement items and

descriptive statistics


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to coefficient a (Fornell and Larcker, 1981). The composite reliabilities range from0.841 to 0.890, which are greater than the recommended value 0.700 and suggest thateach of the scales is reliable (Nunnally and Bernstein, 1994). Together, the results of themeasurement model analysis generally support the reliability of the constructs andtheir measurement items.

Constructs and indicatorsStandardized

weight t-value ReliabilityVarianceextracted

Customer orientation 0.841a 0.517CUST1 ˆ Customer orientation 0.623 11.41 0.388CUST2 ˆ Customer orientation 0.734 14.15 0.539CUST3 ˆ Customer orientation 0.785 15.54 0.615CUST4 ˆ Customer orientation 0.807 16.19 0.652CUST5 ˆ Customer orientation 0.623 11.42 0.389Competitor orientation 0.875a 0.586COMP1 ˆ Competitor orientation 0.702 13.49 0.493COMP2 ˆ Competitor orientation 0.622 11.52 0.387COMP3 ˆ Competitor orientation 0.874 18.53 0.763COMP4 ˆ Competitor orientation 0.804 16.33 0.646COMP5 ˆ Competitor orientation 0.799 16.18 0.638Cost orientation 0.843a 0.520COST1 ˆ Cost orientation 0.776 15.22 0.602COST2 ˆ Cost orientation 0.661 12.26 0.437COST3 ˆ Cost orientation 0.751 14.55 0.564COST4 ˆ Cost orientation 0.745 14.39 0.555COST5 ˆ Cost orientation 0.663 12.30 0.439Service innovation capability 0.890a 0.610SVIN1 ˆ Service innovation capability 0.687 13.17 0.643SVIN2 ˆ Service innovation capability 0.799 16.31 0.632SVIN3 ˆ Service innovation capability 0.806 16.50 0.675SVIN4 ˆ Service innovation capability 0.847 17.80 0.628SVIN5 ˆ Service innovation capability 0.838 17.52 0.471Market performance 0.889a 0.677MPER1 ˆ Market performance 0.802 16.15 0.639MPER2 ˆ Market performance 0.795 15.95 0.649MPER3 ˆ Market performance 0.822 16.73 0.717MPER4 ˆ Market performance 0.793 15.87 0.702

Notes: aDenotes composite reliability. Fit statistics: x 2 ¼ 485.893 (df ¼ 242, p , 0.0001);x2/df ¼ 2.008; CFI ¼ 0.940; RMSEA ¼ 0.058. All t-values significant ( p , 0.001)

Table III.Measurement modelstandardized coefficients,t-values, reliabilities, andfit statistics

Customerorientation

Competitororientation

Costorientation

Serviceinnovationcapability

Marketperformance

Customer orientation –Competitor orientation 0.317 –Cost orientation 0.558 0.372 –Service innovation capability 0.276 0.186 0.204 –Market performance 0.338 0.269 0.235 0.408 –

Table IV.Correlations

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The theoretical modelThe theoretical model was also tested using the CALIS procedure in SAS. Figure 1presents the model tested, along with appropriate fit indices: x 2/df ¼ 2.141;CFI ¼ 0.931; RMSEA ¼ 0.061. As with the measurement model, the indicesindicate an acceptable fit.

H1 suggested that customer orientation within a firm is positively related to serviceinnovation capability. The current study provides empirical support for thisrelationship as the standardized path coefficient ¼ 0.407, t-value ¼ 3.970, andp , 0.001. Therefore, customer orientation of a firm can lead to greater serviceinnovation capability.

H2 proposed that a firm’s competitor orientation is positively related to serviceinnovation capability. Based on the path coefficient of 0.208 and t-value of 2.700, therelationship between competitor orientation and service innovation capability wassupported at the p , 0.01 level. The support for this path indicates that a firm’scompetitor orientation can generate a greater service innovation capability for thefirm.

H3 stated that a cost orientation is also positively related to a firm’s serviceinnovation capability. The current study does not find empirical support for thisrelationship as the path coefficient is 0.050, the t-value is 0.467, and p . 0.1.

H4 proposed that a firm’s service innovation capability is positively related tomarket performance. The path coefficient of 0.669 and t-value of 9.295 indicates thatthis relationship is supported at the p , 0.001 level. Service innovation capability candirectly lead to higher levels of market performance. A summary of the path analysisresults is shown in Table V.

Multiple squared correlations (R 2) for each of the endogenous latent variables –service innovation capability and market performance – were also examined to assessthe utility of the proposed theoretical model. The results (as shown in Table V) indicate

Figure 1.Structural model test

Notes: Fit statistics: c2 = 526.724 (df = 246, p < 0.0001); c2/df = 2.141; CFI = 0.931; RMSEA = 0.061

Customerorientation

Competitororientation

Costorientation

Serviceinnovation

Marketperformance

COMP2

COMP3

COMP4

COMP1

COMP5

COST1 COST2 COST3 COST4 COST5

CUST1 CUST2 CUST3 CUST4 CUST5

MPER1

MPER2

MPER3

MPER4

SVIN1 SVIN2 SVIN3

SVIN4 SVIN5


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that just over 35 percent of the service innovation capability variance is explainedby the customer-oriented, competitor-oriented, and cost-oriented behaviors.Additionally, the study indicates that nearly 49 percent of the market performancevariance is explained by a firm’s service innovation capability.

Discussion and implicationsDifferentiation through service is more difficult to copy than products. Thus,repositioning products by augmenting service capability may help firms achieve acompetitive edge. However, little empirical research has been done to support thesearguments with the exception of Flint et al.’s (2005) qualitative study. We make acontribution by developing a measurement scale of service innovation capability andproviding empirical support of the service innovation capability-performancerelationship – as indicated by the results of H4.

The relevant question is: how can a firm create a corporate culture to facilitateservice innovation capability? It is proposed that a corporate culture focusing onsharing relevant information and intelligence will enhance a firm’s service innovationcapability. Since previous research has argued that corporate cultures are reflected in afirm’s strategic orientations (Deshpande et al., 1993; Hurley and Hult, 1998; Narver andSlater, 1990), the current study empirically examined three strategic orientations:customer orientation, competitor orientation, and cost orientation. The resultsdemonstrated that the different emphases of the strategic orientations yieldeddifferential impacts on a firm’s service innovation capability.

Customer orientation and competitor orientation were both found to be positivelyrelated to service innovation capability – as indicated by the results of H1 and H2.This result is similar to Han et al.’s (1998) argument that the combination of customerorientation and competitor orientation will enhance a firm’s innovativeness. Whiletheir emphasis is a technical and administrative innovation, the current studyempirically extends the argument into a service innovation context. In order to beinnovative in service offerings in today’s supply chain context, a firm must develop astrong external emphasis. Customer and competitor orientations are both externallyfocused. Information and knowledge must be available to help understand and respondto the external environment and market demands. The information can help identifygaps in market offerings, new opportunities, etc. and can also be used in the servicedevelopment/design process. Furthermore, focusing on the interest of customerssupports the pursuit of total customer satisfaction, thereby fostering continuousinnovation (Peters, 1984). This is also consistent with a long-term orientation proposedby the marketing concept. Because the marketing concept pushes a business enterprise

PathStd.

weight t-value p-value Note

H1. Customer orientation ! service innovation capability 0.407 3.970 , .001 SupportedH2. Competitor orientation ! service innovation capability 0.208 2.700 , .01 SupportedH3. Cost orientation ! service innovation capability 0.050 0.467 NS NSH4. Service innovation capability ! market performance 0.669 9.295 , .001 Supported

Notes: Squared correlations (R 2) in the structural model: service innovation capability ¼ 0.351;market performance ¼ 0.448

Table V.Path model results

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to be forward-looking, a customer-oriented business is likely to be more interested inthe long-term business outlook than in short-term profits (Felton, 1959; Han et al.,1998). As suggested by our results, a firm’s customer orientation does not inhibitcompetitor orientation. In fact, customer orientation provides a balanced approach anda more comprehensive view of the operating environment, including a focus oncompetitors. Using target rivals as a frame of reference, competitor-oriented firms seekto identify their own strengths and weaknesses and develop innovative serviceofferings to stay ahead.

However, our study did not provide empirical support for the hypothesized costorientation-service innovation capability relationship (the insignificant resultregarding H3). When compared with customer and competitor orientations, costorientation is internally focused. It may be that the lack of external knowledge (andmarketplace intelligence) impedes the creation of service innovation capability. Ofcourse, we are not saying that cost orientation is a “wrong answer” and should beavoided. Customer and competitor information provides important market knowledge,but costs must be considered to see if it is realistic to try to accommodate such marketdemands. Instead, cost orientation may be an important driver for other types ofinnovation, such as product innovation or process innovation. Firms may actively seekpotential improvements or changes in product or processes to achieve cost reduction.Furthermore, process innovation resulting from cost orientation may also contribute toinnovations in the service area. Although our research suggests that cost orientation isnot a direct driver of service innovation capability, further study is warranted tofurther explore cost orientation’s role.

Future researchAs an initial endeavor to empirically examine service innovation capability, the currentstudy provides some important results as discussed above. Future research is stillneeded to address limitations in this study and further the understanding of serviceinnovation in today’s environment. First, earlier we stated that strategic orientationsare not mutually exclusive; therefore, future research is recommended to explore thebalance needed and the value likely to be gained from each. Firms are commonlyguided by multiple strategic orientations and engage in multiple behaviors. While anyspecific orientation can potentially generate positive outcomes for the firm, differentorientations may lead to different directions. If not managed effectively, optimal resultswill not be achieved. Efforts should be taken to help companies identify how toeffectively balance the various orientations.

Second, while the current study focuses on service innovation capability, futurestudies should explore the differences between service innovation capability and otherinnovation capabilities such as product innovation capability. Services are unique inmany ways because of their basic characteristics including intangibility andperishability, etc. The process of developing service innovation capability could besignificantly different from other innovation capabilities. Understanding potentialdifferences will help managers select appropriate orientations and better allocateresources to facilitate the effective development of these important innovationcapabilities.

Furthermore, it must be realized that service innovation is still a fairly broadconcept and may encompass different areas and engage different levels of involvement.


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For example, while some service innovations aim at enhancing the existing serviceofferings, others may target new service offerings. Owing to its exploratory nature, thecurrent study only examined service innovation in a general sense. Future researchshould explore more specific aspects of service innovation in detail. Consequently, themeasurement scale developed in the current study may need to be modified or be usedas a reference to develop new measures.

Next, in addition to the three strategic orientations examined in our study, futureresearch may explore the impact of other potential internal or external factors on serviceinnovation capability development. Strategic orientations as a corporate culture couldplay a critical role; additional effort is warranted to identify other relevant drivers orbarriers. Specifically, factors that can lead an organization to develop each strategicorientation should be empirically examined.

Also, although the current study empirically examined the direct links betweenstrategic orientations and service innovation capability, the mechanism of implementationprocess is still largely unexplored. In other words, what should a firm do to effectivelydevelop its service innovation capability through specific strategic orientations? Thisimplies that the proposed relationships may be mediated by other relevant constructs.Therefore, future research should investigate the implementation process by includingadditional constructs.

As suggested by Flint et al. (2005), service innovation has been largely ignored inthe supply chain management and logistics literature and warrants much moreresearch. The current study is an initial response to this call to address the researchgap. While reinforcing some of the conceptual arguments made by other researchers,our study also provides a new venue to explore this important phenomenon byfocusing on strategic orientations. It is our hope that our study will stimulate moreresearch on this topic from different angles. A starting point is to examine strategicorientation and service innovation in a broader range of industries and in differentsettings.

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About the authorsScott J. Grawe completed his MBA at, The University of Minnesota and is a PhD candidate inMarketing and Supply Chain Management at The University of Oklahoma. He has published hiswork in the Journal of Business Logistics. His research interests include supply chainmanagement and logistics. His background includes eight years of managing domestic andinternational logistics operations and planning in retail and manufacturing. Scott J. Grawe is thecorresponding author and can be contacted at: [email protected]

Haozhe Chen obtained his PhD at, The University of Oklahoma and is an Assistant Professorin Marketing and Supply Chain Management at East Carolina University. He has published inBusiness Horizons, Industrial Marketing Management, International Journal of LogisticsManagement, Journal of Business Logistics, and Transportation Research: Part E. His industrybackground includes eight years of managerial experience in international trade business.

Patricia J. Daugherty obtained her PhD at Michigan State University and is the DivisionDirector and Siegfried Chair in Marketing and Supply Chain Management at The University ofOklahoma. She is the immediate past-Editor of the Journal of Business Logistics. She haspublished widely in logistics and supply chain journals.

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