IJPDLM 39,4. Received 2 October 2008 Revised 23 January 2009 Accepted 9 February 2009

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1 The current issue and full text archive of this journal is available at IJPDLM 282 Received 2 October 2008 Revised 23 January 2009 Accepted 9 February 2009 The relationship between strategic orientation, service innovation, and Scott J. Grawe Division of Marketing & Supply Chain Management, Michael F. Price College of Business, The University of Oklahoma, Norman, Oklahoma, USA Haozhe Chen Department of Marketing & Supply Chain Management, College of Business, East Carolina University, Greenville, North Carolina, USA, and Patricia J. Daugherty Division of Marketing & Supply Chain Management, Michael F. Price College of Business, The University of Oklahoma, Norman, Oklahoma, USA International Journal of Physical Distribution & Logistics Management Vol. 39 No. 4, 2009 pp q Emerald Group Publishing Limited DOI / Abstract Purpose The purpose of this paper is to determine how a firm s strategic orientation affects service innovation capability and the resulting impact on market. Design/methodology/approach A survey was administered to supply chain executives. Structural equation modeling was used to analyze the relationships among the following constructs: customer orientation, competitor orientation, cost orientation, service innovation, and market. Findings Although the relationship between cost orientation and service innovation is not supported, the relationships between customer orientation and competitor orientation and service innovation are supported. Additionally, the relationship between service innovation and market is supported. Research limitations/implications This study is one of a limited number of studies which has empirically addressed service innovation. Additional research is needed to address the impact of a firm s strategic orientation on product innovation capability. Practical implications The study found that firms seeking to develop a service innovation capability should employ customer orientation, competitor orientation, or a combination of the two different types of strategic orientation. Originality/value Service innovation has received very little empirical attention in the current innovation 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 Introduction Firm managers place different emphases on strategic behaviors and select strategic orientations dependent upon what they wish to accomplish (Olson et al., 2005).

2 For example, firms with a strong customer orientation emphasize the creation and maintenance of customer value. More competitor-oriented firms encourage in-depth assessment of targeted competitors and cost-oriented firms pursue efficiency throughout their value chain (Day, 1990; Porter, 1985). The different types of strategic orientations are not mutually exclusive; firms commonly engage in multiple sets of behaviors at the same time (Gatignon and Xuereb, 1997). Strategic orientations are aspects of corporate culture (Deshpande et al., 1993; Hurley and Hult, 1998; Narver and Slater, 1990). Corporate or organizational culture represents intangible resources for firms (Barney, 1991; Grant, 1991). The deployment of those resources, i.e. orientations, will have different relative impacts (Day, 1994). Strategic orientation focuses resources to achieve desired outcomes. In the current context, we examine how resources impact one type of capability development service innovation. Innovation has been empirically linked with superior (Damanpour and Evan, 1984; Khan and Manopichetwattana, 1989). However, while much of the previous research has centered on product innovation, our research focuses on service innovation. Service innovation is a hot topic warranting greater attention (Berry et al., 2006). Service innovation represents an additional means by which firms can improve their market and efficiency (Chapman et al., 2003), which in turn may contribute to competitive advantages in today s business environment. Many firms elect 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 strategic orientation, service innovation, and market. In the next sections, relevant literature is reviewed and a theoretical framework is introduced along with research hypotheses. This is followed by research methodology and analysis. Managerial implications, study limitations, and research opportunities are then discussed. Orientation, innovation, and 283 Background Innovation Innovation plays a critical role in the increasingly competitive business environment in which firms operate. As a result, researchers have provided insights as to how firms innovate 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 received little empirical study. Defined broadly, innovation is an idea, practice, or object that is perceived as new by an individual or organization (Rogers, 2003). While the definition set forth by Rogers can be applied to the service context, a distinct definition for service innovation is warranted to recognize its unique nature. Service innovation is the development of a new service that is perceived as new and helpful to a particular focal audience (Flint et al., 2005; Grant, 1991). Service enhancements can add value for organizations. Firms often race to market with new product offerings, displaying the latest technologies and capabilities, and almost immediately encounter direct competition. In such instances, service-based competition may be the best response. For example, logistics services can provide firms 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

3 IJPDLM 284 and has become integral to firm strategies and operations (Kandampully, 2002). Service innovation has been linked to the creation of customer value, which is a customer s perceived preference for a product s attributes, s, and consequences of use (Woodruff, 1997). As market environments change, the components of customer value are likely to change (Flint and Mentzer, 2000). As a result, creating value through service innovation often requires that firms anticipate future customer needs. In order for firms to offer superior value to their customers, they need to anticipate environmental changes as they develop new services (Kandampully, 2002). This often requires that new knowledge supplements the existing firm knowledge (Benner and Tushman, 2002). The following sections highlight organizational characteristics that may be relevant to the generation of new knowledge and subsequent service innovation of an organization. Strategic orientation as organizational culture Strategic orientation is defined as the strategic directions implemented by a firm to create the proper behaviors for the continuous superior of the business (Gatignon and Xuereb, 1997; Menguc and Auh, 2005; Narver and Slater, 1990). Previous studies examining strategic orientations have pointed specifically to the behaviors associated with the organization-wide generation, dissemination, and use of market intelligence as being the key ingredients of a strategic orientation (Baker and Sinkula, 1999; Kohli and Jaworski, 1990; Narver and Slater, 1990; Sinkula, 1994). An important aspect of a strategic orientation is the creation of shared values and behaviors throughout the entire organization. When strategic orientation extends to all levels of an organization, it becomes an organizational culture. Organizational culture is defined as the pattern of shared values and beliefs that provide norms for behavior within 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 and intelligence among employees. Organizational cultures will vary among firms; the types of information and intelligence shared within firms will also vary. While later sections will highlight specific differences in the intelligence sought by firms, it is also important to discuss the general intelligence characteristics. The type of intelligence that is shared is driven by the strategic orientation of the firm. In order to effectively share information throughout the organization, it is essential that organizations capture and codify intelligence for dissemination and use (Argote and Ingram, 2000; Spender, 1996; Turner and Makhija, 2006). Intelligence is often codified in information systems, organizational processes, and other communication mechanisms (Slater and Narver, 1995). Access to these systems and methods of communication throughout organizational levels reinforces the orientation of the firm as employees are able to quickly access and share new information with others in the firm. The following sections discuss three relevant strategic orientations, 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; Menguc and Auh, 2005; Narver and Slater, 1990). The current research not only examines both customer and competitor orientations, but also adds cost orientation. As suggested by Porter (1985), competing with low costs is a common strategy. However, cost orientation has not received much empirical attention in the strategic orientation literature.

4 Customer orientation Customer orientation is an organizational culture that facilitates the understanding of targeted buyers and allows for the continuous creation of customer value (Narver and Slater, 1990). Firms with a customer orientation generate intelligence about the current and future needs of targeted customers and disseminate the new intelligence throughout the organization. Employees within a customer-oriented organization are aware of who the customers are and how they should be served. As they learn about the needs of their customers, they are quick to share the new information with other individuals and departments within the organization to ensure that the firm can continue to keep pace with customer needs, and anticipate future needs. A critical component of customer orientation is the emphasis on seeing supply chain opportunities and constraints from the perspective of the customer (Deshpande et al., 1993; Narver and Slater, 1990). This allows the firm to identify potential new customers along with opportunities to create value for the customer. Orientation, innovation, and 285 Competitor orientation Competitor orientation is an organizational culture that stresses the understanding of the short-term strengths and weaknesses and long-term capabilities and strategies of the current and potential key competitors (Deshpande et al., 1993; Narver and Slater, 1990). Firms adopting a competitor orientation develop an in-depth assessment of targeted competitors and potential competitors and use the resulting knowledge to match or exceed competitors strengths (Kohli and Jaworski, 1990; Olson et al., 2005). In a competitor-oriented firm, competitive assessment is not solely the responsibility of senior management. Employees throughout the organization participate in the development of intelligence regarding competitors new products and services, as well as 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 meet their needs. Cost orientation Cost orientation refers to the pursuit of efficiency throughout all parts of a firm s value chain (Olson et al., 2005; Porter, 1985). Cost orientation differs from customer and competitor orientation, as its focus is primarily internal. A cost-orientated firm places a high level of importance on in-depth knowledge regarding the costs of providing products and services to the market. Lowering average and marginal costs are typical benefits to this type of strategic orientation (Dickson, 1992). Firms that are actively engaged in the reduction of costs associated with the development of product and service offerings can benefit when competing for new business, as they are able to offer attractive pricing or additional features for potential customers. Employees within cost-oriented firms seek opportunities to eliminate waste associated with all areas of the firm. For example, a cost-oriented culture focuses on reducing non-value-added services, identifying cost-saving sourcing options, and developing lower cost alternative product and service delivery methods. Theoretical framework and hypothesis development The resource-based view of the firm provides the theoretical framework for the current research. According to this view, effective use of a firm s unique resources can lead to a

5 IJPDLM 286 sustained competitive advantage (Barney, 1991). This framework has been used in previous empirical studies to demonstrate positive relationships between firm resources, capabilities, and (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 and implement strategies to improve efficiency and effectiveness (Barney, 1991, Grant, 1991). As such, resources can be tangible or intangible. The current research is specifically concerned with intangible resources: organizational culture as evidenced by customer orientation, competitor orientation, and cost orientation. Resources are the source of firm capabilities (Grant, 1991). Capabilities are defined as complex routines that 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 placing the 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 s sustained 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). Customer orientation is a culture in which the needs and values of the customers are communicated formally within the organization between departments and managers and informally among all employees of the organization. The communication exchange supports the development of organizational capabilities (Teece, 1998). As a result, these firms should be well positioned to anticipate changes in needs and develop new products and services (Day, 1994). In particular, previous researchers have argued that service innovation may result from a firm s ability to focus on thinking on behalf of the customer to achieve an outcome beyond the customer s expectations (Kandampully, 2002). Leaders in service industries introduce cutting-edge services in advance of customer expectations and set the pace in the market (Kandampully, 2002). Therefore, in line with Deshpande et al. (1993), we propose the following based on the resource-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 the existing and potential competitors. The presence or threat of competition may be the impetus for innovative service offerings and more efficient utilization of resources (Dickson, 1992). The goal is to match, if not exceed, the competitors strengths (Olson et al., 2005). In order to identify the strengths of competitors, it is important for a firm to collectively develop and share competitive intelligence among its employees. Firms will seek information about the resources and offerings of competing firms and develop innovations to gain or maintain a competitive advantage (Hunt and Morgan, 1996). While a firm s service innovation capability depends heavily on the development of a base of knowledge (Chapman et al., 2003), Han et al. (1998) argued that a competitor-centered culture contributes to competitor-related intelligence and facilitates 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

6 through cost reductions and increased (Yasin et al., 2005). More specifically, a cost orientation can encourage firms to implement innovations in processes and service offerings with the expectation of cutting costs (Bayus, 1995; Lederer and Rhee, 1995). The returns associated with cost-oriented innovations are generally 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 competing firms to detect and imitate (Dickson, 1992), suggesting that cost orientation can develop distinctive capabilities. For example, a firm can offer a new service comparable to 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 there is 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 (Hult et al., 2004; Panayides, 2006). One way in which service innovations can benefit firms is by breathing new life into existing products. This can be done by offering a new service related to the firm s existing products. The value-added nature of service innovations can 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 market segments. An example of this is uninterruptible power supply (UPS) Service Parts Logistics. Recognizing that there were limited opportunities for growth in the small package delivery industry, UPS developed a new service aimed at transporting goods quickly on a short notice (Laurie et al., 2006). The new service was aimed at firms needing to move service parts and medical products and offered a new source of growth for the firm. Firms displaying innovation capabilities can achieve market leadership positions (Keskin, 2006). Therefore, the final hypothesis is as follows: H4. Service innovation capability is positively related to a firm s market. Orientation, innovation, and 287 Research methodology Data collection Data were collected in China using Dillman s (1978) approach to survey design and questionnaire administration. Multi-item reflective measures were adapted or developed as necessary to evaluate the proposed constructs (Churchill, 1979). Reflective measures include indicators that are all viewed to be caused by a common underlying construct (Churchill, 1979). A preliminary questionnaire draft was reviewed by six US supply chain management educators familiar with the topics of interest. The questionnaire was also submitted to 15 industry experts for further evaluation. The measures were developed 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 the experts was consolidated to create one questionnaire, which was then translated back to English. The revised English version was compared with the original version to ensure equivalency of the questionnaires in different languages. The Chinese electronics industry was selected for examination as it represents top management practices in the region and is on par with international counterparts in terms of its developmental level. Limiting the targeted demographic to a single industry also improves the internal validity of the study as specific industry factors are controlled.

7 IJPDLM 288 Supply chain, logistics, marketing, operations, and manufacturing executives were targeted 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 using electronics industry directories. The questionnaire was made available to respondents in two different formats. In addition to the traditional paper-based format, the survey was available online using the web site Potential participants were contacted first by telephone to confirm contact information for mail delivery and to provide the link to the web-based survey. Surveys were sent to 900 individuals and follow-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 were returned. Of the completed surveys, 304 were deemed usable, resulting in a response rate 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 the purposes 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 eliminated from the analysis base. Table I highlights the respondent demographics. Category Number of firms Percentage Table I. Respondent demographics Firm type State-owned Private Foreign-invested Unidentified Total Number of employees , ,000-5, , Unidentified Total Annual sales (2006) (in million RMB * ) , ,001 10, , Unidentified Total Notes: * Ren Min Bi (RMB) is the Chinese currency unit. During the data collection, the exchange rate between the US dollar and the RMB was about 1:7.8

8 Additional analysis was done to test for potential differences in the responses of those using the paper-based surveys and those using the online surveys. Respondents were grouped according to the format used to submit the surveys. The between-group variances were then tested using t-tests and no significant differences were found. This is in line with previous research, which has also shown no differences in the nature of data gathered using these two formats (Griffis et al., 2003). Non-response bias was measured in two ways. First, early responses were compared with late responses for all items using ANOVA (Armstrong and Overton, 1977). Second, all participants were compared with 30 randomly selected non-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. Orientation, innovation, and 289 Measurement item development Likert-type scale items were used for all scale items. Customer orientation was assessed using items adapted from Deshpande and Farley (1998). The Likert-type items 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 was , 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 their level 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 competitor orientation within the firms (when compared with customer orientation). The measures for cost orientation were adapted from Olson et al. (2005) and Homburg et al. (1999). Respondents were asked to indicate their level of agreement with statements regarding their firms cost orientation. Five measurement items were used and the mean responses ranged from 5.36 to 5.69 (1 ¼ strongly disagree, 4 ¼ neutral, and 7 ¼ strongly agree), indicating somewhat higher levels of cost orientation within firms. Service innovation capability was measured using a new scale developed for this study. While no existing measurement was available, extant literature on innovation and 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 and modification. The final survey included five items related to service innovation; exploratory factor analysis indicates that they load on one factor. Respondents were asked to indicate their agreement with statements regarding service innovation capability 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 moderate levels of service innovation capability within firms. Market was measured using items adapted from Claycomb et al. (1999) and Jaworski and Kohli (1993). Respondents were asked to indicate the of their firms in the past year compared to the of their major competitors in certain areas (1 ¼ much worse, 4 ¼ about the same, 7 ¼ much better). The mean values for the four items ranged from 4.65 to 4.89, indicating a slightly better market for the respondents relative to their major competitors.

9 IJPDLM 290 Analysis The data were analyzed using the CALIS procedure in SAS 9.1. A basic univariate analysis of the data was conducted first to evaluate the integrity of the coding, items normality (skewness and kurtosis), means, standard deviations, and outliers as suggested 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 and Anderson (1988). First, a measurement model was examined with confirmatory factor analysis using maximum likelihood estimation. The theoretical model was then tested. The measurement model The measurement model consisted of five latent variables, corresponding to the constructs presented earlier: customer orientation, competitor orientation, cost orientation, service innovation capability, and market. Market was measured using four manifest indicator variables, while the remaining latent constructs were measured using five manifest indicator variables. All five latent variables were allowed to covary with each other. The results of the confirmatory factor analysis (CFA) measurement model are presented 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 mean square error of approximation (RMSEA). The resulting x 2 for the measurement model was (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 the measurement model and is preferred by many scholars (Bentler, 1990; Hatcher, 1994). The measurement model produced a CFI value of 0.940, within the acceptable range proposed by Bentler (1990). The model also produced a RMSEA value of 0.058, which is within the suggested range (less than 0.08) for good model fit (Browne and Cudeck, 1993). These critical fit 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. The t-values for these coefficients are also included in Table III and range from to 18.53, indicating that all factor loadings are significant ( p, 0.001). These results provide evidence in support of convergent validity of the measurement items for each construct (Gerbing and Anderson, 1988). Table III also includes the variance extracted estimate for each construct. This is a measure of the amount of variance captured by each 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 is the level recommended by Fornell and Larcker (1981). However, a review of the correlations among the constructs yielded a relatively high correlation estimate for the correlation between customer orientation and cost orientation (0.747). As a result, a more stringent chi-square difference test was conducted in which the correlation for these constructs was fixed at 1. The x 2 difference between the measurement models was significant ( p, 0.001), which provides evidence of support for discriminant validity of the constructs. These correlations are presented in Table IV. The reliabilities of the measurement items (square of the factor loadings), along with the composite reliability of each construct are also included in Table III. Composite reliability is a measure of internal consistency of the construct, comparable

10 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 s Customer orientation a CUST1 Our business objectives are driven primarily by customer satisfaction CUST2 We communicate information about our customer experiences across all business functions CUST3 Our strategy for gaining a competitive advantage is based on our understanding of customer needs CUST4 We measure customer satisfaction frequently CUST5 We regularly survey end customers to assess the quality of our products and service Competitor orientation (Narver and Slater, 1990; Olsen et al., 2005; Porter, 1980) Please indicate your level of agreement with the following statements about your firm s Competitor orientation a COMP1 Our salespeople regularly collect information concerning competitors activities COMP2 Top management regularly discusses competitors actions COMP3 We frequently track the market of key competitors COMP4 We frequently evaluate the strengths of key competitors COMP5 We attempt to identify competitors strategies Cost orientation (Olsen et al., 2005 and Homburg et al., 1999) Please indicate your level of agreement with the following statements about your firm s Cost orientation a COST1 Improving operating efficiency is a top priority in our firm COST2 Achieving economies of scale is an important element of our strategy COST3 Achieving cost advantage is very important to our firm COST4 Cost is the most critical component in our firm s measures COST5 Consideration of cost always comes first in any decision making process in our firm Service innovation capability (new scale) Please indicate your level of agreement with the following statements about your firm s Innovation a SVIN1 Innovation is readily accepted in program/project management SVIN2 Our firm s top management gives special emphasis to service innovation SVIN3 Our firm constantly seeks new ways to better service our customers SVIN4 Our firm is able to change/modify our current service approaches to meet special requirements from customers SVIN5 Compared to our competition, our firm is able to come up with new service offerings Market Claycomb et al., 1999; Jaworski; Kohli, 1993) Please indicate your firm s financial and market in the last year comparing to major competitors in the following areas b MPER1 Sales volume growth MPER2 Profit margin growth MPER3 Market share growth MPER4 Overall competitive position Notes: a Items were measured using a seven-point Likert-type scale, where 1 ¼ strongly disagree and 7 ¼ strongly agree; b items were measured using a seven-point Likert-type scale, where 1 ¼ much worse and 7 ¼ much better Orientation, innovation, and 291 Table II. Measurement items and descriptive statistics

11 IJPDLM Constructs and indicators Standardized weight t-value Reliability Variance extracted 292 Table III. Measurement model standardized coefficients, t-values, reliabilities, and fit statistics Customer orientation a CUST1 ˆ Customer orientation CUST2 ˆ Customer orientation CUST3 ˆ Customer orientation CUST4 ˆ Customer orientation CUST5 ˆ Customer orientation Competitor orientation a COMP1 ˆ Competitor orientation COMP2 ˆ Competitor orientation COMP3 ˆ Competitor orientation COMP4 ˆ Competitor orientation COMP5 ˆ Competitor orientation Cost orientation a COST1 ˆ Cost orientation COST2 ˆ Cost orientation COST3 ˆ Cost orientation COST4 ˆ Cost orientation COST5 ˆ Cost orientation Service innovation capability a SVIN1 ˆ Service innovation capability SVIN2 ˆ Service innovation capability SVIN3 ˆ Service innovation capability SVIN4 ˆ Service innovation capability SVIN5 ˆ Service innovation capability Market a MPER1 ˆ Market MPER2 ˆ Market MPER3 ˆ Market MPER4 ˆ Market Notes: a Denotes composite reliability. Fit statistics: x 2 ¼ (df ¼ 242, p, ); x2/df ¼ 2.008; CFI ¼ 0.940; RMSEA ¼ All t-values significant ( p, 0.001) Customer orientation Competitor orientation Cost orientation Service innovation capability Market Table IV. Correlations Customer orientation Competitor orientation Cost orientation Service innovation capability Market to coefficient a (Fornell and Larcker, 1981). The composite reliabilities range from to 0.890, which are greater than the recommended value and suggest that each of the scales is reliable (Nunnally and Bernstein, 1994). Together, the results of the measurement model analysis generally support the reliability of the constructs and their measurement items.

12 The theoretical model The theoretical model was also tested using the CALIS procedure in SAS. Figure 1 presents the model tested, along with appropriate fit indices: x 2 /df ¼ 2.141; CFI ¼ 0.931; RMSEA ¼ As with the measurement model, the indices indicate an acceptable fit. H1 suggested that customer orientation within a firm is positively related to service innovation capability. The current study provides empirical support for this relationship as the standardized path coefficient ¼ 0.407, t-value ¼ 3.970, and p, Therefore, customer orientation of a firm can lead to greater service innovation capability. H2 proposed that a firm s competitor orientation is positively related to service innovation capability. Based on the path coefficient of and t-value of 2.700, the relationship between competitor orientation and service innovation capability was supported at the p, 0.01 level. The support for this path indicates that a firm s competitor orientation can generate a greater service innovation capability for the firm. H3 stated that a cost orientation is also positively related to a firm s service innovation capability. The current study does not find empirical support for this relationship as the path coefficient is 0.050, the t-value is 0.467, and p H4 proposed that a firm s service innovation capability is positively related to market. The path coefficient of and t-value of indicates that this relationship is supported at the p, level. Service innovation capability can directly lead to higher levels of market. A summary of the path analysis results is shown in Table V. Multiple squared correlations (R 2 ) for each of the endogenous latent variables service innovation capability and market were also examined to assess the utility of the proposed theoretical model. The results (as shown in Table V) indicate Orientation, innovation, and 293 CUST1 CUST2 CUST3 CUST4 CUST5 COMP1 COMP2 COMP3 COMP4 COMP5 Customer orientation Competitor orientation Cost orientation SVIN1 SVIN2 SVIN3 Service innovation SVIN4 SVIN5 Market MPER1 MPER2 MPER3 MPER4 COST1 COST2 COST3 COST4 COST5 Notes: Fit statistics: c 2 = (df = 246, p < ); c 2 /df = 2.141; CFI = 0.931; RMSEA = Figure 1. Structural model test

13 IJPDLM 294 that just over 35 percent of the service innovation capability variance is explained by the customer-oriented, competitor-oriented, and cost-oriented behaviors. Additionally, the study indicates that nearly 49 percent of the market variance is explained by a firm s service innovation capability. Discussion and implications Differentiation through service is more difficult to copy than products. Thus, repositioning products by augmenting service capability may help firms achieve a competitive edge. However, little empirical research has been done to support these arguments with the exception of Flint et al. s (2005) qualitative study. We make a contribution by developing a measurement scale of service innovation capability and providing empirical support of the service innovation capability- relationship as indicated by the results of H4. The relevant question is: how can a firm create a corporate culture to facilitate service innovation capability? It is proposed that a corporate culture focusing on sharing relevant information and intelligence will enhance a firm s service innovation capability. Since previous research has argued that corporate cultures are reflected in a firm s strategic orientations (Deshpande et al., 1993; Hurley and Hult, 1998; Narver and Slater, 1990), the current study empirically examined three strategic orientations: customer orientation, competitor orientation, and cost orientation. The results demonstrated that the different emphases of the strategic orientations yielded differential impacts on a firm s service innovation capability. Customer orientation and competitor orientation were both found to be positively related 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 customer orientation and competitor orientation will enhance a firm s innovativeness. While their emphasis is a technical and administrative innovation, the current study empirically extends the argument into a service innovation context. In order to be innovative in service offerings in today s supply chain context, a firm must develop a strong external emphasis. Customer and competitor orientations are both externally focused. Information and knowledge must be available to help understand and respond to the external environment and market demands. The information can help identify gaps in market offerings, new opportunities, etc. and can also be used in the service development/design process. Furthermore, focusing on the interest of customers supports the pursuit of total customer satisfaction, thereby fostering continuous innovation (Peters, 1984). This is also consistent with a long-term orientation proposed by the marketing concept. Because the marketing concept pushes a business enterprise Path Std. weight t-value p-value Note Table V. Path model results H1. Customer orientation! service innovation capability ,.001 Supported H2. Competitor orientation! service innovation capability ,.01 Supported H3. Cost orientation! service innovation capability NS NS H4. Service innovation capability! market ,.001 Supported Notes: Squared correlations (R 2 ) in the structural model: service innovation capability ¼ 0.351; market ¼ 0.448

14 to be forward-looking, a customer-oriented business is likely to be more interested in the 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 inhibit competitor orientation. In fact, customer orientation provides a balanced approach and a more comprehensive view of the operating environment, including a focus on competitors. Using target rivals as a frame of reference, competitor-oriented firms seek to identify their own strengths and weaknesses and develop innovative service offerings to stay ahead. However, our study did not provide empirical support for the hypothesized cost orientation-service innovation capability relationship (the insignificant result regarding H3). When compared with customer and competitor orientations, cost orientation is internally focused. It may be that the lack of external knowledge (and marketplace intelligence) impedes the creation of service innovation capability. Of course, we are not saying that cost orientation is a wrong answer and should be avoided. Customer and competitor information provides important market knowledge, but costs must be considered to see if it is realistic to try to accommodate such market demands. Instead, cost orientation may be an important driver for other types of innovation, such as product innovation or process innovation. Firms may actively seek potential improvements or changes in product or processes to achieve cost reduction. Furthermore, process innovation resulting from cost orientation may also contribute to innovations in the service area. Although our research suggests that cost orientation is not a direct driver of service innovation capability, further study is warranted to further explore cost orientation s role. Orientation, innovation, and 295 Future research As an initial endeavor to empirically examine service innovation capability, the current study provides some important results as discussed above. Future research is still needed to address limitations in this study and further the understanding of service innovation in today s environment. First, earlier we stated that strategic orientations are not mutually exclusive; therefore, future research is recommended to explore the balance needed and the value likely to be gained from each. Firms are commonly guided by multiple strategic orientations and engage in multiple behaviors. While any specific orientation can potentially generate positive outcomes for the firm, different orientations may lead to different directions. If not managed effectively, optimal results will not be achieved. Efforts should be taken to help companies identify how to effectively balance the various orientations. Second, while the current study focuses on service innovation capability, future studies should explore the differences between service innovation capability and other innovation capabilities such as product innovation capability. Services are unique in many ways because of their basic characteristics including intangibility and perishability, etc. The process of developing service innovation capability could be significantly different from other innovation capabilities. Understanding potential differences will help managers select appropriate orientations and better allocate resources to facilitate the effective development of these important innovation capabilities. Furthermore, it must be realized that service innovation is still a fairly broad concept and may encompass different areas and engage different levels of involvement.

15 IJPDLM 296 For example, while some service innovations aim at enhancing the existing service offerings, others may target new service offerings. Owing to its exploratory nature, the current study only examined service innovation in a general sense. Future research should explore more specific aspects of service innovation in detail. Consequently, the measurement scale developed in the current study may need to be modified or be used as a reference to develop new measures. Next, in addition to the three strategic orientations examined in our study, future research may explore the impact of other potential internal or external factors on service innovation capability development. Strategic orientations as a corporate culture could play a critical role; additional effort is warranted to identify other relevant drivers or barriers. Specifically, factors that can lead an organization to develop each strategic orientation should be empirically examined. Also, although the current study empirically examined the direct links between strategic orientations and service innovation capability, the mechanism of implementation process is still largely unexplored. In other words, what should a firm do to effectively develop its service innovation capability through specific strategic orientations? This implies that the proposed relationships may be mediated by other relevant constructs. Therefore, future research should investigate the implementation process by including additional constructs. As suggested by Flint et al. (2005), service innovation has been largely ignored in the supply chain management and logistics literature and warrants much more research. The current study is an initial response to this call to address the research gap. While reinforcing some of the conceptual arguments made by other researchers, our study also provides a new venue to explore this important phenomenon by focusing on strategic orientations. It is our hope that our study will stimulate more research on this topic from different angles. A starting point is to examine strategic orientation and service innovation in a broader range of industries and in different settings. References Argote, L. and Ingram, P. (2000), Knowledge transfer: a basis for competitive advantage in firms, Organizational Behavior & Human Decision Processes, Vol. 82 No. 1, pp Armstrong, J.S. and Overton, T.S. (1977), Estimating nonresponse bias in mail surveys, Journal of Marketing Research, Vol. 14 No. 3, pp Autry, C.W., Griffis, S.E., Goldsby, T.J. and Bobbitt, L.M. (2005), Warehouse management systems: resource commitment, capabilities, and organizational, Journal of Business Logistics, Vol. 26 No. 2, pp Baker, W.E. and Sinkula, J.M. (1999), The synergistic effect of market orientation and learning orientation on organizational, Journal of the Academy of Marketing Science, Vol. 27 No. 4, pp Barney, J. (1991), Firm resources and sustained competitive advantage, Journal of Management, Vol. 17 No. 1, pp Bayus, B.L. (1995), Optimal dynamic policies for product and process innovation, Journal of Operations Management, Vol. 12 Nos 3/4, pp Benner, M.J. and Tushman, M. (2002), Process management and technological innovation: a longitudinal study of the photography and paint industries, Administrative Science Quarterly, Vol. 47 No. 4, pp

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