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

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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 effectively and efficiently creates the necessary behavior for the creation of superior value for buyers and thus, continuous superior performance for the business’’ (Narver and Slater 1990). A market-oriented service firm can better understand the needs and wants of customers so as to satisfy them more effectively and efficiently than its competitors (Zhou et al 2009). For example, a company called Cinedigm, which launched a network to provide digital cinema delivery in 2005, is a good example of a new service provider using market orientation. With its new service, film makers can deliver movies to theaters over a network, rather than through the traditional method of sending reels of film. This implies that to tap customer’s unfilled needs (e.g., time saving), Cinedigm creates a new service. Meanwhile, to provide better service to Cinedigm, network providers may focus on their competitor’s actions. However, the empirical evidence of the linkage between market orientation and new service performanc... ... middle of paper ... ... 2006). Meanwhile, service firms improved market performance will positively affect their financial performance. This is because higher levels of new service quality and customer satisfaction increase customer loyalty. As such, because loyal customers are less sensitive to price changes, service firms can offer premium prices, leading to a higher profit or market share (Prince and Simon 2009). In addition, the positive reputation that results from higher levels of market performance enables the firm to attract new customers and as a result increase a firms’s profit (Prince and Simon 2009). Thus, H3a: The greater a firm’s incremental service innovation, the greater its market performance. H3b: The greater a firm’s radical service innovation, the greater its market performance. H3c: The greater a firm’s market performance, the greater its financial performance.

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