The Effects of Market Orientation and Service Innovation on Service Industry Performance: An Empirical Study

1951 Words8 Pages
Abstract This study examines how market orientation affects a firm's service innovation and consequently, the firm's market and financial performance. The findings indicate that if firms use customer orientation, the firm is more likely to adopt incremental service innovation, while if a firm uses competitor orientation, the firm is more likely to adopt radical service innovation. Finally, incremental and radical service innovations lead to greater market performance and in turn, greater financial performance.

1 Introduction
How service firms use market orientation has attracted great attention in innovation literature (Agarwal et al. 2003; Manzano et al. 2005). Market orientation refers to ‘‘the organizational culture that most
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Inter-functional coordination, a third component of market orientation, coordinates a firm’s resources and market-related activities. Because customer and competitive orientations are two primary ways that service firms use to cope with markets (Zhou et al. 2009), this study focuses on the customer and competitor orientations and regards inter-functional coordination as a control variable.
The degree of service innovation ranges from a totally new or discontinuous innovation to a service involving a minor improvement or a dramatic change (Griffin, 1997; Avlonitis et al., 2001; Garcia and Calantone, 2002). Although several service innovation types have been proposed (Gadrey et al. 1995; Debackere et al. 1998; Avlonitis et al. 2001; Berry et al. 2006; Paswan et al. 2009), in this study, because we are concerned with the greatest and the least degree of service innovation, service innovation is differentiated into incremental and radical innovation. Such a differentiation has been frequently used in similar innovation research (Olsen and Sallis 2006; Min et al. 2006; Song and Thieme 2009).
Incremental service innovation is related to customer-led strategies that focus on manifest needs (Connor 1999; Slater and Narver 1999) and is posited to be the most common form of innovation (Bell et al. 2002; Slater and Narver 1999). Customer-led businesses focus on understanding the expressed desires of the customers in their
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