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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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 Journal of Service Research
14(1) 3-23
Service Innovation Viewed Through ª The Author(s) 2011
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a Service-Dominant Logic Lens: A DOI: 10.1177/1094670510385332
http://jsr.sagepub.com
Conceptual Framework and
Empirical Analysis
Andrea Ordanini1 and A. Parasuraman2

Abstract
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 partners (Alam 2002). Furthermore, the effects of service inno-

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
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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4 Journal of Service Research 14(1)
(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-
tion—that is, reactive versus proactive (Kirca, Jaychandaran,
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.
Background
Service Innovation: ‘‘Assimilation’’ and ‘‘Demarcation’’
Approaches
The mainstream view in the current literature is that innovation
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
influenced by an excessive emphasis on technology-based
innovations (Drazin and Schoonoven 1996), and for not consid-
ering structural peculiarities of services, such as intangibility
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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.
In both cases, services are conceptualized in relationship
(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).
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
of service provision and that do not merely reflect the
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
of any economic exchange and conceptualizes it as the ‘‘pro-
cess of application of specialized competences (knowledge and
skills) through deeds, processes, and performances for the
Ordanini and Parasuraman
Collaborave
Competences t–1
Customer collaboraon
Business partner collaboraon
Dynamic capability
of customer orientaon t–1
Customer Orientaon
x
Innovave Orientaon
Knowlegde
interfaces t–1
Employee collaboraon
Knowledge integraon
mechanisms
Figure 1. Antecedents and consequences of service innovation: an integrative framework.
benefit of another entity or the entity itself’’ (Vargo and Lusch
2004, p. 2). The process of competence application is copro-
duced with customers and partners and can be provided directly
through intangible services or indirectly through tangible arti-
facts (i.e., goods; Vargo and Lusch 2006). This feature allows
SDL to be applied to tangible goods as well.
The SDL perspective seems especially suitable for studying
service innovations because it nests both services and tangible
goods into an integrated, overarching service view (Vargo and
Lusch 2006) and is consistent with the synthesis approach
advocated for examining service innovation (Drejer 2004).
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-
ture, and using as building blocks some of SDL’s theoretical
propositions, known as FPs, we develop a framework articulat-
ing the antecedents and consequences of service innovation.
The most recent version (Vargo and Lusch 2008) of SDL’s FPs
(introduced later) suggests three drivers relevant for service
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5
Innovaon Firm
outcomes t–1 performance
Volume Δ Revenues t/t–2
Radicalness Δ Ebit t/t–2
Control variables
innovation: collaborative competences, dynamic capability of
customer orientation, and knowledge interfaces. These drivers
are expected to affect service innovation outcomes along the
dimensions of volume (breadth) and radicalness (depth): the
former reflects the number of innovations, the latter the magni-
tude of the change (Vincent, Bharadwaj, and Challagalla
2004). Since the fundamental purpose of any (new) service is
‘‘to contribute to a firm’s growth as a whole’’ (Johne and Storey
1998, p. 213), we also consider the terminal effects of service
innovation on observed measures of a firm’s financial perfor-
mance. Figure 1 summarizes our research framework.
Collaborative Competences
Customer collaboration. Two key FPs2 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-
tion process is similar to suggestions from the Customer Active
Paradigm (von Hippel 1986) and the open-innovation literature
(Chesbrough 2003). However, those suggestions pertain to new
(tangible) product development in engineering contexts,
wherein external stakeholders participate directly in the design
6 Journal of Service Research 14(1)
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
their implementation (Urban et al. 1997), reliance on past
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
on—a network of suppliers and other business partners to
deliver its services. The open-innovation literature suggests
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
foster change (i.e., the previously described collaborative
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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,
we expect that business partner collaboration will enhance
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 Orientation4
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-
preneurial (Deshpandè, Farley, and Webster 1993), (b) advo-
cates a continuous proactive disposition (Han, Namwoon,
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
it focuses attention on current customers and their needs,
Ordanini and Parasuraman
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 that 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
not facilitate gaining firmer control of the market by caus-
ing something significantly new to happen. At the same
time, simply being innovative-oriented, that is, inclined to
use new knowledge or insights to facilitate organizational
changes, does not ensure that the effort is properly chan-
neled to satisfy customer needs and cocreate value. The
imperative that firms should constantly explore innovative
ways of cocreating value with customers calls for a combi-
nation of customer orientation and other firm resources to
enhance service innovation (Lusch, Vargo, and O’Brien
2007). Specifically, the blending of customer orientation
and innovative orientation should lead to the generation of
an operant resource capable of enhancing cocreation oppor-
tunities. Based on this premise, we propose that customer
orientation should be combined with innovative orientation
to create a dynamic capability of customer orientation
(Menguc and Auh 2006), which by avoiding the ‘‘tyranny
of the served market’’ (Hamel and Prahalad 1994) while
ensuring a customer-focused change (Hurley and Hult
1998), will be conducive of service innovations.
Since customer orientation and innovative orientation are
firm-level traits that create the overall context wherein
balanced innovative strategies can take place (Baker and Sin-
kula 2007; Kyriakopoulos and Moorman 2004), we expect a
dynamic capability of customer orientation to affect both vol-
ume and radicalness of service innovation. Such a dynamic
capability is likely to increase innovation volume because it
infuses a culture of change within the entire organization that
stimulates ongoing and systematic analysis and revision of the
status quo vis-à-vis market needs (Menguc and Auh 2006).
It also increases an organization’s willingness to cannibalize
even its currently effective core competences, which has been
recognized as an important precursor of radical innovations in
both product (Chandy and Tellis 1998) and service (Nijssen
et al. 2006) domains. Hence, we posit that:
Hypothesis 3: Greater the dynamic capability of customer
orientation, greater will be the volume and the radical-
ness of service innovation.
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7
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-
contact personnel are considered the most important
knowledge interface for external knowledge transfer
(Atuahene-Gima 1996). However, scholarly investigations of
contact personnel as a catalyst for service innovation are few
(Gounaris 2006) and have been somewhat equivocal (Johne
and Storey 1998). While some scholars suggest that contact
employee participation in new service development helps
identify customer requirements, facilitates innovation imple-
mentation, and prevents process-efficiency considerations
from superseding customer needs (Schneider and Bowen
1984), others have pointed out that contact employees are often
reluctant to collaborate in new service development as it
increases their workload (Johne and Storey 1998). The SDL
considers service employees as operant resources that could
serve as a critical source of innovation knowledge. For employ-
ees to be effective as operant resources in this regard requires a
participative work environment—one that encourages and
values employees’ ideas, without penalizing them for poten-
tially ineffective ones; in such an environment, employees feel
empowered (Bowen and Lawler 1992) and are motivated to
develop new ways of providing service, facilitating the align-
ment of an organization’s internal capabilities and external
objectives (Gounaris 2006). Organizations that genuinely ‘‘treat
their employees as operant resources will be able to develop
more innovative knowledge and skills and thus gain competitive
advantage’’ (Lusch, Vargo, and O’Brien 2007, p. 15).
Effective collaboration with service employees has been
found to increase the speed of new service development (Johne
and Storey 1998) and the amount of information collected
about customer problems (Kelley 1993). Therefore, employee
collaboration is likely to have a positive effect on the volume
of service innovation. At the same time, employees essentially
learn from and reflect the needs of customers who, as previ-
ously noted, provide knowledge that pertains primarily to
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-
lating their knowledge only when it pertains to ‘‘easy’’
problems (Argote, McEvily, and Reagans 2003). We therefore
8 Journal of Service Research 14(1)
expect employee collaboration to affect just service innovation
volume but not radicalness. Thus,
Hypothesis 4: Higher the level of the collaboration with con-
tact personnel in the service innovation process, greater
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).
Moreover, the most recent service studies have employed per-
ceived measures (Chen, Tsou, and Huang 2009). Our proposed
model anchored in SDL is more comprehensive, considers both
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volume and radicalness of service innovations and includes a
broader set of potential predictors of the two innovation facets.
An overarching tenet implied by the SDL is that a continuous
innovative effort that fosters both innovation breadth and
depth, and that mobilizes a wide variety of competences, is
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
Our sampling frame consisted of all 193 five-star luxury hotels
in Italy and provided by the Italian Hotel Industry Association
Ordanini and Parasuraman
(Federalberghi). We included both independent and chain
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
then set up appointments for telephone interviews with those
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.
Thirty-five hotels (38%) were independent organizations
while the rest were chain hotels. Sixty-two hotels (61%) were
in large cities, while the rest were in small towns. The average
hotel had 107 rooms and 99 employees. The average annual
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
data for Italian firms with more than 10 employees. The use of
objective measures of performance in innovation research is
rare, but highly recommended, because perceived-
performance measures tend to inflate the effects of innovation
activities (Szymanski, Kroff, and Troy 2007). Consistent with
prior literature (Han, Namwoon, and Srivastava 1998), we col-
lected year-end performance measures for 2005 and 2007 to
allow a minimum time lag of 1 year between innovation activi-
ties during 2006 (about which our cross-sectional survey col-
lected data) and their likely impact on firm performance at the
end of 2007.
Measures
Independent Variables
We measured customer collaboration by adapting for a service
setting a scale developed by Gruner and Homburg (2000) in a
product-innovation context. Because the primary role of cus-
tomers in new service development is that of a knowledge
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9
provider (Alam 2002) and given that collaboration with
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
told that business partners included suppliers and other external
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 Deshpandè, 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
the presence of knowledge integration mechanisms, we used a
5-item scale measuring the extent to which a set of formal pro-
cesses are used to capture, interpret, and integrate knowledge in
the service innovation process (De Luca and Atuahene-Gima
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
respondents to list all innovations that required a change in the
application of competences. We also asked for a brief descrip-
tion of each implemented innovation as well as some examples
of the consequent changes in competences. We used the latter
information to ensure that our analyses only included service
innovations that were accompanied by changes in the
application of competences (Michel, Brown, and Gallan
2008). Table 1 contains examples of service innovations intro-
duced by hotels in our sample, together with the changes in the
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
changes in the application of competences. We measured this
construct at the firm level (i.e., as an overall measure of
service-innovation radicalness) with a 3-item scale, by adapt-
ing a firm-level radical-product-innovation scale developed
10 Journal of Service Research 14(1)

Table 1. Illustrative Service Innovations in Our Sample With important than international customers’’ and ‘‘international
Associated Changes in the Application of Competences customers are much more important than domestic customers.’’
Changes in the Applied The pattern, relative magnitudes, and statistical significance of
New Services Competences the correlations between the various predictor variables and the
two criterion variables (innovation volume and radicalness)
‘‘Journey through the arts:’’ New personnel, external after partialling out the marker variable were similar to those
painting and sculpture courses partnership (museums), of the unadjusted correlations (shown in Table 4), thereby sup-
and museum experiences customer willingness/capacity
to personalize the service
porting the inference that common method bias was not an
Heating system that reuses the Technology (plants), new skills issue in our data set.
hot water from the thermal unit (training) of personnel for We also assessed the factorial validity of the innovation-
assistance, external partnership antecedent and innovation-outcome variables through confir-
for maintenance (different matory factor analysis (CFA). Due to limited sample size, and
manufacturer) the conventional requirement that the ratio of sample size to
Rental of electric cars for Technology (new cars), skills and number of estimated parameters be at least 5:1 (Shook et al.
customers’ short trips and relations with external
travels provider (rental company)
2004), we ran two separate CFAs: one with customer orienta-
Fully automated central Interactive capabilities of tion, innovative orientation, and radicalness and the other with
reservation system, with high customers, technology customer collaboration, partner collaboration, employee colla-
personalization of the service resources (information boration, and knowledge integration mechanisms. The results
systems) of the two CFAs, summarized in Tables 2 and 3, show satisfac-
Personal life style consultant/ New personnel, customer tory overall model fit. Moreover, for each latent construct,
shopper willingness/capacity to composite reliability and average variance measures indicate
personalize the service
Transfer by helicopter to New personnel, new technology,
good convergent validity. Finally, discriminant validity of the
restaurants, shops, etc. customer willingness/capacity constructs is supported since the lowest level of average var-
to personalize the service iance extracted is .51 and the highest correlation between latent
‘‘Never say no:’’ customer claim New organizational routines, constructs is .4.
management by employees training of personnel, training
of customers
Dependent Variables
We employed two terminal performance measures frequently
by Chandy and Tellis (1998).6 Tables 2 and 3 contain the used in the hotel industry (Verma, Plaschka, and Louviere
scale items for the multiple-item constructs in our study 2002): growth in revenues per room (during the period 2005-
(Tables 2 and 3). 2007), which reflects the marketing or ‘‘top line’’ impact of
innovation efforts, and growth in the EBIT-to-sales ratio (dur-
Validation of Survey Measures ing the same period), which captures the net effect on profits
after accounting for costs associated with innovation efforts.
We took several steps to minimize and to check for the pres-
Data on both measures were derived from the hotels’ income
ence of common method bias, a potential concern because our
statements as mentioned previously.7
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
Control Variables
rotating items in using the CATI technique). Second, we per- Since both innovation outcomes and performance were mea-
formed Harmon’s one factor test by conducting principal com- sured at the firm level, we included relevant firm-level control
ponent factor analysis of all antecedent and outcome variables: variables in our analyses to account for the effects of potential
the results revealed multiple distinct factors with the first unro- performance determinants not included in our model. First, we
tated factor accounting for just 29% of the total variance, sug- considered the effect of slack resources due to firm size by
gesting that common method bias was not a serious concern. employing the logarithm of the number of hotel rooms (Harris
Third, we employed the marker-variable approach (Lindell and and Watkins 1998). Second, we included a dummy variable
Whitney 2001) to check whether common method bias was an representing whether each hotel was independent or part of a
issue. An appropriate marker variable is one that is theoreti- chain, because belonging to an international chain could influ-
cally unrelated to the criterion variables and not employed in ence a hotel’s capabilities (Haugland, Myrtveit, and Nygaard
the focal analyses, but on which data are gathered on the same 2007). Third, we included year-end sales revenue and return
survey. A variable that satisfied the preceding criteria in our 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) objective measures of all control variables from the secondary
scale with end anchors ‘‘domestic customers are much more 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 Constructsa

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 Std. items CR ¼ 0.81 AVE ¼ 0.52
statements describe what happens in your firm during the innovation process:
We interact with customers 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 0.76
Business-Partner Collaboration [PART] (adapted from Gruner and
Homburg 2000)
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:
We interact with business partners beyond the standards of market research 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 0.63
Employee Collaboration [EMP] (adapted from Li and Calantone 1998)
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 0.80
strategic activities
Knowledge Integration Mechanisms [KIM] (De Luca and Atuahene-Gima 2007)
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 (D EBIT), the two endogenous variables. Our model speci-
for the study variables. fication, including time lags,8 was as follows (control
variables are shown in lower case):
Model Specification VOLt1 ¼ b0 þ b1 ðCUSTÞt1 þb2 ðPARTÞt1
We used three-stage least squares (3SLS) to test the pro- þ b3 ðCORÞt1 þb4 ðINNORÞt1
posed framework. This procedure is ideal for dealing with
þ b5 ðCOR  INNORÞt1 þb6 ðEMPLÞt1 ð1Þ
the simultaneous effects in our model because it handles
both the endogeneity of the innovation variables and the þ b7 ðKIMÞt1 þb8 ðsizeÞt1 þb9 ðchainÞt1
possibility of correlated errors between variables (Aiken and þ b10 ðrevenuesÞt2 þb11 ðebitÞt2 þe1
West 1991). We modeled customer collaboration (CUST),
partner collaboration (PART), customer orientation (COR), RADt1 ¼ b12 þ b13 ðCUSTÞt1 þb14 ðPARTÞt1
innovative orientation (INNOR), the interactive term
þ b15 ðCORÞt1 þb16 ðINNORÞt1
between the two (COR  INNOR), employee collaboration
(EMPL), and knowledge integration mechanisms (KIM) as þ b17 ðCOR  INNORÞt1
ð2Þ
determinants of the two innovation outcomes: volume þ b18 ðEMPLÞt1 þb19 ðKIMÞt1
(VOL) and radicalness (RAD). The two outcomes were in þ b20 ðsizeÞt1 þb21 ðchainÞt1
turn modeled as determinants of the growth in revenues per
room (D REV) and the growth in the EBIT-to-sales ratio þ b22 ðrevenuesÞt2 þb23 ðebitÞt2 þe2

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12 Journal of Service Research 14(1)

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

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 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 0.71
future market needs
Customer Orientation [COR] (Deshpandè, Farley, and Webster 1993)
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:
We have routine or regular measures of customer service 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 0.68
Innovative Orientation [INNOR] (adapted from Hurley and Hult 1998)
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:
Technical innovation, based on research results, is readily accepted 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).

predictor so that simple effects represent the impact of a

DREVt2=t ¼ b24 þ b1 ðCUSTÞt1 þb25 ðPARTÞt1 variable when the others are set to their means. Due to space
þ b26 ðCORÞt1 þb27 ðINNORÞt1 constraints, we only present results for the full model.
þ b28 ðCOR  INNORÞt1 Hypotheses 1 and 2, postulating a positive effect of colla-
borative competences on innovation outcomes, are supported.
þ b29 ðEMPLÞt1 þb30 ðKIMÞt1 Customer collaboration (Hypothesis 1) has a positive effect
þ b31 ðVOLÞt1 þb32 ðRADÞt1 þb33 ðsizeÞt1 on innovation volume (i.e., the number of new services; b ¼
þ b34 ðchainÞt1 þb35 ðrevÞt2 þe3 .32; p < .05) but does not have a significant effect on innovation
radicalness. Hence, collaborating with customers enhances the
ð3Þ capacity to generate new service ideas, although those ideas
may not represent radical departures from current offerings.
DEBITt2=t ¼ b36 þ b37 ðCUSTÞt1 þb38 ðPARTÞt1 On the other hand, business-partner collaboration (Hypothesis 2)
þ b39 ðCORÞt1 þb40 ðINNORÞt1 has no effect on innovation volume but is positively associ-
þ b41 ðCOR  INNORÞt1 ated with innovation radicalness (b ¼ .25; p < .05). There-
fore, collaborating with business partners in service
þ b42 ðEMPLÞt1 þb43 ðKIMÞt1 þb44 ðVOLÞt1
innovation enhances a firm’s likelihood of being a radical
þ b45 ðRADÞt1 þb46 ðsizeÞt1 þb47 ðchainÞt1 innovator, although it may not necessarily contribute to the
þ b48 ðebitÞt2 þe4 : volume of new services. Although we did not formally
hypothesize differences between the effects of customer and
ð4Þ business-partner collaboration, we conducted Wald tests, the
results from which showed the differences to be significant
for both innovation volume (w2 ¼ 5.51; p < .02) and radicalness
Findings (w2 ¼ 4.62; p < .03).
Table 5 summarizes the 3SLS model estimation results. Hypothesis 3, relating to the joint effect of customer orien-
Because of the presence of interaction effects, we centered each tation and innovative orientation on innovation outcomes, is

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 Table 4. Means, Standard Deviations, and Correlationsa
M SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. D_EBIT 0.08 0.08 1

2. D_REV 0.19 0.23 0.24 1
3. CHAIN 0.62 0.49 0.06 0.17 1
4. SIZE (ln) 4.40 0.76 0.35 0.12 0.38 1
5. CUST 3.16 1.01 0.19 0.14 0.03 0.04 1
6. PART 3.02 1.17 0.03 0.03 0.00 0.06 0.09 1
7. COR 3.57 0.79 0.22 0.28 0.03 0.01 0.05 0.28 1
8. INNOR 3.22 1.12 0.04 0.16 0.07 0.11 0.35 0.36 0.32 1
9. EMPL 3.51 0.96 0.38 0.30 0.09 0.12 0.26 0.24 0.26 0.40 1
10. KIM 3.61 0.92 0.26 0.22 0.04 0.12 0.26 0.25 0.26 0.25 0.22 1
11. VOL (sqrt) 1.70 1.06 0.16 0.23 0.02 0.25 0.15 0.14 0.20 0.08 0.21 0.21 1
12. RAD 3.40 1.16 0.26 0.38 0.12 0.06 0.20 0.06 0.42 0.29 0.28 0.30 0.20 1
13. Ebit 0.09 0.02 0.51 0.08 0.03 0.19 0.14 0.09 0.04 0.03 0.07 0.09 0.05 0.05 1
14. Revenues 74.48 60.10 0.25 0.15 0.24 0.21 0.05 0.06 0.04 0.03 0.08 0.05 0.05 0.15 0.31 1

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

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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.

13
14 Journal of Service Research 14(1)

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

VOL R2 ¼ .26; RAD R2 ¼ .56; D_REV R2 ¼ .38; D_EBIT R2 ¼ .24;

w2 ¼ 31.12 w2 ¼ 116.58 w2 ¼ 54.60 w2 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
have no effect (either individually or interactively) on the vol-
ume of innovations, while they show the expected joint effect
on the radicalness (b ¼ .16; p < .05).9 Customer orientation
also has a positive main effect on radicalness (b ¼ .37; p <
.05). Thus, a firm’s cultural trait of innovative orientation
apparently does not have much to do with innovation volume,
while customer orientation, both directly and in interaction
with innovative orientation, has an enhancing effect on innova-
tion radicalness. Figure 2 graphically shows the interaction
effect by plotting the relationship between customer orientation
and radicalness at different levels of innovative orientation
(‘‘high’’ and ‘‘low’’ are operationalized as the mean level +
one standard deviation). The effect of customer orientation
on radicalness increases from b ¼ .19 to b ¼ .55 when innova-
tive orientation shifts from low and high levels. Moreover,
when innovative orientation is low, the impact of customer
orientation is not statistically significant.
Hypotheses 4 and 5 deal with the role of knowledge interfaces.
The posited positive impact of employee collaboration on innova-
tion outcomes (Hypothesis 4) is partially supported: the effect on
innovation volume is positive (b ¼ .41; p < .05); surprisingly,
employee collaboration also has a positive effect on radicalness
(b ¼ .51; p < .01). As such, the participation of contact personnel
seems to be a consistent and robust driver of service innovation.
The expected positive effect of knowledge integration mechan-
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.
Hypotheses 6 and 7 pertain to relationships between
innovation outcomes and performance. Findings from our
second block of equations (the latter two sets of columns
in Table 5) show that radicalness has a positive effect on
both change in revenues (b ¼ .02; p < .05) and change in
EBIT (b ¼ .11; p < .05), while innovation volume has a
positive effect only on change in revenues (b ¼ .01;
p < .05), but not on change in EBIT (b ¼ .01; ns). Thus,
three of the four relationships implied by Hypothesis 6 are
supported. The postulated stronger effect of radicalness
(relative to volume) on performance (Hypothesis 7) is
partially supported. The Wald test does not reject the null
hypothesis of no difference between coefficients for the
revenue measure (w2 ¼ .92; ns), while it detects a slightly
stronger effect of radicalness for the EBIT measure w2 ¼
3.86; p < .05). In short, volume and radicalness of service
innovation have similar effects on revenue growth, while
the effect of radicalness is stronger than the (nonsignificant)
effect of volume on EBIT growth.
Overall, the proposed model has good explanatory power,
especially with respect to radicalness. Among the two control
variables, the type of the hotel (i.e., chain vs. independent) has
no effect on the two innovation outcomes nor does it have a sig-
nificant effect on the two performance measures. Likewise,
hotel size has no significant effects. The initial levels of perfor-
mance (Revenue and Ebit) have no effect on either the innova-
tion outcomes or the final performance measures (D REV and
D EBIT).
Post Hoc Analyses
Given some unexpected findings, and to explore further the
links among the model constructs, we examined four

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Ordanini and Parasuraman 15

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 appropriate blocks of equations in
our model): (a) the interactive effect of the two external col-
laborative competences (CUST  PART) on the two inno-
vation outcomes (VOL and RAD); (b) the interactive
effect of customer collaboration and customer orientation
(CUST  COR) on the two innovation outcomes; (c) the
interactive effect of employee orientation and knowledge
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
graphically shows the interaction effect by plotting the relation-
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
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-
tively). Likewise, the interaction between employee collaboration
and knowledge integration mechanisms has no significant effect
on either volume (b ¼ .13; ns) or radicalness (b ¼ .01; ns).
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)
and (b) volume, although it has no direct effect on EBIT
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 R2 ¼ .33; w2 ¼ 45.84 RAD R2 ¼ .57; w2 ¼ 119.78 D_REV R2 ¼ .38; w2 ¼ 55.72 D_EBIT R2 ¼ .30; w2 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.

1
Predicted VOL

–1

–4 –2 0 2 4
CUST (centered)

PART_high PART_low

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- innovation volume is high (b ¼ .19; p < .01). This means that
calness on EBIT growth virtually disappears when innovation below a certain volume of innovation, radicalness has negligi-
volume is low (b ¼ .03; ns), while it is magnified when ble effect on profit growth.10

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Ordanini and Parasuraman
.5
Pred VAR_EBIT
–.5
–4
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
comprehensive and theoretically informed basis for under-
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
robust driver of service innovation, contributing to both
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 of their 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
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17
–2 0 2
RAD (centered)
VOL_high VOL_low
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-
tion—namely, the effect of customer collaboration on
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
customer orientation’s links to innovation and performance,
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
18
service innovation literature. Specifically, they disconfirm the
evidence—detected in manufacturing contexts—that there is
apparently a trade-off between radical and incremental innova-
tions and that the simultaneous pursuit of both types tends to be
problematic (Atuahene-Gima, Slater, and Olson 2005). Our
analysis shows that both volume and radicalness of service
innovation are important contributors to performance improve-
ment, although in different ways. Their effect is positive and
additive on the revenue growth measure, while radicalness is
apparently much more important for profit growth, with the
direct effect of volume being nonsignificant. However, innova-
tion volume moderates the effect of radicalness on profit
growth in that when the former is low, the latter’s effect virtu-
ally disappears (Figure 4). Thus, on one hand, a steady flow of
innovations might sustain revenue growth independently of the
degree of radicalness and also boost the impact of the latter on
profit growth. On the other hand, since the main difference
between the two performance measures is the level of costs,
and given the strong direct impact of radicalness on profit
growth, our findings imply that radicalness contributes to more
efficient use of a firm’s operant resources (i.e., competences)
and is therefore critical for sustaining profit growth.
Finally, our study contributes to the evolving literature on
SDL. Our analysis suggests that this new perspective offers a
potentially useful platform for integrating insights from differ-
ent literature streams, by examining them through a different
conceptual lens, thus either reinforcing or challenging existing
findings. In particular, our findings offer empirical support for
the suggestion in the current SDL literature that employees,
business partners, and customers are all operant resources in
the innovation process (Lusch, Vargo, and O’Brien 2007).
However, our findings also reveal differences in the nature and
extent of the impact of these operant resources, in conjunction
with a firm’s overall orientation and knowledge integration
mechanisms, on the firm’s service innovation outcomes and
hence performance.
Managerial Implications
Our findings, although subject to confirmation and refinement
in future studies, offer several preliminary insights for manag-
ing service innovation, particularly in complex, multiplayer
service contexts such as the luxury hotel sector that was our
study context. First, to improve performance via innovation
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
study results also demonstrate. Moreover, collaborating with
business partners can benefit service firms in another important
way—namely, by enhancing the salutary effect of customer
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
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Journal of Service Research 14(1)
innovation success only when there is business-partner colla-
boration as well.
Follow-up interviews we had with a small sample of manag-
ers of hotels that had introduced major innovations revealed a
good example of the importance of the interplay between cus-
tomer and partner collaboration for service-innovation success.
A hotel manager told us that a long-standing customer had
repeatedly suggested that the hotel should offer painting
courses to their guests because this hotel was in a town with
a huge artistic endowment and many guests were likely to
appreciate the courses. In 2004, the hotel added such courses
as part of a special service package. For 2 years, this new ser-
vice did not produce any measurable benefits. But then in 2006,
the directors of the two main museums in the town became
aware of it and initiated discussions with the hotel’s manage-
ment. These discussions led to the two museum directors
becoming involved in more radical innovation projects that
resulted in the introduction of thematic exhibitions in the hotel,
modular courses on artistic skills (i.e., painting and sculpture)
and on history of the arts, and customized visits to both
museums. The hotel manager told us that it was only at that
stage—when partner collaboration was coupled with customer
collaboration—did a truly innovative and profitable set of ser-
vices emerge.
Second, benefits from innovation activity also accrue from
‘‘looking inside’’ the service organization (i.e., through
employee collaboration). Our findings suggest a strong impact
of employee collaboration on both innovation volume and radi-
calness. This pervasive influence of contact personnel is appar-
ently due to their proximity to and frequent interactions with
service customers, coupled with their latent knowledge (gained
through experience) about how things could/should be done
differently to improve customer service. Building on the SDL
perspective that knowledge is the very essence of service pro-
vision, and based on the empirical findings from the current
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
employee, who would then have complete authority to handle
and resolve it. Management had designed and implemented this
new service without any employee collaboration. During 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
customer and employee frustration, the hotel formed three
teams of contact employees during the first half of 2006 and
charged them with critically examining different aspects of this
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,
Ordanini and Parasuraman
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-
mote a balanced dynamic capability that transforms a merely
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
dual customer-innovation orientation: ‘‘We spend a lot of
money on surveying customers’ sentiments, requirements,
satisfaction, etc. [While such information is useful] I have to
say that when I read reports from such surveys I am often
tempted to go in a different direction than what is suggested
in the report. Though customers are quite committed to provid-
ing useful information and interesting suggestions, they tend to
focus on current issues. In my experience, managers who rely
too much on customer knowledge are the ones that contribute
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-
vations, in addition to contributing to revenue growth, are
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
be generalized with caution. Our choice of the luxury hotel sec-
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
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19
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-
ing and testing more comprehensive models of service innova-
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-
partner collaboration is high and vanishes when it is low? What
might explain the weakening of the effect of innovation
radicalness on EBIT growth when innovation volume is low
relative to when it is high? Research aimed at better under-
standing the nature and extent of the interplay between
customer and business-partner collaboration, and between
innovation volume and radicalness, can enrich extant knowl-
edge about the service-innovation process. Moreover, research
is needed to explore the associations between service innova-
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-
boration and extent of knowledge transfer) may be affected by
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
measured customer collaboration in service innovation as per-
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
20
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
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Journal of Service Research 14(1)
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
(MeanRAD ¼ 3.91 [n ¼ 39] and MeanINC 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
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23
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).