Journal of Business Research 66 (2013) 10981107

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Journal of Business Research

Designing service quality to survive: Empirical evidence from Chinese new ventures
Y. Lisa Zhao a,, C. Anthony Di Benedetto b, c
a
b
c

Department of Global Entrepreneurship and Innovation, Henry W. Bloch School of Management, University of Missouri-Kansas City, Kansas City, MO United States
Department of Marketing and Supply Chain Management, Temple University, 523 Alter Hall, 1801 Liacouras Walk, Philadelphia, PA 19122, United States
High-Tech Entrepreneurial Marketing, Technische Universiteit Eindhoven, The Netherlands

a r t i c l e

i n f o

Article history:
Received November 2012
Accepted April 2013
Available online 1 April 2012
Keywords:
New service venture
Service quality
New venture survival
Service scalability

a b s t r a c t
The sizeable literature on service success suggests that service quality is a major success factor in that it
drives customer retention and market share; the service provider's ability to capitalize on scale economies
is also an antecedent of success. This literature, however, generally studies established rms and does not
consider the special challenges faced by new service startups. In addition, the potentially complex interactions between service quality dimensions and scalability have not been studied. This study proposes a
model of survival of new service ventures based on the dimensions of service quality and examines the contingency role of scalability, develops research hypotheses, and empirically tests them using a sample of 479
new service ventures in China. The study provides a rich theoretical understanding of the antecedents to new
service venture survival and insight to new service managers who can better allocate their scarce resources to
build quality and scalability effectively.
2012 Elsevier Inc. All rights reserved.

1. Introduction
Services are the dominant economic sector in most industrialized
nations. About 80% of the U.S. gross domestic product comprises services. GNP percentages of 70% or higher are seen throughout Western
Europe as well as in Canada, Japan, Australia, and elsewhere; other
countries that have lagged behind, such as China and India, are rapidly
increasing their investments in service infrastructure (Bitner & Brown,
2008). Due to the signicant contribution of service to the global economy, service innovation has become high-priority for many rms, and
will continue to be important well into the future (Jana, 2007). The
Organization for Economic Cooperation and Development recently
identied the need for more service innovation in order to boost the
productivity of the service sector (OECD, 2005).
This unprecedented growth in the service sector has encouraged
entrepreneurs to initiate new service ventures and to face the associated
risks (Bitner & Brown, 2008). However, new ventures face signicant
obstacles relative to larger and well-established competitors: they lack
experience and reputation, and are very likely to lack nancial resources
(Williamson, 1985). Due to these challenges, new ventures are known
to have a low survival rate (Dunne, Roberts, & Samuelson, 1989;
Headd, 2003; Shook, Priem, & McGee, 2003). In a recent study of over
11,000 new technology ventures established between 1991 and 2000
in the U.S., Song, Podoynitsyna, van der Bij, and Halman (2008) nd
Corresponding author at: Marketing Department, University of MissouriKansas
City, Bloch School, 5100 Rockhill Road, Kansas City, MO 64110-2499, United States.
E-mail addresses: zhaol@umkc.edu (Y.L. Zhao), Anthony.dibenedetto@temple.edu
(C.A. Di Benedetto).
0148-2963/$ see front matter 2012 Elsevier Inc. All rights reserved.
doi:10.1016/j.jbusres.2012.03.006

that only about 4000 rms (36%) with more than ve full-time employees had survived after 4 years. After the fth year, the survival rate
fell further to below 22%, leaving fewer than 2500 surviving rms in
the sample.
Although there is a large literature that investigates the factors leading to service success, academic study of service development and management continues to lag behind manufactured-goods research (Hauser,
Tellis, & Grifn, 2006) and, according to Jim Spohrer, director of service
research at IBM's Almaden Research Center, service management remains relatively poorly understood (Spohrer, Maglio, Bailey, & Gruhl,
2007; Metters & Marucheck, 2007).
Service quality is an important differentiator in a competitive business environment, and a key driver to rm performance (Parasuraman,
Zeithaml, & Berry, 1985, 1988; Parasuraman, Berry, & Zeithaml, 1991;
Zeithaml, Berry, & Parasumaran, 1996). Providing excellent service quality is critical to customer satisfaction and retention, and in turn to market
share growth and protability (Fornell & Wernerfelt, 1987; Buzzell &
Gale, 1987; Fornell, Johnson, Anderson, Cha, & Bryant, 1996; Anderson,
Fornell, & Lehmann, 1994; Piccoli, Brohman, Watson, & Parasuraman,
2004; Escrig-Tena & Bou-Llusar, 2005).
Generally accepted dimensions of service quality from the frequently
cited SERVQUAL scale include tangibles, reliability, responsiveness, assurance, and empathy (Parasuraman et al., 1988). Numerous studies
conrm that these ve service quality dimensions affect the service provider's performance (e.g., Parasuraman et al., 1991; Anderson et al.,
1994; Easton & Pullman, 2001). Another important driver of service performance is its level of service scalability, dened as the service provider's ability to expand its initial concept and scope such that it can
reach a larger market-space and achieve scale economies (Bharadwaj,

Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

Varadarajan, & Fahy, 1993; Berry, Shankar, Parish, Cadwallader, & Dotzel,
2006).
However, most of these studies examine established rms. Although some literature specically studies service offers by new ventures and nds that excellent service quality helps these ventures
build corporate reputation (Fombrun, 1996; Walsh & Beatty, 2007),
no study to date has attempted to link the new service venture's ability
to deliver quality service to its likelihood of survival. None of these studies addresses the issue of how a small-sized, resource-poor new venture
can compete or even survive in the marketplace. Specically, a new
venture is unlikely to have the necessary resources to invest in all ve
dimensions of quality, and it is unclear how these should be prioritized
such that the scarce resources are allocated to increase performance
and maximize the chances of survival.
Additionally, while some new service ventures may seek to establish successful niche positions and are unconcerned about pursuing
scale economies, the ability to achieve economies of scale may be
quite important to many new ventures. Scalability may be one of
the most important ways for a small, new service provider to increase
efciency, reduce costs, and ultimately provide added value for its
customers. Nevertheless, the extent to which scalability affects the
service quality dimensions is still not understood. Considering that
some services are by denition more scalable than others, it is possible
that some dimensions of quality are more important in services where
scalability is easy to attain, while others are more important in cases
where economies of scale are difcult to achieve. This issue has received
no research interest so far, despite its importance to service providers
seeking how best to allocate their nancial resources across quality
dimensions.
Service quality involves outcomes (what the customer actually
receives) and the process (how the service is received) (Parasuraman
et al., 1985). Although service quality measures customer satisfaction
with a service actually delivered, managers of ventures must understand customer expectations, design the materials and facilities and
train employees such that customers' expectations are met. The
research objectives of this study are to investigate how the service
quality design of a new venture is linked to its survival, to assess
the relative impacts of each dimension of service quality, and to assess the contingency role of scalability on the service quality dimensions. The study builds a conceptual model based on the SERVQUAL
literature and adopts the ve SERVQUAL dimensions of service quality (Parasuraman et al., 1988). The research assesses the contingency
role of scalability by determining its interaction with each of the
service quality dimensions. The study develops research hypotheses
from the conceptual model, validates the SERVQUAL scale, and tests
the hypotheses using a sample of 479 new service ventures based in
China.
The Chinese market is undergoing economic reform, and small business initiatives are increasing rapidly in China. The Chinese economy is
currently the second largest in the world, and China is second after the
U.S. in terms of value of services produced (The World Factbook,
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.
html). Yet China is still in the process of transitioning from a planned to
a market economy, and the government continues to maintain signicant ownership positions in many key rms (Liu, Luo, & Shi, 2003). A
better understanding of how service quality affects service venture
performance can potentially be gained by generalizing and adapting
these models, developed in Western economies, to the Chinese business
environment.
The theoretical contribution of the results is a greater conceptual
understanding of how service quality affects the survival of small,
new service ventures and how scalability can magnify the positive
effects of service quality on new venture survival. The results also
provide insight to new service managers who can allocate their scarce
resources to build quality and scalability in the most effective manner,
such that they remain viable despite their limited resources.

1099

2. Theoretical framework
Customer satisfaction is theorized to be related to business performance. According to the extant literature, increased customer satisfaction leads to more positive customer word-of-mouth, higher levels of
customer loyalty and repeat purchase intentions, and, ultimately, improved business performance (Anderson et al., 1994; Anderson,
Fornell, & Rust, 1997; Fornell, 1992; Gremler & Gwinner, 2000). Empirical studies conrm that customer satisfaction, as measured by standard
scales (e.g., Fornell et al., 1996; Ittner & Larcker, 2003), is signicantly
related to business performance metrics (Morgan & Rego, 2006). Due
to differences between the marketing of services versus the marketing
of tangible goods, in particular the importance of the customer's direct
encounter and interaction with service personnel, a service is evaluated
not only by what customers receive but also the manner in which the
services are received (Parasuraman et al., 1985). Service quality measures how well the service delivered matches customer expectations,
and it takes such things as materials, facilities and personnel into
account. Service quality is an important driver of the level of customer
satisfaction and also of the customer's expectation of the service encounter (Parasuraman et al., 1985).
Several studies in the literature dene and operationalize service
quality (e.g., Cronin & Taylor, 1992, 1994; Wolnbarger & Gilly,
2003). Parasuraman et al. (1985) represent service quality as a combination of discrete elements; while their original version included
as many as ten elements, the most common conceptualization of service
quality comprised ve dimensions, all highly correlated with service
performance (Zeithaml et al., 1996). The ve components of service
quality are: tangibles (the appearance of the new venture's physical facilities, equipment, employees, printed matter, and so forth), reliability
(the new venture's capability to perform the service accurately and
dependably), responsiveness (a willingness to work with customers
and provide prompt service), assurance (knowledge and courtesy of
front line employees; their ability to inspire trust and condence), and
empathy (the ability to provide caring, individualized attention to customers) (Parasuraman et al., 1988, 1991). Parasuraman et al. (1988)
also develop and validate the SERVQUAL scale, which assesses customer
perceptions of a service provider's performance on all of these dimensions. If low levels of customer satisfaction are identied, this scale
can be used to diagnose the weak points and identify where service personnel training must be focused to boost customer satisfaction.
There is controversy about the suitability and generalizability of the
SERVQUAL scale to different contexts, in particular whether it generalizes
across different kinds of services (Babakus & Margold, 1992; Van Dyke,
Prybutok, & Kappelman, 1999; Dabholkar, Shepherd, & Thorpe, 2000)
or across different countries (Donthu & Yoo, 1998; Mattila, 1999; Zhao,
Bai, & Hui, 2002; Lai, Hutchinson, Li, & Bai, 2007; Carrillat, Jaramillo, &
Mulki, 2007). Other studies raise similar generalizability issues or other
objections related to the use of SERVQUAL (Carman, 1990; Babakus &
Boller, 1992; Smith, 1995; Silvestro, Fitzgerald, & Johnston, 1992).
In order to reect different business or cultural settings, the
SERVQUAL scale is often adapted when applied in international studies
(Kettinger & Lee, 1994; Dabholkar et al., 2000) or in studies across multiple types of service industries (Dabholkar, Thorpe, & Rentz, 1996).
Nevertheless, numerous studies (including some international ones)
conrm that the ve SERVQUAL dimensions affect the service provider's
business performance (e.g., Parasuraman et al., 1991; Anderson et
al., 1994; Easton & Pullman, 2001; Piccoli et al., 2004; Escrig-Tena
& Bou-Llusar, 2005; Lai et al., 2007), suggesting that the SERVQUAL
is a predictor of service performance with pragmatic validity. Performance measures include market growth, protability, market share,
and the ability to charge premium prices (Zeithaml et al., 1996 summarizes this literature).
Although service quality measures customer satisfaction with a
service, it is important for new venture managers to understand the
impact of service quality on new venture survival, and to design

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Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

materials and facilities and to properly train the employees so as to

meet the customer expectations. Consistent with the Cox proportional
hazard models (Cox, 1972) for survival analysis, the following sections
develop research hypotheses linking the service quality dimensions to
a new service venture's failure hazard, which is the odds that a new service venture would fail at a given time.

2.1. Direct effects of service quality dimensions on new service venture

failure hazard

a service provider high on this dimension has the ability to inspire

trust, condence, and a sense of security in customers (Parasuraman
et al., 1988; Zeithaml et al., 1996). A perception that the front line employees are not expending the required amount of effort is related to
low customer satisfaction and switching behavior (Keaveney, 1995;
Mohr & Bitner, 1995). The new service provider lacks the nancial resources to offer training to its employees and may nd it difcult to
compete with larger, more established rms on this dimension. As
seen above, lacking an established reputation, the new service venture
may suffer more from customer switch out than larger competitors.
Thus:

The rst ve hypotheses express the direct impacts of the dimensions

of service quality on new service venture failure. Since services are intangible, the customer cannot easily evaluate them and may not be able to
distinguish them easily from competitors (Lovelock & Wirtz, 2007, Ch. 1
and Ch. 15). Since the new venture, by denition, has little or no brand
equity, loyalty, or built-up trust among customers, it cannot fall back on
its reputation to differentiate its service; furthermore, its limited size
and available nancial resources may make it difcult or impossible to
achieve high enough levels of promotion or advertising to overcome its
lack of recognition. Consequently it must work especially hard to provide
tangible cues of the service's superiority, such as physical facilities, quality
equipment, visual attractiveness of printed material, or even appearance
of personnel (Parasuraman et al., 1991). Tangible evidence of quality is
important for services as they leave lasting impressions in the customer's
mind (Bitner, Brown, & Meuter, 2000); they are considered one of the
most important customer touchpoints in managing the customer experience (Berry, Seiders, & Grewal, 2002). Lacking tangible evidence of quality, it would be difcult even for a large rm to communicate quality; it
may be fatal for a small, resource-poor new venture. Thus:

The empathy dimension refers to a new venture's capability to provide caring, individualized attention to its customers (Parasuraman et
al., 1988, 1991; Zeithaml et al., 1996). The service provider stresses
customer convenience (such as convenient operating hours of the business) and a keen understanding of customers' needs. Service encounters often entail personalized face-to-face interactions between front
line employees and customers, much more so than is the case for
manufactured goods, and the social content of these interactions has
been shown to signicantly affect customer perceptions of overall
service quality (Mittal & Lassar, 1996). Indeed, the behavior of front
line employees is also considered a touchpoint of the customer experience that must be carefully managed (Berry et al., 2002). Failing to
establish an empathetic attitude among its front line employees, the
new service venture will nd it hard to survive in the face of competition. Thus:

Hypothesis 1a. An increase in the tangible quality dimension is related

to a decrease in the failure hazard faced by the new service venture.

Hypothesis 1e. An increase in the empathy quality dimension is related

to a decrease in the failure hazard faced by the new service venture.

Reliability refers to the ability to perform the service right the rst
time when required by the customer, which also communicates quality (Parasuraman et al., 1988, 1991; Zeithaml et al., 1996). A new service venture startup may not have access to, or the ability to afford,
sophisticated controls for operational inputs and outputs that minimize variability and increase service productivity; and may be less
able to shield customers in the case of service failure and/or quickly implement a contingency plan to make up for poor initial service performance (Lovelock & Wirtz, 2007, Ch. 1 and Ch. 15). The small new
venture then must work at building reliability into its service offering,
as well as develop effective contingency planning, so that it has a chance
to compete against larger, better-equipped rms. Thus,
Hypothesis 1b. An increase in the reliability quality dimension is related
to a decrease in the failure hazard faced by the new service venture.
The responsiveness dimension of service quality is related to the service provider's willingness to assist customers and provide prompt,
helpful service (Parasuraman et al., 1988, 1991; Zeithaml et al., 1996).
Again, the larger rm is generally more able to afford front line employee training such that the customer receives quick, knowledgeable
service at all times, and also is treated in a helpful manner by the employee. Lacking a positive reputation, familiarity, or brand loyalty, and
hampered by smaller size, a perceived lack of responsiveness will likely
hurt the new service venture provider more than the larger rm as the
customer has little reason to return if dissatised. Thus:
Hypothesis 1c. An increase in the responsiveness quality dimension
is related to a decrease in the failure hazard faced by the new service
venture.
The assurance dimension implies that the service provider's front
line employees are credible, trustworthy, competent, and courteous;

Hypothesis 1d. An increase in the assurance quality dimension is related to a decrease in the failure hazard faced by the new service venture.

2.2. Moderating effects of scalability

Service research studies (e.g., Parasuraman et al., 1991; Bharadwaj
et al., 1993) dene service scalability as the service provider's ability
to expand the initial scope of the business. Having a scalable business
model is quite obviously advantageous for manufactured goods, perhaps less so for services. Services are often people-intensive, which
makes it difcult to achieve scale advantages (Barber & Strack,
2005; Berry et al., 2006). Nevertheless, there are opportunities for
service providers to achieve scalability. This can be done, for example,
by becoming more capital-intensive (eBay can handle a huge growth
of customers without having to hire too many new employees by
investing in its computer technology), or by transferring some of the
workload to the customer (Hertz #1 Gold card members can avoid
the customer service counter and go right to their rental car) (Quinn
& Gagnon, 1986; Berry et al., 2006). Other recommendations for achieving scalability include: scaling down and outsourcing (Quinn, Doorley,
& Paquette, 1990); adopting new technology or automation (Quinn &
Gagnon, 1986); or adopting quality-control and standardization practices (Upah, 1980).
If a new service venture is able to overcome barriers to scalability, and achieve economies of scale, it will be able to increase
production and market share without unduly increasing its costs.
In fact, scale economies may be especially important to the survival
of a new service venture, since its initial service output is by denition very small and it must ramp up production substantially
(without escalating costs) to compete against larger competitors.
If a new service venture can increase its scalability while improving
service quality, it should further reduce the likelihood of failure.
This effect would be reected in a signicant moderating effect,
by which each service quality dimension's ability to reduce the

Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

failure hazard will be magnied. Stated as moderating effect hypotheses, then:

Hypothesis 2. An increase in scalability increases the negative effect
of the (a) tangibility, (b) reliability, (c) responsiveness, (d) assurance,
and (e) empathy service quality dimensions on the failure hazard.

3. Methodology
3.1. Study measures
The SERVQUAL scale developed by Parasuraman et al. (1988) and
validated extensively in the marketing and management literatures
(e.g., Parasuraman et al., 1991) was adopted for this study. Also, case
studies were conducted with executives from two rms (in engineering and software) located in Guangzhou, two rms (in computer and
electronics parts) located in Shanghai, and four rms (in technical research and testing, programming, computer and computer peripheral
equipment retailing, and computer maintenance and repair) located
in Putian. The results conrm that the SERVQUAL measures are appropriate for measuring service quality in China and that the executives
had no trouble in relating their experience to the measurements.
For this study, rather than measuring customer perceptions of
service quality, the level of service quality as designed by the venture
was measured in terms of materials, facilities, and personnel. Respondents were asked to describe the extent to which their companies
have the features described by the statements, using 17 Likert-type
scales (1 = strongly disagree that the company has that feature, 7 =
strongly agree that the company has that feature). (The questionnaire
appears in Appendix A).
The tangibles' scale (TANG) had four items, rating whether the
new service venture used modern-looking equipment, had visually
appealing facilities and materials associated with the services, and had
neat-appearing service delivery people. The reliability scale (RELI) contained ve scale items that measured if the service venture delivered
services on time, and if it showed a sincere interest in solving the
customer's problem, kept promises to customers, and performed the
service right the rst time and at the promised time. Four items of
the responsiveness scale (RESP) assessed the new service venture's
willingness to help customers, giving prompt services and responses
to customers, and telling customers exactly when the service will be
performed. Four items of the assurance scale (ASSU) rated the new
service venture's ability to instill condence in customers, its knowledge to answer customer questions, its courtesy, and its ability to
make customers feel safe in their transactions. The empathy scale contained ve items measuring the new service venture's ability to give
customers their complete attention, to provide convenient operating
hours, to understand customers' specic needs, to give customers individual attention, and to always have the best interest of the customers.
Finally, the ve items of the scalability scale (SCAL) rated the new service venture's opportunities for exploring and achieving scale economies, the extent to produce equipment-based and technology based
rather than people-based services, and the ability to centralize service
production facilities and critical equipment-intensive activities.
3.2. Data collection
The initial sample consisted of lists of the new ventures in service
industries provided by the Bureau of Industry and Business (ofcial
Chinese government business registration and management agency)
in three Chinese cities: Guangzhou, Shanghai, and Putian. These lists
consisted of 1754 new service ventures established in 2001 with
legal registration in three service industries: 1) engineering, professional, scientic, technical, research and testing services; 2) computer
and software related services (programming, computer processing,

1101

data preparation and processing, information-retrieval, computer

facilities management, computer rental and leasing, computer maintenance and repair), and 3) wholesale trade and retail (electronic
parts and equipment, home appliance, computer and computer peripheral equipment, and software).
Data were collected from the founders of the new service ventures
using a mail survey. Service quality data were collected from the
founders of the ventures instead of consumers for two reasons. First,
new ventures mostly likely do not have a customer base at the time
of founding. It is, therefore, almost impossible to collect customers'
perceived service quality of a new venture. It is nevertheless important for new venture founders to understand customer expectations,
and to design the service to meet these expectations. Second, collecting
data from founders conveys information about the founders' intended
service quality, which is information that cannot be obtained from
customers.
To increase the response rate, a supporting letter from the Bureau of
Industry and Business was obtained. The rst mailing packet included a
personalized letter to the founder of the company, the government
endorsement letter, a business card, a copy of the survey, and a selfaddressed, individualized envelope with postage. After 2 weeks, a
follow-up letter to each of the companies was sent. After 4 weeks, a second follow-up letter was sent with a complete package to each of the
companies that had not responded. In some cases a third follow-up
letter was sent. In the end, completed questionnaires from 479 rms
were received, representing a response rate of 27%. The industries included in the nal data are: 153 new ventures in industry 1 (engineering, professional, scientic, technical, research and testing services);
160 new ventures in industry 2 (computer and software related services); and 166 new ventures in industry 3 (wholesale trade and retail).
In addition, characteristics about the founding team were also
obtained, as previous studies show that new ventures with strong
founding teams can generate strong early sales and can sustain these
sales through time (Eisenhardt & Schoonhoven, 1990). Similarly, a
awed new venture team lacking key skills will nd it difcult to sustain performance through time (Kamm, Shuman, Seeger, & Nurick,
1990). A review of the literature on founding teams (Ancona &
Caldwell, 1992; McGee, Dowling, & Megginson, 1995; Marino & De
Noble, 1997; Murray, 1989) suggested ve potentially important
founding team variables: team size (number of founding members),
years of startup experience, years of industry experience, years of marketing experience, and years of service design experience. These were
collected as additional control variables.

3.3. New venture survival data collection

After the initial survey data collection, each company's survival
status (health check) was tracked every December through the
Chinese Bureau of Industry and Business. If a rm was out of business
at the time of the health check, the company was classied as dead
in the calendar year and the life of the rm was recorded. If a rm was
still operating at the time of the health check, the rm was classied
as alive and life of the rm was not recorded. If a company had
merged with or sold to another company at the time of the health
check, the company was classied as censored and the life of the
rm is recorded. The life of a rm is the number of years the rm operated as an independent business. For example, if a rm was founded in
2001 and was found dead or censored at the data collection in
December 2002, the life of the company is 1 year. In 2007, the last
year of health checking, 105 rms were still operating as independent
businesses, 56 rms had merged or sold either that year or before that
year, and 318 rms had died either that year or before that year. For a
rm that was still operating at the conclusion of our data collection,
the rm is classied as censored and life of the rm is recorded (as
6). Table 1 displays the details of the survival data.

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Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

Table 1
Company survival data (sample size = 479).

Table 2b
Conrmatory factor analysis results.

Year

Number of
rm failed

Number of rms
sold or merged

Number of rms
operating

Factor

2001 (founding year)

2002
2003
2004
2005
2006
2007
At the end of the study
At the end of the study
percentage

X
110
72
44
21
29
42
318
66.39%

X
2
17
6
1
4
26
56
11.69%

479
367
278
228
206
173
105
105
21.92%

Scalability
(SCALE)

4. Data analyses and results

4.1. Measurement validation
First, an exploratory factor analysis, was performed, generating six
dimensions with each item loaded to the right construct as shown in
Table 2a. Using standard procedures as recommended by Anderson
and Gerbing (1988), the SERVQUAL and scalability scale items were further validated using a conrmatory factory analyses (CFA). Table 2b
reports the results from CFA.
The unidimensionality and convergent validity were established
by factor loadings, the overall t of the measurement model, the standardized residuals, and Cronbach alpha reliabilities suggested by
Gerbing and Anderson (1992) and Jreskog and Srbom (1999). All
items have signicant (at pb 0.01) loadings on their expected constructs.
The overall t indices for the measurement model are: 2 = 803.5078;
df= 300; GFI= 0.8925; CFI =0.9247; RMSEA=0.0593. 90% of the elements of standardized residual covariance matrix are less than 2.58.
The smallest alpha is 0.72.
Discriminant validity was examined using two methods: chi-square
difference tests and comparing AVE with shared variance (Gerbing &
Anderson, 1992; Fornell & Larcker, 1981). The chi-square difference
Table 2a
Exploratory factor analysis loadings.

SCALE4
SCALE1
SCALE2
SCALE5
SCALE3
RELI1
RELI3
RELI5
RELI2
RELI4
EMPA2
EMPA1
EMPA3
EMPA4
EMPA5
TANG4
TANG1
TANG3
TANG2
RESP4
RESP1
RESP2
RESP3
ASSU1
ASSU2
ASSU3
ASSU4

Scalability

Reliable

Empathy

Tangible

Responsive

Assurance

0.73
0.70
0.67
0.66
0.66
0.04
0.04
0.01
0.01
0.01
0.23
0.14
0.15
0.17
0.14
0.12
0.15
0.14
0.10
0.22
0.24
0.31
0.15
0.11
0.08
0.20
0.03

0.05
0.00
0.08
0.04
0.01
0.84
0.77
0.71
0.69
0.63
0.18
0.09
0.08
0.02
0.17
0.08
0.02
0.17
0.03
0.10
0.02
0.01
0.04
0.03
0.03
0.03
0.14

0.10
0.32
0.11
0.23
0.25
0.05
0.02
0.11
0.11
0.13
0.76
0.67
0.65
0.61
0.54
0.12
0.14
0.05
0.11
0.17
0.19
0.16
0.05
0.17
0.25
0.03
0.16

0.12
0.12
0.16
0.13
0.10
0.03
0.04
0.05
0.15
0.13
0.07
0.10
0.08
0.09
0.14
0.83
0.80
0.71
0.70
0.15
0.16
0.16
0.08
0.11
0.09
0.00
0.04

0.17
0.22
0.21
0.20
0.22
0.00
0.12
0.01
0.04
0.14
0.12
0.25
0.04
0.08
0.13
0.04
0.21
0.09
0.16
0.86
0.78
0.76
0.42
0.05
0.13
0.12
0.16

0.12
0.08
0.09
0.22
0.11
0.05
0.02
0.01
0.03
0.10
0.14
0.13
0.06
0.22
0.21
0.02
0.07
0.11
0.07
0.01
0.02
0.00
0.17
0.71
0.63
0.54
0.51

Note: orthogonal rotation was used; the bold numbers indicate factor loadings
associated with the items load to the construct.

Items

Standardized
factor loading

Factor

SCALE1 0.8401
Tangibles
SCALE2 0.7537
(TANG)
SCALE3 0.7627
SCALE4 0.6744
SCALE5 0.7289
Reliability RELI1
0.8691
Responsiveness
(RELI)
RELI2
0.7066
(RESP)
RELI3
0.8126
RELI4
0.6049
RELI5
0.6555
Empathy
EMPA1 0.7479
Assurance
(EMPA) EMPA2 0.9075
(ASSU)
EMPA3 0.5851
EMPA4 0.6390
EMPA5 0.6573
Measurement model t summary
2 = 803.5078; d.f. = 300; 2/d.f. = 2.6784
GFI = 0.8925; CFI = 0.9247; RMSEA = 0.0593
Pairwise 2 test: 2 > 316; d.f. = 1; p b 0.0001

Items

Standardized
factor loading

TANG1
TANG2
TANG3
TANG4

0.9401
0.7569
0.6272
0.7553

RESP1
RESP2
RESP3
RESP4

0.9120
0.8957
0.4160
0.8966

ASSU1
ASSU2
ASSU3
ASSU4

0.7709
0.7283
0.5188
0.5480

test compares two models. The rst model allows the two factors to covary. The second model collapses the two factors. The discriminant validity is demonstrated if the chi-square value is signicantly lower for the
rst model than for the second model. Pair-wise tests for each pair of
constructs were carried out. All of the tests show signicant chi-square
differences (smallest 2 difference=316) at p b 0.001.
Discriminant validity was further investigated by comparing the
AVE with shared variance between different constructs. Comparing
the square root of AVE (displayed in Table 3) with correlation coefcients (displayed in Table 3) reveals that the smallest square root of
AVE (0.65) is bigger than the largest correlation coefcient (0.48).
Therefore, the discriminant validity is further conrmed (Fornell &
Larcker, 1981).
After establishing unidimensionality, convergent validity, and discriminant validity, each construct was measured by the average of the
items that are loaded to the construct. Table 3 presents the basic statistics of the constructs and founding team variables.
4.2. Survival analysis
This study applies the Cox proportional hazard model to the survival analysis of new ventures. The explanatory variables are the
ve dimensions of a new venture's service quality and service scalability. The study also includes industry dummies and ve founding
team variables as control variables. Since all rms that fail during a
particular year are recorded as failing at the same time (even though
in reality they will have failed at different times during the year), ties
may result due to imprecise recording. The study used the exact
method to handle ties (Kalbeisch and Prentice, 1980). The exact
method includes all possible orders of failures in the semi-likelihood
function. For example, if three rms (A, B, and C) failed during a particular year, the semi-likelihood function would include orders A-B-C,
A-C-B, B-A-C, B-C-A, C-A-B, and C-B-A (see Allison, 1995 for details for
Cox regression and the Kalbeisch and Prentice method).
4.3. Models, results and discussion
Table 4 presents the estimates from four Cox proportional regression
models. Service quality variables and scalability are centered around the
means. Model 1 includes only industry dummies as the covariates;
Model 2 adds the ve founding team variables; Model 3 adds ve service
quality dimensions; and Model 4 adds scalability and two interaction
terms.

Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

1103

Table 3
Means, standard deviation, construct reliability, and correlations.

Note: 1. All correlation coefcients are signicantly different from zero at p = 0.05 except those that are denoted with ns. 2. The bold diagonals in the selected boxes are square roots
of average variance extracted (AVE) from the conrmatory factory analysis.

The study tested the interactions of scalability with all ve service

quality dimensions, and for the simplicity of presentation, Model 4
only includes the two interaction terms that are signicant: interaction
between scalability and tangible and interaction between scalability
and responsiveness.
Chi-square (2) tests on the likelihood ratios suggest that Model 2
ts the data signicantly better than Model 1; Model 3 ts the data signicantly better than Model 1 and Model 2; Model 4 (the full model
presented in Table 4) ts the data signicantly better than other
models. Therefore, Model 4 is retained and all remaining discussion is
drawn from the Model 4 results.
The regression coefcients shown in Table 4 are Cox model coefcients that estimate the hazard ratio (or conditional odds of failure): a
negative coefcient indicates a decrease in failure rate while a positive coefcient indicates an increase. Also shown in Table 4 are hazard
ratios. The value (1 hazard ratio) can be interpreted directly as the
change in the odds of survival related to a one-unit increase in the
covariate (the direction of the change can be inferred from the sign
of the regression coefcient).

The Model 4 results in Table 4 show no signicant industry effects

(none of the industry regression coefcients is signicant at the 0.05
level). Only one of the founding team variables, founding team industry
experience, signicantly affected new service venture survival (coeff. =
0.03, signicant at p b 0.01, hazard ratio = 0.97). That is, for each additional year of industry experience, there was a (10.97) = 3 percent decrease in the odds of failure.
Of the ve service quality dimensions, four were signicantly related
to new service venture survival when the scalability is at the mean level
(4.23). As Table 4 indicates, the coefcients for reliability, responsiveness, assurance, and empathy are 0.12, 0.24, 0.22, and 0.18 respectively, all signicant at p b 0.01 (the coefcient for tangibles is not
signicant). The corresponding hazard ratios are 0.89, 0.79, 0.81 and
0.84 respectively. Using the (1 hazard ratio) calculation as above,
one can interpret these ndings to mean that a one-unit increase in reliability, responsiveness, assurance, and empathy is related to an 11%,
21%, 19%, and 16% decrease in the odds of failure (or increase in odds
of survival) respectively. These ndings support Hypothesis 1b, Hypothesis 1c, Hypothesis 1d, and Hypothesis 1e; Hypothesis 1a is not

Table 4
Cox proportional hazard rate regression results.
Model 1
Coef.
Industry 1
Industry 2
Industry 3
Team size
Startup experience
Industry experience
Marketing experience
Service design experience
Scalability (SCAL)
Tangibles (TANG)
Reliability (RELI)
Responsiveness (RESP)
Assurance (ASSU)
Empathy (EMPA)
SCAL TANG
SCAL RESP
2 log likelihoodd

0.30
0.16
0.00

Model 2
Std

1584.35

0.14
0.13

Hazard ratio
0.74
0.86

Coef.
b

0.30
0.07
0.00
0.01
0.06
0.06c
0.02c
0.06c

1482.74c

Model 3
Std

Hazard ratio

0.14
0.13

0.74
0.93

0.06
0.10
0.01
0.01
0.02

1.01
1.07
0.94
0.98
0.94

Model 4

Coef.

Std

Hazard ratio

0.12
0.02
0.00
0.09
0.19
0.04c
0.01
0.02
0.20c
0.06
0.11b
0.16c
0.20c
0.19c

0.14
0.13

0.07
0.11
0.01
0.01
0.02
0.06
0.08
0.04
0.05
0.05
0.06

0.89
0.98

0.92
0.83
0.96
0.99
1.02
0.82
0.94
0.90
0.85
0.82
0.83

1397.21c

Coef.

Std

Hazard ratioa

0.17
0.02
0.00
0.05
0.18
0.03c
0.01
0.01
0.20c
0.03
0.12c
0.24c
0.22c
0.18c
0.09b
0.16c
1376.33c

0.14
0.13

0.07
0.11
0.01
0.01
0.02
0.05
0.08
0.04
0.05
0.05
0.06
0.04
0.04

0.85
0.99

0.95
0.84
0.97
0.99
1.01
0.82
0.97
0.89
0.79
0.81
0.84
1.10
0.85

Note: 2 log likelihood of the model without covariates = 1589.03.

a
1-hazard ratio is the reduction in the odds of failure by one unit increase in the covariate. For example, hazard ratio associated with scalability in model 3 is 0.82, which implies
that one unit increase in scalability leads to (10.82) or 18% reduction in the odds that the venture would fail. If the hazard ratio is smaller than 1, an increase in the covariate leads
to decrease in the odds of failure, and if it is bigger than 1, an increase in the covariate leads to increase in the odds of failure.
b
p b 0.05.
c
p b 0.01.
d
Chi square test was used to compare the models where chi-square for model k = ( 2log likelihood of model k) ( 2log likelihood of model k-1). The model without covariates was used to test the model signicance for Model 1.

Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

1.5

Log Hazard

supported. Similarly, the coefcient for scalability is signicant and

negative (0.20, signicant at p b 0.01), thus a one-unit increase in
scalability is related to an 18% decrease in the odds of failure. (The coefcients in Table 4 are correct assuming all other dimensions are held at
their mean levels).
The results only partially support Hypothesis 2. The model initially
included all ve interactions between scalability and service quality
dimensions. However, three of them were not statistically signicant,
and they were excluded from the nal model. Table 4 shows that two
of the moderation effects are signicant. One signicant moderation
is in an unexpected direction: the interaction between scalability
and tangibles is positive (0.09, signicant at p b 0.05), indicating that
achieving scalability decreases the impact of tangibility on survival.
This nding contradicts Hypothesis 2(a). The other signicant interaction between scalability and responsiveness is negative ( 0.16,
signicant at p b 0.01), which indicates that achieving scalability increases the impact of responsiveness on survival (that is, in reducing
the odds of failure). This nding supports Hypothesis 2(c). No support is
found for the other three moderation hypotheses.
To understand the implications of the signicant moderations,
consider the results shown in Table 5. The Model 4 results showed
that scalability negatively moderating the negative effects of the responsive dimension of failure hazard (i.e., increases the impact of
responsiveness on survival), but positively moderates the negative
effect of tangibles on failure hazard (Also recall that a signicant
main effect of tangibility was not found.). These effects can be better
understood by examining the moderations shown in Table 5. This
table shows that there is a signicant interaction between tangibility
and scalability, so correct assessment of the main effect of tangibility
on failure rate must be done within the context of scalability. At very
low levels of scalability (SCAL = 1 or 2), an increase in tangibles increases the survival odds, but this effect is not found for higher levels
of scalability. To be precise, at SCAL = 1 and 2, a one-unit increase in
tangibility decreases the odds of failure by 28% and 21% respectively.
Thus, it would be more correct to say that the main effect hypothesis
for tangibility, Hypothesis 1a is supported, but only in the case of low
scalability. One possible reason for this nding is that the scalability
scale includes many items that measure whether the service is technology or equipment based, or if the service facilities or activities
can be centralized. When scalability (as measured by these items) is
high, it is possible that there is lower need for customer interaction,
and thus the impact of tangibles is reduced.
Table 5 also provides additional insight into the interaction between scalability and responsiveness. At very low levels of scalability
(SCAL = 1), an increase in responsiveness actually increases failure
odds. In fact, at SCAL = 1, a one-unit increase in responsiveness increases the odds of failure by 32%. At higher levels of scalability
(SCAL = 4 or higher), a signicant positive effect of responsiveness
occurs. At maximum scalability (SCAL = 7), the effect of a one-unit
increase in responsiveness is a 50% increase in survival odds. This
interaction is in the direction hypothesized in Hypothesis 2(c)
(greater scalability increases the positive impact of responsiveness
on survival).
Figs. 1 and 2 present the impacts of tangibles and responsiveness
at different levels of scalability and graphically illustrate these main
and interaction effects discussed above. Adding the signicant interaction effects to the model provides a richer understanding of the

Scale=1
Scale=2

0.5

Scale=3
Scale=4

Scale=5
Scale=6

-0.5

Scale=7

-1
1

Degree of Tangibles
Note: Dashed lines indicate that the slopes are not significant
Fig. 1. Impact of tangibles on failure hazard at different levels of scalability.

2.5
2
1.5
Scale=1

Log Hazard

1104

Scale=2

0.5

Scale=3

Scale=4

-0.5

Scale=5
Scale=6

-1

Scale=7

-1.5
-2
-2.5
1

Degree of Responsiveness
Note: dashed lines indicate that the slopes are not significant
Fig. 2. Impact of responsiveness on failure hazard at different levels of scalability.

effectiveness of each of the service quality dimensions on the odds

of new venture survival rate:
Tangibles if scalability is low, investing in tangibles has a positive
effect on new venture survival. At moderate or high levels
of scalability, it has no effect.
Responsiveness if scalability is low, investing in responsiveness can
have a positive effect on new venture failure. The benets
of investing in responsiveness are only present if scalability
is moderate or high.
Assurance, Empathy, and Reliability each of these has a positive effect
on new venture survival (the magnitudes of these effects are
in the order shown), unaffected by scalability.

5. Discussion and conclusion

Table 5
Decrease in the odds of failure from one unit increase in tangibles or responsiveness at
different level of scalability.
SCAL = 1 SCAL = 2 SCAL = 3 SCAL= 4 SCAL= 5 SCAL= 6 SCAL= 7
TANG
0.28
RESP 0.32

0.21
n.s

n.s
n.s.

n.s.
0.17

n.s.
0.31

n.s.
0.41

n.s
0.50

This study uses the service quality literature and the literature that
supports the cost-saving benets of scalability to develop a model of
how the small new service venture can best allocate its scarce resources.
The established service quality literature indicates that higher performance on all ve service quality dimensions is related to more satised
customers, more customer retention, fewer customer acquisition costs,
and improved performance by the service provider (typically measured

Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

by prot or market share) (Parasuraman et al., 1988; Zeithaml et al.,

1996). In the case of the small, cash-starved and vulnerable new
venture, a salient performance measure, quite simply, is survival. The
research model of this study specically investigates the main effects
of each service quality dimension on survival independently, and also
separately estimates the moderating effect of scalability on each of
these impacts.
This study collects and analyzes new venture survival data from
three industries over a six-year period. Our results make a conceptual
and theoretical contribution to the service quality literature and also
to the new venture literature. Our theoretical contribution is not so
much about survival or performance per se; rather, it is about the
link between service quality and new venture survival. The results
provide a deeper and more detailed understanding of how service
quality affects new service venture survival.
The study also provides managerial insight about how the new
venture should prioritize its limited resources in order to improve
service quality most efciently and to take advantage of scalability.
The study achieves this insight by obtaining our service quality data
not from customers, but from the managers of the rms themselves,
who can then use this information to link the rm's strategy in service
quality delivery to new venture performance.
As would be expected from the SERVQUAL literature, service quality
is important for new ventures to survive the early, perilous years. However, the individual effects of each service quality dimension are different; second, their interaction patterns with scalability are different.
Generally, the results suggest that a monolithic investment in service
quality is not appropriate. Certain dimensions of service quality have
a greater impact on new venture survival than others. A new venture
should strategically locate its scarce resources to the dimensions that
have the biggest impact on its survival. According to our results,
assurance, empathy, and reliability are important for all new ventures
regardless of the ventures' scalability, with assurance being the most
important dimension. However, investing resources in tangibles and
responsiveness does not necessarily increase service venture survival
and can possibly even have adverse consequences.
Further, the analysis of the moderating effects shows that the investment decision is difcult, and that the potential for service scalability
needs to be fully considered to make the optimum investment. For
example, the ndings show that if a new service venture can achieve
scalability with its service offering, it is wise to invest in strengthening
responsiveness, since that dimension is closely related to new service
venture success. Another reason to increase spending on responsiveness is that this dimension often requires fewer nancial resources
than tangibles. Scalability also has other added benets, such as reducing costs of providing the service and increasing revenues per customer.
However, a large investment in responsiveness does not help the
service rm, if it is not capable of exploiting this responsiveness over a
large scale of operations. In the case where scaling up is not feasible,
the new service venture should invest in tangibles rather than responsiveness. That is, a new service provider unable to capitalize on scalability
must nd other ways to increase likelihood of success, since responsiveness seems to be most benecial to service providers who can exploit it
on a large scale. The results show that the best investment in this case is
to build up the tangibility dimension, as this is the most effective way to
increase the perception of quality among its customers.
While previous studies have demonstrated the importance of scalability, this is not always a reachable goal, due to human or nancial resource constraints. In some people-intensive service businesses, service
usage may be very difcult to separate from production, and front line
employees are the primary cost center as well as the creator of customer
value (Barber & Strack, 2005). This might be the case in a medical practice, for example, where the immediate contact with the physician is a
critical part of the service encounter and would be difcult to duplicate
on a large scale (although consultations by phone or internet, or expert
systems built on physicians' expertise and knowledge, allow a certain

1105

degree of scalability). A good example of a rm that has been able to

build scalability despite its people-intensiveness is the tax accountancy
H&R Block. Not long ago, growth into different geographic regions required hiring and training new staff, but more recently it has complemented traditional growth with TaxCut, a tax preparation software
that allows users to do their own taxes (Barber & Strack, 2005). By contrast, other services such as fast food franchises or online services can
more easily achieve scale economies. The research ndings presented
here provide guidance to the service provider on how best to invest in
building specic dimensions of service quality, based on how scalable
their service is.
The study has several limitations. The research examines new service providers in only three service industries, and only one country (indeed, only a limited number of cities and regions within a very large and
diverse country). It is unknown how well the ndings generalize to
other services or geographic locations. Previous studies also have
found that environmental condition also affect new venture performance. It is not clear how the service quality dimensions affect new
service venture survival under different environmental conditions.
Still, by constraining the study to one country, the analysis is not confounded by the presence of cross-national or cross-cultural differences
which may limit generalizability of the SERVQUAL scale (Babakus &
Margold, 1992; Donthu & Yoo, 1998; Mattila, 1999; Van Dyke et al.,
1999; Dabholkar et al., 2000). Previous studies have been equivocal as
to how well SERVQUAL generalizes to the Chinese context (Zhao et al.,
2002; Lai et al., 2007); the results of this study support the ndings of
Lai et al. (2007) who found that SERVQUAL was useful in the Chinese
cultural context.
Regarding generalizability to other service contexts, in several
studies of retail services, fast food services, and others, the original vefactor SERVQUAL scale did not replicate (see discussion in Dabholkar et
al., 1996). This may be because the SERVQUAL scale was primarily derived for pure services as opposed to services with an important
product component such as retail. As Dabholkar et al. (1996) notes, dimensions such as quality and availability of the merchandise may be
important drivers of retail service quality, though these drivers are
perhaps not well captured by the SERVQUAL dimensions. For these reasons, several researchers have made adaptations to SERVQUAL before
administering this scale (see Carman, 1990; Dabholkar et al., 2000). In
the three specic service industries we studied, this study did not nd
evidence that such adaptation was necessary, as the original ve dimensions replicated. Nevertheless, it is possible that the ndings would not
replicate to other service industries, especially if major adaptations
would need to be made to the SERVQUAL scale.
There may also be many other direct or moderating factors that may
inuence the survival rate of new ventures (Dabholkar et al., 1996) and
that the model can only explain a certain percentage of new venture
survival rates. Different kinds of data and different modeling techniques
may provide complementary insights. For example, one possible research direction would be to include archival macro-economic data
for each time period, and examine the potential moderating roles they
might play in new venture survival. These are all promising areas for
future research.
Acknowledgment
The authors thank Michael Song for contributing to the theoretical
model, research design, and data collection for this research project.
Appendix A. Research variables and study measures
Notes: The statements were in random order in the survey. The
construct names and variable labels were not part of the survey.
Service quality: adopted from Parasuraman et al. (1991).
Listed below are some statements which may be related to your company's service quality during the rst year of the operation. For each

1106

Y.L. Zhao, C.A. Di Benedetto / Journal of Business Research 66 (2013) 10981107

statement, please indicate the extent to which you believe your company
has the feature described by the statement. Please indicate your degree of
agreement or disagreement by circling a number from one (1) to seven
(7) on the scale to the right of each statement. Here: 1 = strongly disagree that your company has that feature, 7 = strongly agree that
your company has that feature. You may circle any of the numbers in
the middle that show your degree of agreement or disagreement. There
are no right or wrong answers. All we are interested in is a number
that best shows your perceptions.
From the beginning of our new venture, our founders insist that,

Tangibles (TANG): Cronbach alpha = 0.87.

TANG1 We have modern-looking equipment in all service offering facilities.
TANG2 The service offering facilities are visually appealing.
TANG3 Materials associated with the service (such as pamphlets or statements)
are visually appearing
TANG4 Our service delivery people are neat-appearing.
Reliability (RELI): Cronbach alpha = 0.85.
RELI1
When we promise to do something by a certain time, we do so.
RELI2
When our customers have a problem, we show a sincere interest in
solving it.
RELI3
We perform the service right the rst time
RELI4
We provide the service at the time we promise to do so.
RELI5
We insist on error-free records.
Responsiveness (RESP): Cronbach alpha = 0.84
RESP1 We tell customers exactly when the service will be performed.
RESP2 We are always willing to help customers.
RESP3 We are never too busy to respond to customer requests.
RESP4 We give prompt service to customers.
Assurance (ASSU): Cronbach alpha = 0.73
ASSU1 We do everything possible to instill condence in customers.
ASSU2 Our employees have the knowledge to answer customer questions.
ASSU3 We are consistently courteous with customers.
ASSU4 We do everything possible to ensure that our customers feel safe in their
transactions with us.
Empathy (EMPA): Cronbach alpha = 0.83
EMPA1 We have employees who give customers personal attention.
EMPA2 We give customers individual attention.
EMPA3 We have operating hours convenient to our customers.
EMPA4 We always have the customers' best interests at heart.
EMPA5 We understand the specic needs of our customers.
Scalability, new items developed from Bharadwaj et al. (1993), Cronbach
alpha = 0.87
SCAL1 Related to other services in our industry, opportunities for exploring scale
economies of our services are great.
SCAL2 Related to other services in our industry, our services are more
equipment-based service than people-based service.
SCAL3 We can easily achieve economies of scale by centralizing our service
production facilities.
SCAL4 We can easily achieve economies of scale by centralizing certain critical
(e.g., equipment-intensive) activities.
SCAL5 Related to other services in our industry, our services are more
technology-based service than people-based service.

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