How to Boost Innovation and Financial Performance in Service Firms

A. Parasuraman

Contact personnel are the key resource of service firms willing to innovate, and the radicalness of innovation – rather than its volume - has the strongest effect on their financial performance, according to a recently published study by Andrea Ordanini (Department of Marketing) and A. Parasuraman (University of Miami School of Business): Service Innovation Viewed Through a Service-Dominant Logic Lens: A Conceptual Framework and Empirical Analysis (Journal of Service Research, Volume 14, No. 1, February 2011, Pages 3-23, doi: 10.1177/1094670510385332).

"Previous empirical investigations of innovation", Ordanini and Parasuraman assert, "are based on narrow conceptual frameworks that may not fully capture the complexities of service innovation", because they use poor conceptualizations of services. The two authors rely, then, on the Service-Dominant Logic (SDL) approach, which states that service is the central mechanism of any economic exchange and conceptualizes it as "the process of application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself". "The process of competence application", Ordanini and Parasuraman write, "is coproduced with customers and partners and can be provided directly through intangible services or indirectly through tangible artifacts, i.e. goods".

A model explicating antecedents and consequences of service innovation, based on SDL, is proposed in the paper. The model singles out three main innovation drivers, namely collaborative competences (the ability to involve customers and business partner in the innovation process), a dynamic capability of customer orientation (the ability to keep a focus on both customers and innovation) and knowledge interfaces (employees and other mechanisms to integrate knowledge) and posits they have different effects on innovation volume and radicalness. The model is, then, tested in the context of five-star luxury Italian hotels, a highly complex industry wherein customers experience and evaluate multiple services on multiple criteria and firms compete more on the basis of creativity and innovation than on price and location. Ninety-one hotels (47% of all the Italian five-star luxury hotels) participated in the study.

The results confirm the best part of the previsions derived by SDL principles. Collaboration with customers boosts the volume of innovation, while collaboration with business partners boosts its radicalness; a firm with a balanced customer/innovative orientation comes to more radical innovations; collaboration with contact personnel in the service innovation process boosts not only the volume of service innovation, as expected, but also its radicalness; the use of knowledge integration mechanisms improves radicalness of innovation.

The authors also study the effect of innovation on revenues and profits; while volume and radicalness affect revenues at the same extent, only radicalness has a significant effect on profits. The data, the authors write after analyzing the interactions between variables, "disconfirm the evidence – detected in manufacturing contexts- that there is apparently a trade-off between radical and incremental innovations and that the simultaneous pursuit of both types tends to be problematic".

Even if the authors admit that the findings of this, like of any single-context study, should be generalized with caution, they draw some important managerial implications. To improve performance via innovation outcomes, service managers have to look outside the core organization and collaborate with business partners and customers, while looking inside by providing appropriate incentives to customer-contact employees and putting in place formal or informal mechanisms for capturing and sharing employee knowledge. Managers should maintain a continuous focus on both customer and innovative orientations in order to boost especially the radicalness of innovation and should promote both innovation volume and radicalness, with the awareness of the different links between these innovation outcomes and the performance consequences.