Service Product Development for Sustainable Competitive Advantage; The Use of the

Sources – Position - Performance Model

Tony Garrett, Brendan Gray, Department of Marketing, University of Otago

Sheelagh Matear, Lincoln University

Abstract

The results of research into the competitiveness of service firms using the Sources –
Performance – Position (SPP) model suggests that a culture of innovation is more important
to success than the actual innovation process. Top innovators are more market-oriented, invest
more in branding and take more risks. In order to sustain their sources of competitive
advantage, these firms also tend to reinvest profits in personnel skills training. This paper
reports on the findings of a two stage study survey and follow-up interviews with senior
managers of a broad array of service providers, and discusses the implications for services
innovation practices and for future research.

Introduction

This study extends the state of the current new study development (NSD) research by
examining innovation within the greater firm context. This is important as there is
recognition that that NSD differs from new product development in fundamental ways (e.g.
Johne and Storey, 1998; de Brentani, 2001). This paper examines innovation outcomes as a
contributor to the performance of the firm as well as one of its key sources of advantage. This
question has been drawn from the conceptual view espoused by the sources-position-
performance (SPP) model of sustainable competitive advantage (Day and Wensley, 1988),
conceptually extended to include the service industry (Bharadwaj, Varadarajan et al., 1993).
Empirical work has suggested that this is important in both product and service firms (e.g. de
Brentani, 2001) although the capabilities may be quite different (e.g. Eriksson, Majkgard et
al., 1999). The first objective of this paper, therefore, is to determine the best practice
innovation performance relationships with the SPP model. The second objective is to identify
good practice within “best practice” service firms and the key components of the SPP model.

Conceptual Development

The main theories and concepts that underpin the present paper are the resource-based view of
the firm (Wernerfelt, 1984; Barney, 1991; Bharadwaj, Varadarajan et al., 1993), the SPP
model of sustainable competitive advantage (Day and Wensley, 1988), and services
innovation (e.g. De Brentani, 1991; de Brentani, 2001). From a resource-based view, the
capabilities that set service firms apart from their competitors are based on intangible business
processes, rather than capital equipment (Oliver, 1997). Intangible assets such as customer
relationships, industry relationships and unique competencies (Eriksson, Majkgard et al.,
1999) are likely predictors of service quality. The service organisation therefore needs to
draw on multiple sources of advantage (Day, 1994). Of importance are: organisational
processes and systems; project management skills; and organisational culture and vision
(Mattyssens and Vandenbempt, 1998). However, there are three agreed market-related
sources of advantage that contribute to superior performance; market orientation (Kohli and
Jaworski, 1990; Narver and Slater, 1990; Hunt, 1995; Fahy, Hooley et al., 2000), branding
(Aaker, 1992; Day and Montgomery, 1999; Berry, 2000) and innovation or new product
development (De Brentani, 1991; Han, Kim et al., 1998; Vandarajan and Jayachandran,

ANZMAC 2005 Conference: Entrepreneurship, Innovation and New Product Development 29

1999). Together, these form the basis of competitive advantage enabling service
organisations to be more responsive to changing customer requirements and competitive
threats and to achieve superior performance.

Innovation is considered an important competency and source of competitive advantage

(Vandarajan and Jayachandran, 1999; Verona, 1999). The development of new services is
likely to be particularly important for firms that make greater use of technology for service
delivery (Dabholkar 1994), when the service is widely temporally and spatially available
(Lovelock and Yip 1996; Lovelock, Vandermerwe and Lewis 1999) and when services need
to be customised (de Brentani 1991).

The study by de Brentani (2001) suggests that for low innovativeness (incremental) NSDs,
managers can enhance performance by leveraging the firm’s unique competencies,
experiences and reputation through the introduction of new services that have a strong
corporate fit. They should also ensure that efforts to differentiate services do not lead to high
cost or unnecessarily complex offerings. For new-to-the-world business services, a culture of
innovation is the primary predictor of performance. This culture encourages entrepreneurship
and creativity, and encourages senior managers to be visionaries and mentors for NSD

The main drivers of performance are likely to be: the adoption of more market-oriented
business practices (Narver and Slater 1990, Jaworski and Kohli 1993, Deng and Dart 1994,
Gray et al 1998); the development of more effective and efficient service innovation processes
(de Bentani 1991); greater investment in service branding and corporate image (Aaker, 1992;
Gregory and Wiechmann, 1998); and reinvesting profits in resources and skills to sustain
sources of advantage (Day and Wensley, 1988; Bharadwaj, Varadarajan et al., 1993).

Investment in these sources of competitive advantage is likely to lead to positional advantages

in the marketplace (Porter, 1985; Day and Wensley, 1988), particularly: differentiated service
products or service delivery methods based on superior quality or innovative features; and/or
cost advantages based on more efficient service production and delivery methods. In turn,
competitive market positioning is likely to lead to performance advantages, including: greater
customer satisfaction and loyalty; superior sales revenues and profitability; enhanced brand
equity and corporate reputation; and more successful NSD.

The market environment (market and technology turbulence, competitive intensity, market
growth and barriers to market entry) can have a direct effect on performance, and also
moderate the relationships between sources of advantage, positional advantages and
organisational performance (Jaworski and Kohli, 1993; Gray, Matear et al., 1998).

These are all key components of the SPP model. The question that arises is what components
of the model that best reflects best innovation practice?

Methodology

A two-stage research methodology was used for this study. Stage one’s principal objectives
were to establish relationships between the level of innovation and marketing capabilities and
to form the sample frame for stage two through identifying high and low performing firms,
through a quantitative survey. The objective of stage two was to examine qualitatively the
sources of competitive advantage and practices associated with NSD by top and low
performing firms.

ANZMAC 2005 Conference: Entrepreneurship, Innovation and New Product Development 30

Data were collected in Stage One through a mail survey. The sample consisted of 1952
service firms from which responses were received from 398 firms (20.4% response rate).
Further analysis of 43 of these organisations determined that although services made up a key
component of their business, their core business was manufactured physical goods. These
firms were dropped from subsequent analysis making an effective response rate of (18.2%).
Data were collected from single respondents given the anticipated number of small companies
(55% of the final sample had less than 50 employees). With the use of single respondents,
care needs to be taken that those respondents are appropriate to answer on behalf of the
responding organisation (Capron and Hulland, 1999). Early wave/late wave analysis
(Armstrong and Overton, 1977) and a single page fax questionnaire to non-respondents did
not indicate any non-response bias.

The top 50 firms from the stage one’s survey were identified, based on their self-assessed
performance scores for brand awareness, customer satisfaction and loyalty, sales, profitability
and profit growth compared to their nearest competitor. Analysis showed these performance
outcomes were closely interrelated. A smaller group of 20 less well-performing firms was
selected to contrast their marketing and management practices with the practices adopted by
the top performers. These formed the sample for stage two, the qualitative phase.

27 top performers (54%) and 10 lower performers (50%) agreed to take part. Where possible,
multiple interviews were held in the larger organisations, to insure a consistent managerial
view, while single interviews were held in the smaller and medium-sized firms (with either
the owner or managing partner). A total of 44 interviews, between 1 and 2 hours in length
were under taken using a semi-structured format. Established qualitative research guidelines
were used to ensure correct procedure was adhered to (e.g. Miles and Huberman, 1994; Healy
and Perry, 2000).

In each interview, respondents were first asked open-ended questions to describe their firms,
to offer their unprompted (top of mind) views on what made their firms successful and what
they considered to be their main sources of competitive advantage. This was followed by a
more structured phase, where managers were asked to comment on a "report card" of how
well they performed in various areas compared to other firms in their particular sector, based
on their survey answers. Managers were asked to elaborate on examples of marketing and
management practice related to the generic sources of competitive advantage identified by the
survey. The data was analysed by grouping responses to particular questions and views of
particular issues into data tables, and assessing commonalities and differences between
managers' views.

Summary of the Results

Overall, the stage one’s mail survey results suggest that the SPP model captures the important
drivers of sustainable competitive advantage in service firms (Matear, Gray et al., 2004). Top
innovators are more market-oriented, indicating they are closer to their customers, aware of
their competitors’ actions, and better at sharing market information throughout the
organisation and responding to it in a co-ordinated and profitable manner, including
communicating innovations to the customer. These companies also have better-managed
innovation processes, with greater top management support and co-ordination of different
groups, and a more formalised process. In order to sustain their sources of competitive
advantage, these firms are also more likely to reinvest profits in personnel skills training.

ANZMAC 2005 Conference: Entrepreneurship, Innovation and New Product Development 31

There are moderate but significant correlations between overall performance (RPERF)
relative to the nearest competitor and market-oriented behaviour, branding and NSD (table 1).
This suggests that those organisations and firms with superior financial, customer and brand
performance are also those which are more market-oriented and who invest more heavily in
building brand equity and NSD.

Table 1: Correlations between relative performance & firm characteristics

RPERF MO BRAND NSD IT Differ. Cost. Employ
RPERF 1.000
MO score 0.385 1.000
BRAND score 0.473 0.572 1.000
NSD score 0.361 0.518 0.417 1.000
IT score 0.069 0.107 0.192 0.127 1.000
Differentiation 0.439 0.212 0.206 0.284 0.033 1.000
Cost-effectiveness 0.397 0.209 0.175 0.197 -0.087 0.260 1.000
Size (employees) 0.097 0.175 0.150 -0.018 0.236 0.038 -0.080 1.000
Note - Shaded correlations are significant at the 99% confidence level. "Number of employees" was measured on a different scale to the other items,
and its correlations are therefore calculated with the non-parametric version of the Pearson correlation coefficient.

Caution must be taken when interpreting these results. If NSD practices of above and below
average performers are compared, then there are few significant differences in mean
responses (at a 95% significance level) between the two groups. Top performers are more
market-oriented, invest more in branding, invest more in personnel skills training, and have
greater service skills levels compared to lower performers. They also have higher NSD
success. This suggests that the types of innovation developed as a result of greater market
orientation, rather than the process, may be more important to new service market success.

Stage two results suggest that having a culture of innovation, which encourages staff,
customers and suppliers to suggest improvements or NSDs, is more important than the
innovation process. The best innovators possess a strong, clear and well-articulated vision that
guides the organisation's culture, structure and strategies. This culture encourages staff to
become more innovative and market-oriented through exploring new ideas, accepting
mistakes and learning from them, this being one of the key differentiators between top and
low performing firms.

Unprompted, respondents were asked to describe their firms' major sources of competitive
advantage. Responses suggest that managers perceive branding (mentioned by managers in
44% of the top performing firms) and staff motivation, skills, competencies (44% of top-
performers and 10% of lower performers) to be the two major sources of advantage. The next
most important source of advantage was having a strong organisational culture with a clear
vision, mission, values, energy and passion to guide staff behaviour. Utilising partnerships
and alliances to leverage sources of advantage and having a culture which encouraged
innovation were also important, although surprisingly much lower.

Managers' prompted perceptions of best practice in NSD activities are related to developing a
corporate culture that encourages innovation and risk-taking, as well as continuous innovation
to stay ahead of competitors. The major differences in innovation practices between top
performers and lower performers revealed by the prompted section of the interviews were that
top performers were: much more likely to have a corporate culture and climate which
encourages continuous innovation; more willing to take risks and learn from mistakes; and

ANZMAC 2005 Conference: Entrepreneurship, Innovation and New Product Development 32

more likely to utilise a formal innovation management process or hybrid process with a mix
of informal idea creation and formal product and market processes.

Corporate culture – encouraging creativity and innovation, being market-oriented, employee-

oriented and/or community-oriented – is driven from the top. This includes having a CEO or
owner with a strong, well-articulated vision, and sufficient resources to explore and develop
new ideas. Encouraging people to take risks (within reason) and to learn from their mistakes
are also important features of innovative organisations. Of note was that none of the lower
performers who were interviewed were willing to take risks: all low performers were risk
averse. In addition, better innovators were more likely to: utilise cross-functional innovation
teams to get broad range of views; encourage good internal communication to share new
ideas; emphasise continuous, incremental improvements; and focus on innovations that
improve both customer value and also provide the firm with economic value.

Conclusions

The findings show that a culture of innovation is the primary predictor of performance for
firms developing new-to-the-world business services (e.g. see de Brentani, 2001). The results
suggest that innovation is an important competency and a source of competitive advantage in
services firms (Verona, 1999), in line with the resource-based view of the firm (Wernerfelt,
1984; Barney, 1991; Grant, 1991) and the SPP model of sustainable competitive advantage
(Day and Wensley, 1988).

The SPP model captures most of the important drivers of sustainable competitive advantage
in service firms. Top innovators in this study are market-oriented, indicating their closeness to
customers, awareness of their competitors’ actions, and ability to share market information
with a co-ordinated and profitable responsiveness. Results suggest a greater investment in
branding, perhaps reflecting greater communication of NSDs to customers. These companies
also have more managed NSD processes, with greater top management support, inter-
functional coordination and more formalised processes. This propensity to actively research
and share market information mirrors the greater market orientation of brand-oriented service
firms. In order to sustain their sources of competitive advantage, these firms are more likely
to reinvest profits in personnel skills training.

The prompted and unprompted sections of the interviews show that having a culture of
innovation which encourages staff, customers and suppliers to suggest improvements or
NSDs, is more important than the innovation process. The best innovators possess a strong,
clear and well-articulated vision that guides the organisation's culture, structure and strategies.
Such a culture encourages staff to become more innovative and market-oriented. Of light
though is the willingness of the organisations to embark on more uncertain course, learn from
failure and mistakes. In all instances the low performing firms were risk adverse. The
management of this risk therefore is a key finding in this study.

The major managerial implications are that process alone may not be the answer to successful
NSD, but that successful innovations need to be informed by both customer needs and
competitors’ alternative offerings (a market-oriented view). Owners, CEOs and senior
managers should also foster a climate of innovation which encourages staff and other
stakeholders to suggest new service ideas, to take risks with NSDs, and to provide
encouragement and financial support for new initiatives.

ANZMAC 2005 Conference: Entrepreneurship, Innovation and New Product Development 33

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