With the growing significance of services in most developed economies, there is an increased interest in the role of service innovation in service firm competitive strategy. Despite growing literature on service innovation, it remains fragmented reflecting the need for a model that captures key antecedents driving the service innovation-based competitive advantage process. Building on extant literature and using thirteen in-depth interviews with CEOs of project-oriented service firms, this paper presents a model of innovation-based competitive advantage. The emergent model suggests that entrepreneurial service firms pursuing innovation carefully select and use dynamic capabilities that enable them to achieve greater innovation and sustained competitive advantage. Our findings indicate that firms purposefully use create, extend and modify processes to build and nurture key dynamic capabilities. The paper presents a set of theoretical propositions to guide future research. Implications for theory and practice are discussed. Finally, directions for future research are outlined.
The growing significance of services in driving productivity, economic growth and employment in countries which have traditionally relied on manufacturing is increasingly evident. Accordingly, the share of revenue derived from services in Fortune 500 companies has grown considerably over the past few decades,3 forcing organizations to calibrate their existing business models to adopt a service-centric view. For example, IBM, which was once viewed as a manufacturing giant, has reoriented its business to provide solution based service, positioning itself as the ‘largest service business’ in the world (Zeithaml, Bitner, & Gremler, 2009). As services increasingly drive firm value, innovation becomes an effective way to accelerate growth and profitability, contributing to novel ways of new value creation (Berry, Shankar, Parish, Cadwallader, & Dotzel, 2006).
Service innovation has been characterized as distinct from manufacturing innovation, with several researchers suggesting that there are important differences. For example, co-creation at the client–provider interface; the incremental and continuous nature of service innovation; the ‘fuzzy’ nature of the service innovation output; the absence of ‘developmental stages’ and R&D departments in service firms — all suggest that service innovation may be inherently different from manufacturing innovation. Similarly, Service Science literature emphasizes co-creation of value with customers/clients. Unlike the traditional manufacturing-based approach where value is created for the customer, a service approach entails creation of value with the customer as a collaborative partner ( Kowalkowski, 2011, Ordanini and Parasuraman, 2011 and Vargo and Lusch, 2004). Here value creation is driven by unique client needs and based on the principle of reciprocity between the service provider and the client. Yet, service innovation thought is still largely based on a manufacturing mindset ( Gallouj & Windrum, 2009), even though innovation in services has been shown to be different in that imitation is widespread, especially, in the financial services sector (e.g., Davison et al., 1989 and Teixeira and Ziskin, 1993). While there has been a strong emphasis in service innovation literature on the success factors ( Avlonitis and Papastathopoulou, 2001, Cooper and de Brentani, 1991, De Brentani, 1991 and Easingwood and Storey, 1993), there has been less research on how new value is co-created and sustained through innovation. This service centered view which is more customer-oriented and relational needs closer examination in relation to value co-creation and the sources of competitive advantage ( Bharadwaj, Varadarajan, & Fahy, 1993).
Although it is commonly understood that service innovation-based advantages cannot be sustained, this observation is predominantly based on research conducted in financial services where imitation is rampant. However, a growing number of researchers suggest that service innovation-based advantages can be sustained (e.g., Bharadwaj et al., 1993, Gustafsson and Johnson, 2003 and Kandampully and Duddy, 1999). While this debate remains inconclusive, it highlights the need for research to model the antecedents of service innovation and to examine innovation-based strategy in industry settings where long-term customer/client involvement is evident. Overall, there is a need for a theoretical framework that captures the antecedent factors driving innovation-based competitive strategy in service firms.
Addressing this need, this paper attempts to build a coherent theoretical framework of innovation-based competitive strategy in project-oriented service firms4 by drawing on the dynamic capability-based view of competitive strategy and using multiple case study evidence. Project-oriented firms are characterized by relatively long project life cycles where the provision of service often involves close collaboration with the client, reflecting client input to the innovation process. These firms co-create value by working closely with clients on a continuous basis to provide effective solutions. Providing solutions not only needs technical knowledge, but also requires an in-depth understanding of the client's industry and business processes. Therefore, project-oriented firms provide an appropriate setting to examine service innovation-based competitive strategy. Findings from in-depth case interviews with 13 project-oriented firms suggests that service entrepreneurs build and nurture a set of dynamic capabilities that drives the service innovation and competitive advantage process. This evidence is used to develop an emergent model of service innovation-based competitive strategy, together with a set of testable propositions.
The paper is structured as follows. First, the theory of competitive strategy is briefly revisited with specific attention given to the dynamic capability-based view of competitive strategy. Second, the literature on service innovation-based competitive strategy is reviewed highlighting existing gaps in the literature. This is followed by a brief discussion of the research method. Third, drawing on the literature and case study findings, a new conceptual model is developed with a set of theoretical propositions. Finally, the implications of the emergent model for theory and practice as well as directions for future research are presented.
