Tsou 2015

Management Decision
Selecting business partner for service delivery co-innovation and competitive advantage
Hung-Tai Tsou Colin C.J. Cheng Hsuan-Yu Hsu
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To cite this document:
Hung-Tai Tsou Colin C.J. Cheng Hsuan-Yu Hsu , (2015),"Selecting business partner for service delivery co-innovation and
competitive advantage", Management Decision, Vol. 53 Iss 9 pp. -
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http://dx.doi.org/10.1108/MD-01-2015-0014
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Selecting Business Partners for Service Delivery Co-Innovation and
Competitive Advantage
Introduction
Traditional views of co-innovation focus mainly on third party involvement, such as customer
or supplier (Dawson et al., 2014; Yeniyurt et al., 2014). Yet, co-innovation with business
partners1 is also an important approach for developing new products/services (Romero and
Molina, 2011). Previous studies on co-innovation have demonstrated that co-innovation acts
a critical driver of value co-creation, which allows firms to access new knowledge, share
resources, and acquire complementary capabilities (e.g., Lee et al., 2012; Bonney et al., 2007;
Plé and Chumpitaz Cáceres, 2010). In addition, the use of co-innovation enables firms to
co-create new sources of value through a combination of resources, technologies, ideas, and
practices (e.g., Baldwin and Von Hippel, 2011; Davis and Eisenhardt, 2011; Fawcett et al.,
2012). As Dawson et al. (2014) indicate, co-innovation with business partners can enhance
firms’ competitive advantage, leading to sustainable market success.
However, one of the challenges to firms that co-innovate with business partners is how
select appropriate business partners (Yeniyurt et al., 2014). When reviewing the existing
research on business partner selection, we find that most studies have focused mainly on the
approaches to collaborating with business partners, such as strategic alliances (Hitt et al.,
Shah and Swaminathan, 2008), organizational learning (Hitt et al., 2000), inertial forces (Li
Rowley, 2002), or joint ventures (Luo, 2002). The existing literature on how to select
appropriate business partners to co-innovate new products/services leaves this question
unanswered.
1
A business partner in this study refers to a focal firm, its suppliers, its complementary firms, and customers
involved in a collaborative process for the development of a new service/product.
1
Another challenge to such firms with their business partners is how to co-innovate new
service delivery processes. In this study, we label this phenomenon “service delivery
co-innovation”, which refers to a firm’s innovation activities that involve collaboration with
business partners to create value to customers through a new service delivery mechanism. In
practice, there are a number of examples of service delivery co-innovation. For example,
Taiwan’s leading information technology (IT) service firms such as TSMC, Mitac, and
Synnex, are using open platforms to engage with their business partners for co-innovation of
new service delivery processes. While service delivery co-innovation has been playing a
critical role in the service industry, there has been relatively little academic research on
service delivery co-innovation. This impedes our understanding of how business partner
selection influences service delivery co-innovation.
The final challenge for firms is how to assess the effectiveness of service delivery
co-innovation. Since the innovation academics have widely believed that service delivery
innovation has a positive relationship with firms’ competitive advantage (e.g., Chen et al.,
2009; Tsou et al., 2014), we expect that service delivery co-innovation may have the potential
to significantly impact firms’ competitive advantage. However, while a number of academics
have addressed the nature of the competitive advantage construct (e.g., Krause et al., 2014), it
is important to distinguish the constructs of competitive advantage for service delivery
co-innovation. This is because, according to Chen et al. (2009), service delivery
co-innovation not only provides a common competitive advantage that is superior to
competing market offerings, but also creates a unique competitive advantage, generated by
service employees’ skills and capabilities. Thus, this study deliberately distinguishes the
competitive advantage of service delivery co-innovation between market-based competitive
advantage and employee-based competitive advantage.
The objective of this study is, therefore, to investigate the relationships among business
2
partner selection, service delivery co-innovation, and competitive advantage. Building on
resource dependence theory (RDT), this study proposes four criteria for business partner
selection: partner reliability, partner complementarity, partner expertise, and partner
compatibility. Regarding service delivery co-innovation, this study focuses on three types of
co-innovation activities: new communication encounters, new usage encounters, and new
service encounters. Finally, this study operationalizes competitive advantage into two types:
market-based competitive advantage and employee-based competitive advantage.

Following the input–process–output model developed by Deeter-Schmelz et al. (2003),
this study develops and tests the conceptual model that links business partner selection,
service delivery co-innovation, and competitive advantage. Results of a survey of 120 IT
service firms reveal that all four criteria of business partner selection are positively related to
service delivery co-innovation, which, in turn, has a significant impact on both market-based
and employee-based competitive advantages.
Our findings, therefore, contribute to the literature in the following ways. First, building
on partner selection theory (Emden et al., 2006), this study contributes to the understanding of
how a manager selects appropriate business partners to enhance service delivery
co-innovation. Second, this study extends the RDT (Pfeffer and Salancik, 1978) to service
delivery co-innovation research by explaining how some companies’ inter-firm collaboration
strategies produce greater performance. Third, this study enriches the input–process–output
model (Deeter-Schmelz et al., 2003) by empirically confirming the links among business
partner selection, service delivery co-innovation, and competitive advantage. Fourth, this
study moves strategy research beyond the traditional aggregate conceptualization of
competitive advantage by distinguishing competitive advantage into two types: market-based
competitive advantage and employee-based competitive advantage. Finally, our research adds
to the resource-based view literature by providing new insight for managers as to how to
3
properly allocate resources to implement effective business partner selection.
The remainder of this paper is structured as follows. First, we discuss the theoretical
background and develop hypotheses. Next, the research method and results of the data
analysis are presented. We conclude with a discussion of theoretical and managerial
implications and directions for future research.
Theoretical Background
This study draws on RDT (Pfeffer and Salancik, 1978) and the input–process–output model
(Deeter-Schmelz et al., 2003), to support the conceptual model and the hypothesized
relationships. The RDT explains how an organization’s strategy and structure depend on its
inter-organizational relationships (Pfeffer and Salancik, 1978). RDT has emerged as a
powerful approach to explaining organizational behavior and inter-organizational
relationships (Jacobs, 1974). Like the resource-based approach, RDT argues that the key to
organizational survival is the ability to acquire and maintain resources, emphasizes the way in
which organizations reduce or overcome environmental uncertainty, and stresses the impact
external forces have on how firms organize (Pfeffer and Salancik, 1978) in order to compete
in the marketplace. RDT has two broad principles: (1) organizations are constrained by, and
depend on, other organizations that control critical resources (e.g., financial resources,
information, and scarce employee skills (Tremblay et al., 2003)) for them and, (2)
organizations attempt to manage uncertainty and their dependence on external groups in order
to acquire more autonomy and freedom (Oliver, 1991).
In a B2B context, firms own resources that are relevant for partners’ survival (i.e.,
information and resource demand). Thus, RDT provides a fundamental theoretical explanation
as to why the use of inter-firm behaviors may maintain organizational survival of each other.
According to the logic of RDT, establishing such collaborative relationship constitutes a

4
bridging strategy. Relationships among organizations are determined by three factors: (1) the
degree of concentration of authority in the environment; (2) the abundance of resources in the
environment; and (3) the interrelations of organizations in the environment (Pfeffer and
Salancik, 1978). Since the organizations are rarely self-sufficient, they enter into collaborative
relationships with other organizations in order to obtain critical resources. Accordingly,
organizations seek to reduce uncertainty by means of establishing formal or semiformal
relationships with other firms, such as contracting, joint ventures, mergers, cooperation, and
alliances (Carroll, 1993; Heide, 1994). To the best of our knowledge, we propose that RDT
views service delivery co-innovation as a strategic response to conditions of uncertainty and
to situations where firms lack necessary self-resources.
Furthermore, RDT suggests that firm behavior becomes externally influenced because it
must attend to the demands of those in its environment that provide resources necessary for
survival (Pfeffer, 1982). Organizations are constrained by their environments because
organizational survival is dependent upon resources located in the environment. These
resources are affected by various interrelationships with other entities, for example, suppliers,
customers, competitors, and regulators of the organization. Thus, the environmental context
within which the organization is located is crucial to the survival of the organization (Pfeffer
and Salancik, 2003). Although external relationships are an effective method for increasing
innovation, they create new dependencies for most firms. Companies struggle to find a
balance between what they must own and what they must acquire, or “source”, through
collaboration, partnering, alliances, joint ventures, and the like (Witzeman et al., 2006).
Unlike the resource-based view (RBV), the RDT pays attention to the behaviors of
organizations in a resource exchange. The usefulness of the RDT for our study at hand lies in
its ability to identify dependence and uncertainty, and to motivate the establishment of
inter-organizational relationships. In other words, the RDT is helpful in identifying forces
5
driving changes in the inter-firm relationship. Hence, RDT has two major implications
regarding service delivery co-innovation. First, firms possess service delivery co-innovation
to manage environmental uncertainties and to solve the situation where firms rarely have
self-resources. Second, in response to environmental uncertainties, firms build partnerships
that should affect a firm's management practices (e.g., service delivery co-innovation
practices). Following this line of thought, co-innovation with business partners can be
regarded as a strategic response to dealing with conditions of uncertainty, and as a resolution

to situations where firms lack necessary self-resources. In other words, based on the RDT, we
expect that firms that intend to practice service delivery co-innovation must engage in
searching for partnerships, in order to address situations where the firms have barely any
self-resources.
Business partner selection
From the extant literature that relates to service delivery co-innovation, commonly employed
in practice, we identified four criteria to select business partners.
When searching for partners, Emden et al. (2006), propose three key factors to ensure an
effective collaboration process: relational alignment, technological alignment, and strategic
alignment. Relational alignment occurs when partners possess compatible cultures, which
allows them to more easily overcome conflicts that may arise, be more likely to understand
one another, and be more inclined to work toward common goals. Possessing compatible
cultures tends to facilitate collaboration and enhance its effects. Thus, we propose partner
compatibility as one of the antecedents to service delivery co-innovation.
Technological alignment describes a partnership where each partner possesses unique
expertise that expands the range of competencies and can be leveraged to enhance service
production related activities. Thus, expertise is vital for defining technological alignment, as it
6
contributes to co-innovation practices. Accordingly, partners with expertise will be more
likely to participate in collaboration (Lusch et al., 2007). Similarly, prior studies demonstrate
that an essential factor affecting collaboration is expertise (Auh et al., 2007; Lusch et al.,
2007; Subramani and Venkatraman, 2003). Therefore, we employ the term partner expertise
to identify partners who possess unique expertise for co-innovation practices.
The second part of technological alignment is resource complementarity. As Emden et al.
(2006) indicated, partners would be able to exploit or create opportunities only by integrating
their complementary skills and resources. Accordingly, collaborations are more likely to
succeed when partners possess complementary assets (Hill and Hellriegel, 1994; Luo, 2002).
Therefore, we propose partner complementarity as another important antecedent to
co-innovation.
Finally, strategic alignment refers to the extent to which partners have correspondent
motivations to enter into a collaborative partnership. Following Selnes and Gonhaug’s (2000)
work, we found that reliability is a key factor in developing collaborative relationships based
on commitment. Therefore, we propose that, when a partner is able to contribute specifically
to co-innovation, its partner reliability may greatly impact co-innovation. Accordingly, four
business partner selection criteria emerge: partner reliability, partner complementarity, partner
expertise, and partner compatibility.
Service delivery co-innovation
As for service delivery co-innovation, service delivery refers to the delivery of a service
(Zeithaml et al., 2002) or a product to customers (Lovelock and Wright, 2002; Moorman and
Rust, 1999). Service delivery mainly concerns where, when, and how a service or product is
delivered to customers, and whether it is delivered with high, medium, or low interactions. As
such, service delivery should be designed, established, refined, and debugged to meet
7
customers’ needs (Scheuing and Jonson, 1989). In particular, co-innovation may be facilitated
through a series of encounters, including communication encounters, usage encounters, and
service encounters (Payne et al., 2008).
Communication encounters refer primarily to activities that are intended to connect with
customers and to promote and propel dialogues. For example, firms actively provide updated
information for customers through Internet home pages, keyword marketing, launching
ceremonies for new services, and online social networking tools, such as WhatsApp, WeChat,
Skype, Facebook, Line, Yahoo Messenger, Google +, etc. Usage encounters amplify a method
that a customer practices with a product or a service, and include the services that support
usage, such as self-service technology. Mobile banking is one example. Banks have created
software to provide customers with access to their mobile banking web pages. Customers can
thus obtain several benefits by using mobile banking to gain immediate financial news from
banks. Service encounters are ways by which customers interact with customer service
personnel or service applications. For instance, service personnel provide services, such as
videoconferences, or deliver post-sales service, such as 24-hour call centers.
Co-innovation is defined as an innovation that is co-created by a partnership between
companies and/or suppliers and/or customers for sharing knowledge, costs, and benefits to
create unique value for the end users (Dawson et al., 2014). As such, co-innovation involves
collaboration with various strategic partners and may be performed in different configurations,
depending on how companies’ innovative capabilities are supported with those of their
strategic partners (Von Hippel et al., 2011). Along this line, co-innovation in service delivery
can be regarded as a novel mechanism of delivery that offers customers greater convenience.
In addition, as discussed earlier, service delivery is a series of two-way interactions. Therefore,
service delivery co-innovation is explicitly characterized as a type of encounter that includes
new communication encounters, new usage encounters, and new service encounters.
8
Competitive advantage
Competitive advantage can be gained when an organization produces its goods/services the
organization is able to create more value than its competitors, and resolves bargaining
situations with its customers and suppliers to its own advantage. Competitive advantage is
achieved by fully deploying and using idiosyncratic, valuable, and inimitable resources and
capabilities, and may be viewed, externally, as outcome performance, and, internally, as

organizational capabilities (Bhatt and Grover, 2005). Thus, firms can achieve superior
competitive advantage in different ways, such as innovation-based, cost-based, market-based,
employee-based, or relationship-based competitive advantages (e.g., Barney, 1995; Dyer and
Singh, 1998).
As discussed earlier, we employ two competitive advantages to describe the
effectiveness of service delivery co-innovation: (1) market-based competitive advantage,
through the development of differentiated goods and services in markets, and (2)
employee-based competitive advantage, through the development of employees’ unique skills
and capabilities.
The conceptual model
According to the input–process–output model (Deeter-Schmelz et al., 2003), organizational
inputs influence organizational effectiveness entirely through organizational processes. This
study applies this model to link three variables: business partner selection, service delivery
co-innovation, and competitive advantage (see Figure 1). The input variable is business
partner selection, which includes partner reliability, partner complementarity, partner
expertise, and partner compatibility, while the output variable is competitive advantage, which
consists of market-based competitive advantage and employee-based competitive advantage.
9
The process variable is service delivery co-innovation, which contains new communication
encounters, new usage encounters, and new service encounters. In the following section, we
develop hypotheses to examine how business partner selection influences service delivery
co-innovation, which, in turn, leads to firms’ competitive advantage.
Insert Figure 1 about here

Hypotheses Development
Business partner selection and service delivery co-innovation
Partner reliability
Reliability is identified as a key factor in developing inter-organizational relationships based
on trust and commitment, as well as in developing the ability to honor and keep promises
(Selnes and Gonhaug, 2000). The importance of a partner’s reliability is clear because an
unreliable partner may provide inaccurate information and, thus, subject a firm to unnecessary
costs and risk exposure (Li and Rowley, 2002). For example, reciprocity is an important
indicator of partner reliability and is defined as a certain pattern of exchanges between
partners. When the principle of reciprocity is embedded in firms, they are willing to both
share the benefits and bear the possible risks and costs with their partners (Chung et al., 2000).
This study defines partner reliability as the ability to manage working conditions effectively
and continuously, and to engage in reciprocal cooperative behavior. Social interaction
between firms played a major role; therefore, trusting relationships were considered very
important. Trust enables parties to take risks, but also enhances communication, knowledge
sharing, and commitment. Trust enhances flexibility, thus improving both efficiency and value
creation, especially in co-innovation (Blomqvist et al., 2005). Therefore, firms that choose to
10
pursue service delivery co-innovation as a strategy must be able to develop the trust and
commitment necessary among partners to support a collaborative approach.
H1: Partner reliability has a positive effect on service delivery co-innovation.
Partner complementarity
Partner complementarity is regarded as a combination of the distinctive competencies of

partners, and is the primary factor in the partner selection process (Hill and Hellriegel, 1994).
Recently, complementarity has been defined as the extent to which two firms’ resources are
different, interdependent, and mutually supportive (Wang and Zajac, 2007). Partner
complementarity exists when a firm’s resources may be enhanced by a partner’s resources
(Powell and Dent-Micallef, 1997; Tippins and Sohi, 2003). Therefore, partners have a certain
domain of strength that may compensate for the weaknesses of their potential cooperative
partners. In this study, partner complementarity is defined as the combination of the
distinctive resources and capabilities of partners that may be used to compensate for each
firm’s weaknesses. Partner complementarity takes the perspective of the RDT and is, in many
instances, the initial motivation for the formation of an alliance (Duane et al., 2002; Lin et al.,
2009; Sivadas and Dwyer, 2000). Complementary partners have access to specific resources,
skills, know-how and further dimensions that benefit collaboration (Becker and Gerhart,
1996). Miotti and Sachwald (2003) argue that if partners aim to reduce costs and risks,
through economies of scale, they must seek similar resources in the collaboration. If partners
aim at innovation, they must combine complementary resources. In addition, complementarity
in capabilities of cooperating firms is a source of integration for the organization of
innovation activities. Therefore, external knowledge or resources, especially from partners, is
more conducive than existing ones to new service co-innovations by firms (Leiponen, 2005).
11
This finding is supported by Spin (2011), who argues that partners with complementary
routines demonstrate advanced levels of service delivery co-innovation.
H2: Partner complementarity has a positive effect on service delivery co-innovation.
Partner expertise
Firms often seek partners with skills and capabilities they may learn from to enhance their
competitive advantage (Hitt et al., 2000). Partner expertise indicates the partners’ abilities or
competencies; an expert partner may provide accurate and pertinent information to improve
service transactions (Kelley et al., 1990; Auh et al., 2007). Partner expertise may reflect the
extent to which either partner is capable of delivering a service or providing necessary
knowledge related to a relevant underlying technology (Bendapudi and Berry, 1997;
Parmigiani, 2007). Firms that collaborate may deliver their services more effectively by
integrating the expertise and skills of their partners. In this study, partner expertise is defined
as the specialized knowledge and skills of partners and their capacity to provide accurate
information. Co-innovation is the creation of innovation across firm boundaries, through the
sharing of ideas, knowledge, expertise, and opportunities (Miles et al., 2005). In this respect,
although a partner’s high level of expertise may translate to an inflexible, know-it-all behavior
that hinders innovative efforts, it may be argued that this partner’s knowledge, skills, and
abilities can provide a source of valuable inputs for the generation and development of new
ideas. Therefore, a partner’s expertise deserves careful examination to understand not only its
influence on co-innovation possibilities, but also the type of knowledge and abilities that best
favor collaborative innovation development.
H3: Partner expertise has a positive effect on service delivery co-innovation.
12
Partner compatibility
Partner compatibility is important for partner selection (Sarkar et al., 2001; Emden et al.,
2006; Podolny, 1994). Researchers describe the concept of compatibility from the viewpoint
of similarity, which is regarded as the degree to which firms have similar or compatible
operating systems (Chung et al., 2000). Shared goals, skills, and tasks contribute to a domain
of similarity, which has been found to enhance the quality of interaction between
organizations (Ruekert et al., 1987; Frazier, 1983). Furthermore, partner compatibility refers
to the complementarity of resources, coupled with cultural and operational compatibility
between the partners (Parkhe, 1991; Sarkar et al., 2001). Cultural compatibility is defined as
the congruence between partners’ philosophies, goals, and values. Operational compatibility
is regarded as a type of similarity of operational status that may assess congruence in the
partners’ procedural capabilities. Based on definitions of organizational compatibility, this
study defines partner compatibility as the extent to which partners possess congruent culture,
procedural capabilities and compatible operating systems within inter-organizational firms.
The effect of partner compatibility on creating value through alliances has been noted
(Madhok, 1995). According to transaction cost economics, as partner compatibility increases,
coordination costs decrease, leading to alliances becoming efficient solutions (Gulati and
Singh, 1998). For co-innovation, Doz et al. (2000) suggested that an important antecedent for
successful innovation alliances is the cultural compatibility of the partners. It follows that the
collaborative organization set up to invent and commercialize new products and services must
be culturally consistent (Barbaroux, 2012). For operational compatibility, Gulati (1995)
showed that compatibility in operating systems is critically important to the effectiveness of
partner firms. If partners do not match other partners’ operating requirements, these factors
become obstacles prohibiting the achievement of cooperation in high-level strategic alliances
13
(Niederkofler, 1991) and co-innovation practices. Therefore, partner compatibility has a
positive effect on service delivery co-innovation.
H4: Partner compatibility has a positive effect on service delivery co-innovation.
Service delivery co-innovation and firms’ competitive advantage
Previous studies have shown that service delivery innovation is an important antecedent to
firms’ competitive advantage (e.g., Chen et al., 2009; Tsou et al., 2014). Following this line,
we expect that service delivery co-innovation may have a positive impact on firms’
competitive advantage. Service delivery co-innovation concerns the innovative activities that
generate new service delivery mechanisms. As noted earlier, three main activities can be
distinguished: new communication encounters, new usage encounters, and new service
encounters. As a result, new communication encounters, new usage encounters, and new
service encounters are expected to affect market-based competitive advantage and
employee-based competitive advantage differently.
In the new communication encounters, a new communication approach between partners
is developed through a series of collaborative activities. This new approach can be integrated
into a new service delivery mechanism by matching market and service employees’ offerings.
Market-based competitive advantage that stems from new communication encounters is likely
to create superior competitive market advantage because the new communication approach
enables managers to upgrade existing service delivery mechanisms to overcome those of their
competitors. In addition, the new communication approach may advance the development of
service employees’ skills and capabilities. As such, firms with new communication
encounters are likely to create market-based competitive advantage, as well as
employee-based competitive advantage.
14
The new usage encounters generate new methods in the service delivery mechanisms of
a firm. These new usage methods enable managers to choose the best methods to entirely
change or improve their existing service delivery mechanisms. As such, new usage encounters
enable a firm to create a competitive market advantage superior to those of their rivals.
Similarly, new usage encounters enable a firm to develop employees’ skills and capabilities
that are superior to competing offerings. Thus, new service delivery mechanisms create
market-based and employee-based competitive advantages through new usage encounters.

In the new service encounters, interactions must occur through contact activities and
interface mechanisms between service providers and receivers. Both contact activities and
interface mechanisms can be integrated into a new service delivery design. Thus, new service
delivery mechanisms are likely to be well-suited to customer needs because new contact
activities and interface mechanisms enable managers to check whether new service delivery
mechanisms are actually beneficial for customers. Furthermore, new service delivery
mechanisms are able to improve employees’ skills and capabilities to interact with customers
and, thus, provide better service offerings. Therefore, firms’ employees could possess superior
experience, skills, and capabilities that are unique and difficult-to-imitate (Lee et al., 2012).
Accordingly, firms with new service encounters are likely to develop new service delivery
mechanisms that produce superior market-based and employee-based competitive advantages.
Therefore,
H5: Service delivery co-innovation has positive effects on (a) market-based competitive
advantage and (b) employee-based competitive advantage.
Methodology
Sample and data collection

15
The sampling frame was drawn from the 2013 Top 5,000 – The Largest Corporations in
Taiwan, published by Taiwan Credit Information Center 2012. To alleviate concerns about
sample distribution, we stratified the total employment numbers of IT service firms (referring
to a set of related functions provided by IT systems to support one or more business areas)
into four categories, based on their employee counts: 1000 and over, 500–999, 100–499, and
99 or fewer. A total of 600 (150 × 4) IT service firms were randomly selected. The IT service
industry was selected primarily for three reasons. First, as Patrakosol and Olson (2007) noted,
the industry has had a great influence on global business, which relies heavily on IT to offer
and innovate products and services, and conduct business in new ways, such as a
co-innovation model. Second, the nature of the IT service industry in Taiwan is
hypercompetitive and highly turbulent, and it is necessary for firms to develop and provide
better new services to sustain their competitive advantage by collaborating with partners.
Third, the IT service industry is the largest industry in Taiwan, and a number of Taiwanese IT
service firms are well known worldwide for global service delivery innovation, such as Asus,
Acer, Foxconn, HTC, TSMC, etc. (Lee et al., 2012).
Senior marketing managers were the key informants, because they were likely to have a
comprehensive view of collaboration projects, to have a broad view of the role of service
innovation in IT service firms, and were expected to provide reliable and objective data. In
addition, senior marketing managers are normally involved in collaborations with customers,
partners, and competitors; they are responsible for providing better collaborative new services
to customers; in addition to marketing management, they are also knowledgeable and
experienced in terms of service innovation strategies and management. Hence, we assumed
that senior marketing managers would have the knowledge necessary to respond to the service
co-innovation issues.
To gain insights into senior marketing managers’ experiences, opinions, aspirations, and
16
attitudes toward business partner selection, service delivery co-innovation, and competitive
advantage, 60-90 minute interviews with eight marketing managers were scheduled. Their
average tenure was between 10 and 15 years. Afterward, the interviewees were asked to
review and complete the draft version of the questionnaire to identify ambiguities and suggest
improvements. An examination of the feedback led to further refinement and eventually a
final version (see Appendix).
A questionnaire, accompanied by a cover letter and postage paid return envelope, was
mailed to the senior marketing manager in charge of collaborative new service development at
each firm. Respondents were asked to reflect on a recently launched collaborative new service
project undertaken from 2011 to 2013. A total of 120 completed questionnaires were returned,
which indicates a response rate of 20%.
To test for nonresponse bias, early respondents were compared with late respondents, as
suggested by Armstrong and Overton (1977). We classified responders to the initial mailing
as early (n = 56) and those to the follow-up contacts as late (n = 64). The independent-sample
t tests revealed no statistically significant differences between the two groups in terms of
capital (t = 1.92, p = 0.07), years established (t = 0.84, p = 0.68), or number of employees (t =
0.83, p = 0.42). The analysis indicated that the two groups were statistically similar on all
demographics. Early and late respondents were also compared using a chi-square test, and
again no significant differences were found. Results indicate that no significant differences
exist, suggesting that nonresponse bias was not a major problem.
A single key informant in each company provided the data for independent and
dependent variables, which can be a source of common method bias. We addressed
procedural remedies by protecting respondent anonymity, reducing evaluation apprehension,
improving item wording, and separating the measurement of predictor and criterion variables
(Podsakoff et al., 2003). Additionally, we used a statistical procedure to assess the strength of
17
potential common method bias. The result from an exploratory Harman’s one-factor test
shows ten factors in the unrotated factor structure, with the first factor accounting for 27% of
the total variance explained, which suggests that common method variance does not pose a
serious threat.
Furthermore, the correlation matrix (see Table IV) did not indicate any highly correlated
variables, whereas common method bias usually results in extremely high correlations (r >
0.90) (Bagozzi et al., 1991). Lastly, following Agarwal and Selen’s (2009) method, the
empirical study validated the research model using a triangulation research methodology,
initially with a convergent interviewing method; this step was followed by Harmon’s
one-factor test, followed by SEM model building and model validation. This method is
regarded as a safeguard against common method variance. Table I shows demographic
information for the firms. A vast majority of the firms have been in existence for over 20
years. A majority of them have capital of more than USD 33 million and have between 100
and 500 employees.
Insert Table I about here
Measures
Table II lists the operationalized constructs, with a five-point Likert-type scale that ranged
from strongly disagree to strongly agree. Business partner selection is a second-order
construct, including partner reliability, partner complementarity, partner expertise, and partner
comparability. Partner reliability was measured on six items by four criteria: partners have the
ability to manage working conditions continuously and effectively; partners can be trusted;
partners exhibit cooperative exchange behaviors for mutual gain; and partners show a
willingness to share the benefits and to bear the possible risks and costs of collaboration.
18
Partner complementarity was measured by four items, which were adapted from the
scale of resource complementarity on the willingness to accomplish the goal and the enhanced
value provided by another firm (Sarkar et al, 2001; Tippins and Sohi, 2003; Chung et al.,
2000). In addition, as two firms’ resources are distinct, partner complementarity was also
measured by the extent to which partners could provide distinct capabilities to enhance each
other’s resources (Wang and Zajac, 2007).
Partner expertise was measured by seven items. Specifically, three items drawn from
Subramani and Venkatraman (2003) described three types of capabilities, competitive analysis,
and strategy formulation from the partner perspective. Additionally, we developed two new
items based on Bendapudi and Berry (1997), which gauged whether partner expertise can
actually be reflected in the process of service delivery. Finally, we used two items for
measuring the ability to provide accurate and pertinent information and to conduct effective
service transactions (Auh et al., 2007).
Partner compatibility was measured using six items adapted from the scale of Sarkar et
al. (2001) and Chung et al. (2000), for measuring congruence in organizational philosophies,
goals, values, procedural capabilities, and operating systems.
Service delivery co-innovation is a second-order construct formed from new
communication encounters, new usage encounters, and new service encounters. New
communication encounters, new usage encounters, and new service encounters were adapted
from Payne et al. (2008). The new communication encounters were measured using three
items that describe a firm’s ability to offer information through new visible channels, new
invisible platforms, and new marketing programs. The new usage encounters were measured
by four items describing customer practices in using service/product, or support facilities. The
new service encounters were measured using three items that assessed the extent to which
service personnel can deliver the service or product, solve customers’ problems, and
19
immediately respond to customers’ complaints.
Competitive advantage was measured by two dimensions: market-based competitive
advantage and employee-based competitive advantage. Market-based competitive advantage
was mainly adopted from Chen et al. (2009), using three items to assess how a firm uses new
services to increase competitive advantage, enter new markets, and provide better service
quality than competitors. Employee-based competitive advantage was also mainly adopted
from Chen et al. (2009), with three items, including improvements to employee innovation,
domain knowledge, and job satisfaction.
Insert Table II about here
Control variables
Firm capital, firm size, and firm age were used as control variables. Prior research has
suggested that financial resources and firm size play important roles in driving innovative
practices (Tellis et al., 2009; Sorescu et al., 2003; Yeoh and Roth, 1999). In particular, larger
IT service firms tend to have more resources, including financial, personnel and social capital
resources and, thus, are better able to undertake a greater number of innovation projects (Lee
et al., 2012). In addition, the notion of IT service has traditionally been described as a
human-mediated service delivered by IT service employees to business clients (Patrakosol
and Olson, 2007; Lee et al., 2012). Finally, following Chandler and Hanks (1998), firm age
was also included as a control variable, due to its potential influence on a firm’s growth rate
and innovation. Overall, firm capital was measured by the logarithm of the firm’s total capital,
firm size was measured by the number of employees, and firm age was measured by the
number of years since the firm was established.
20
Data analysis and results
Partial least squares (PLS) analysis was chosen to analyze our model, using PLS-Graph 3.0
(Chin, 2003). Our choice of PLS was guided by four considerations. First, it has the ability to
model latent constructs as formative or reflective. Based on the suggestion of Patnayakuni et
al. (2007), constructs are modeled as being formative if the direction of causality is from
indicators to constructs; indicators need not be interchangeable, indicators need not co-vary,
and the nomological net of indicators can differ. In contrast, if the opposite conditions are
applicable, they are modeled as being reflective. As a result, items within a formative scale
are not expected to correlate. As in our research model, the second-order construct of service
delivery co-innovation is modeled as being formative.
Second, PLS is more appropriate when the research model is in an early stage of
development and has not been tested extensively (Teo et al., 2003). Because a review of the
literature indicated that empirical tests of business partner selection and service delivery
co-innovation remain sparse, it is better to use PLS in our study. Third, PLS has the ability to
support the hierarchical component approach for modeling second-order factors, in which the
second-order factor is measured using the first-order factor scores as manifest indicators of
the second-order construct (Karimi et al., 2007).
Fourth, the sample size for PLS power analysis is based on the largest number of
predictors (Urbach and Ahlemann, 2010), compared to covariance-based structural equation
modelling (Hair et al., 2011); thus, it is insensitive to sample size consideration (Hair et al.
2010). Further, the study had a relatively small sample size (N = 120). The advantage of the
PLS approach is its ability to work with small sample sizes (Urbach and Ahlemann, 2010).
Hence, small sample size in this study does not invalidate the results.
Validation of measures
21
The measurement model was tested to ensure that the constructs had sufficient psychometric
validity. We also employed a bootstrapping method (500 iterations) to compute significance
levels. Measures were subjected to a purification process to assess their construct reliability,
convergent validity, and discriminant validity. No unidirectional path was specified among
any latent variables. The Cronbach alpha values ranged from 0.81 to 0.93 for the ten
constructs that exceeded the 0.70 threshold (Nunnally, 1978), indicating high internal
consistency in measurement reliability. Likewise, the composite reliabilities for all measures
were high, ranging from 0.87 to 0.95. Accordingly, as seen in Table III, convergent validity
was assessed by reviewing the item loadings. All factor loadings of the indicators for each
underlying construct were significant.
Insert Table III about here
Additionally, all of the values of average variance extracted (AVE) were above the
recommended threshold of 0.50 (Barclay et al., 1995), proving the convergent validity of each
construct. The discriminant validity of the measures was assessed by examining the
correlations between measures with potentially overlapping constructs. As shown in Table IV,
the constructs were more strongly correlated with their own measures than with any of the
other constructs. The values of the square root of the AVE (reported on the diagonal) were all
greater than the construct correlations (the off-diagonal) (Fornell and Larcker, 1981). The
validity of all constructs and their indicators was also supported by the tests described above.
Therefore, discriminant validity was confirmed.
Insert Table IV about here
22
PLS structural model
An important part of model evaluation is the examination of fit indexes that reflect the
predictive power of estimated inner and outer model relationships. As noted by Tenenhaus et
al. (2005, p. 173), “… differently from SEM-ML, PLS path modeling does not optimize any
scalar function so that it naturally lacks an index that can provide the user with a global
validation of the model (as it is instead with χ2 and related measures in SEM-ML). The
Goodness-of-Fit (GoF) represents an operational solution to this problem as it may be meant

as an index for validating the PLS model globally”. Thus, GoF is used to calculate the
geometric mean of the average communality and the average R2 (0 ≤ GoF ≤ 1). According
to the results in Table V, GoF = (0.62) × (0.33) = 0.45 exceeds the cut-off value of 0.25 for a
medium effect size (Wetzels et al., 2009) and can be considered satisfactory (Tenenhaus et al.,
2005).
Insert Tables V and VI about here
The predictive power of the research model was assessed by examining the explained
variance for the endogenous constructs (Chin, 2003). Regarding the R2 values, business
partner selection explains 30 percent of the variance in service delivery co-innovation. Service
delivery co-innovation explains 42 percent of the variance in market-based competitive
advantage and 28 percent of the variance in employee-based competitive advantage. Both of
them exceed the cut-off value of 0.13, indicating a medium effect size of R2 (Cohen, 1988).
All of these values are significant at p < .01. In sum, the R² scores for all dependent variables
yielded an adequate goodness-of-fit for the overall research model.
As shown in Table V, the effect of partner reliability on service delivery co-innovation
was positive and significant, supporting H1. The effect of partner complementarity on service
23
delivery co-innovation was positive and significant, supporting H2. The path between partner
expertise and service delivery co-innovation was positive and significant. This result provides
support for H3. The effect of partner compatibility on service delivery co-innovation was
positive and significant, supporting H4. The effect of service delivery co-innovation on
market-based competitive advantage was positive and significant, supporting H5a. The effect
of service delivery co-innovation on employee-based competitive advantage was positive and
significant, supporting H5b. In sum, all of our hypotheses were supported. Figure 2 and Table
V present the results.
Insert Figure 2 about here
Robustness check
To assess whether service delivery co-innovation fully mediates the relationship between
business partner selection and competitive advantage, this study used regression-based factor
scores as the data pertaining to business partner selection, service delivery co-innovation, and
competitive advantage. The results show that the proposed model accounted for 39 percent of
the variance in competitive advantage. The total effect of business partner selection and
service delivery co-innovation on competitive advantage is B = .32 and B = .39, respectively.
Particularly, the indirect effect of business partner selection on competitive advantage through
service delivery co-innovation is insignificant (B = .09). Thus, the result suggests that service
delivery co-innovation fully mediates the relationship between business partner selection and
competitive advantage.
We also addressed the potential endogeneity issue. Although we argue a causal
relationship from business partner selection to service delivery co-innovation, it is possible
that business partner selection can be determined by service delivery co-innovation. This is
24
because firms that are more innovative are likely to attract more high-quality business
partners and have more opportunity to select compatible and reliable business partners.
Similarly, we need to address an endogeneity issue regarding service delivery co-innovation
and competitive advantage, because firms that are more competitive are likely to be more
innovative and, thus, more likely to attract desirable business partners.
We conducted the following two tests to address the potential endogeneity issue. We first
used the Durbin-Wu-Hausman test (a two-stage least squares method), and then used a
Heckman two-step regression approach to control for the potential endogeneity issue. Both
results show that our main results had not changed, suggesting that endogeneity is not a
concern in this study.
Discussion
This study addresses a central question in the co-innovation field regarding firms’ service
delivery co-innovation practices. Our results indicate that business partner selection has a
positive impact on service delivery co-innovation, which, in turn, is positively related to
market-based and employee-based competitive advantages. Our findings suggest that (1)
appropriate business partner selection results in better service delivery co-innovation, and (2)
service delivery co-innovation has a significant impact on market-based and employee-based
competitive advantages.
Both results indicate that, first, business partner selection has a significant positive
association with service delivery co-innovation, implying that business partner selection plays
a critical role in service delivery co-innovation. Based on the RDT, this study provides the
most comprehensive understanding to date of partner-led enabling mechanisms in the IT
service industry. Little previous research has empirically tested a model that incorporates the
RDT view of service delivery co-innovation. Our findings show that if firms do not select
25
business partners based on partner reliability, partner complementarity, partner expertise, and
partner compatibility, they might be unlikely to facilitate service delivery co-innovation. This
reinforces the notion that firms should continue to evaluate partner reliability, partner
complementarity, partner expertise, and partner compatibility attributes that require minimum
evaluation for business partners to check and develop, leading to better service delivery
co-innovation outcomes. Hence, an important characteristic of this research model is that,
building on the RDT, business partner selection explains variance in service delivery
co-innovation.
Second, we confirm our expectation that service delivery co-innovation has significant
and positive association with market-based and employee-based competitive advantages.
Since service delivery co-innovation is considered to be an essential driver of market-based
and employee-based competitive advantages, it is imperative for firms to view service
delivery co-innovation as a new service innovation strategy to generate value and potentially
facilitate firms’ market-based and employee-based competitive advantages in the IT service
industry. Also, we examine the relationship between partner selection and competitive
advantage (see Table VI). The results indicate that partner reliability, partner complementarity,
partner expertise, and partner compatibility all have positive effects on market-based and
employee-based competitive advantages.
In particular, we view service delivery co-innovation as a strategic innovation process
that relates to the introduction of new products and services within an existing strategic
paradigm (i.e., partner-led strategies) and business model (i.e., co-innovation model). Firms
that are able to develop diverse models of new service delivery by considering the opinions
and information of business partners would be able to develop better service delivery
co-innovation. Furthermore, in this study, new communication encounters, new usage
encounters, and new service encounters are new service delivery mechanisms added to
26
existing or new customer segments. Therefore, as long as firms involve themselves in
focusing on the new communication encounters, new usage encounters, and new service
encounters of service delivery co-innovation, to the greatest extent possible, firms will be
spurred to attain service delivery co-innovation, leading to market-based and employee-based
competitive advantage.
Theoretical implications
First, this study contributes to the service innovation literature by introducing service delivery
co-innovation. By introducing the service delivery co-innovation construct, this study
proposes that the components of service delivery co-innovation primarily comprise new
communication encounters, new usage encounters, and new service encounters. Thus, this
study improves our understanding of service co-innovation as a new mechanism and a new
way of producing, delivering, or distributing existing or new products or services to
customers. Therefore, this study represents a step toward a more coherent service innovation
literature. Based on these three elements, researchers from different disciplines could work to
identify and develop a common and general determinant that reflects the effort to deliver
values for the organization, its customers, and its employees. In this respect, the new
communication encounters, new usage encounters, and new service encounters might provide
valuable insights for exploring the next step in service delivery co-innovation research in the
years to come.
Second, this study extends the RDT (Pfeffer and Salancik, 1978) to service delivery
co-innovation, by explaining how such business partner selection criteria create service
delivery co-innovation. While this study proposes and empirically confirms that partner
reliability, partner complementarity, partner expertise, and partner compatibility are important
criteria to generate service delivery co-innovation, knowledge about the antecedents of the
27
service delivery co-innovation is scarce.
Third, building on the input–process–output model (Deeter-Schmelz et al., 2003), our
research highlights an integrated perspective to link business partner selection, service
delivery co-innovation, and competitive advantage. This study identifies service delivery
co-innovation as an important mechanism that defines firms’ competitive advantage. Through
appropriate business partner selection, service delivery co-innovation can introduce valuable
benefits into service delivery mechanisms for delivering new products/services. Even if
collaborating business partners retain some differences in their interests, service delivery
co-innovation is a promising pathway for achieving service innovation goals and, thus, for
increasing firms’ competitive advantage.
Fourth, this study contributes to the literature on partner selection by adapting the notions
of relational alignment (partner compatibility), technological alignment (partner expertise and
partner complementarity), and strategic alignment (partner reliability) from Emden et al.’s
(2006) partner selection theory, explaining how such partner attributions enable service
delivery co-innovation.
Fifth, we highlight two competitive advantage dimensions: market-based and
employee-based. We propose that market-based and employee-based competitive advantages
are important because they depict how firms continually develop their partnerships to shape
their service delivery co-innovations. Attention to the market-based and employee-based
competitive advantages in our model will be important for researchers. Similarly, past
competitive advantage literature has focused primarily on positional advantages gained
through superior physical product (Song and Parry, 1997), with researchers paying scant
attention to capturing competitive advantage in a service delivery co-innovation context, a
gap this research addresses.
Finally, our research model suggests that gaining service delivery co-innovation will
28
require attention to new communication encounters, new usage encounters, and new service
encounters. Researchers should examine the nature of organizational design, governance
structures, necessary knowledge and technological resources, and partnerships that will foster
such service delivery co-innovation as described in our model. Accordingly, we hope to
extend this comprehensive agenda by proposing that an important direction for service
delivery co-innovation research lies in adopting a partner-led perspective.

Managerial implications
An understanding of the key service delivery co-innovations affecting market-based and
employee-based competitive advantages will put managers in a better position to develop
service delivery co-innovations. First, firms should pull more business resources into related
service delivery programs. Further, to provide a new specialty service, a firm might create a
distinct unit responsible for its service delivery, as well as a new revenue mechanism.
Second, the results of this study suggest that the degree to which a business commits to
service delivery co-innovation depends on its upfront investment, particularly in selecting
compatible partners (partner compatibility) with complementary expertise (partner
complementarity and expertise). In addition, partners’ commitment extends beyond a
contractual working relationship and to guanxi, a relationship that encompasses cooperation,
collaboration, support for one another and the exchange of favors (partner reliability), and
done for the good of the whole. Most importantly, such relationships are built over time. In a
business-to-customer setting, this means selecting partners who demonstrate an interest in
being involved with the service co-innovation and delivery of services, and gaining their
loyalty. Because co-innovation is directly linked to customization markets, the business and
customer will select each other for their shared expectations (partner compatibility and
complementarity) and work together (partner reliability and expertise) toward deriving an
29
innovative end result.
Third, service delivery co-innovation project managers need to ensure that (1) project
objectives are clearly defined in terms of perceived needs of co-innovation from customers’
and organizations’ perspectives; (2) the involvement and support of the top management (i.e.,
CEO) are secured; (3) standard project management processes are used for mitigating
co-innovation risks; and (4) sufficient innovation resources and capacity are dedicated to get
the co-innovation project done in the time allowed. This sequence of resource picking and
capability building may serve as an effective road map for firms contemplating service
delivery co-innovation implementation.
Fourth, service delivery co-innovation affects firms’ competitive advantage differently
(market-based and employee-based). Therefore, managers should be aware that firms’
competitive advantage requires being distinguished in accordance with service delivery
co-innovation. When the employee-based competitive advantage is powerful, firms should
invest in improving the skills and capabilities of their employees. On the other hand, if
competing market offerings are superior to those of competitors, firms should emphasize new
approaches or methods of service delivery co-innovation.
Limitations and future research
Despite these contributions, this study has several limitations that suggest directions for future
research. First, given the characteristics of IT service firms, our analysis was based on
perceptual data. Since perceptual data can be subject to bias, our findings must be interpreted
with caution. Since competitive advantages are notoriously difficult to measure, we merely
offer the perceptual measures. Nonetheless, following Powell’s (1996) suggestion, a series of
tests of common method variance in the present study did not indicate a serious problem. Still,
future research should collect objective data from all appropriate external (customers) and
30
internal (database) sources. Second, this study examines service delivery co-innovation from
the focal firm perspective. Future research might discuss other perspectives, such as the view
from the business partner’s perspectives.
Third, the use of single respondents is limited by issues of key informant bias. While this
limitation is partly overcome by the use of senior marketing managers as key respondents,
future studies could consider the use of multiple respondents as key informants within a single
firm. Fourth, potential differences in industry characteristics might influence research results.
Scholars should investigate this issue in a wider variety of IT industries or in different
countries to overcome this limitation. Future research should also replicate the present study
to guarantee the generalizability of the results.
Fifth, we did not address the forms service delivery co-innovation can take. Our
construct of service delivery co-innovation focuses on innovation activities that involve
collaboration with business partners to create value for customers through a new service
delivery mechanism. Different types of new service delivery mechanisms (i.e., new
communication encounters, new usage encounters, and new service encounters) may be better
or worse for developing partnerships. In addition, different types of collaborative relationships
could be difficult and thus affect the efficiency of service delivery co-innovation practices.
Further, we do not analyze what businesses are not currently doing on their own that is
enabled by service delivery co-innovation. These aspects of forms, weaknesses, and gaps will
likely be important for fully understanding the relationship between collaborative
relationships and service delivery co-innovation but are beyond the scope of our article.
Finally, this study is based on the IT service industry. Research could determine if the results
of this study hold equally well for other service industries, such as the financial service
industry.
31
Appendix: Measurement Scales
Partner reliability (PR)
We select business partners because they
PR1 have the ability to manage working conditions continuously.
PR2 have the ability to manage working conditions effectively.
PR3 can be trusted.
PR4 have cooperative exchange behaviors for mutual gain.
PR5 have the willingness to share benefits.
PR6 have the willingness to bear possible risks and costs.
PR7 have the willingness to exchange new knowledge.
Partner complementarity (PC)

We select business partners because they
PC1 need resource sharing to accomplish the collective goal with us.
PC2 have enhanced value provided by us.
PC3 have distinct capabilities or skills.
PC4 have enhanced our resources or skills.
Partner expertise (PE)

We select business partners because they have…
PE1 the capability to do competitive analysis.
PE2 the capability to do strategy formulation.
PE3 the capability to co-develop a new product or service.
PE4 the mastery of relevant competencies in service delivery.
PE5 the mastery of relevant skills in service development.
PE6 the ability to provide accurate and pertinent service/product information.
PE7 the ability to bring effective service/product transactions.
Partner compatibility (PCP)

We select business partners because they are
PCP1 congruent in our organizational philosophies.
PCP2 congruent in our goals.
PCP3 congruent in our values.
PCP4 congruent in our technical capabilities.
PCP5 congruent in our organizational operation processes.
PCP6 congruent in our operating systems.
New communication encounters (NCE)

We have…
NCE1 offered information through new visible channels.
NCE2 offered information through new invisible platforms.
NCE3 offered information through new marketing programs.
New usage encounters (NUE)

We have…
NUE1 offered new solutions through customer behaviors in the use of online platforms.
NUE2 offered new solutions through customer behaviors in the use of service/product.
NUE3 delivered proper ways of using service/product through new methods.
NUE4 provided new methods by which customers can experience service/product.
New service encounters (NCE)

Our service personnel can provide new ways to…
NCE1 deliver service/product.
NCE2 solve customers’ problems.
NCE3 respond to customers’ complaints immediately.
Market-based competitive advantage (MCA)

Compared to major competitors, our company has been more successful in providing new collaborative
32
services…
MCA1 to enter new markets.
MCA2 to satisfy customers’ need.
MCA3 to offer higher quality than competitors.
Employee-based competitive advantage (ECA)

Compared to major competitors, our company has been better able to
ECA1 increase employee job satisfaction.
ECA2 increase employee-related experience and domain knowledge.
ECA3 enhance the innovative capabilities of employees.
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37
Tables
Table I. Responding company demographics

Variable Category N Rate (%)
1 years and fewer 2 1.7
Over 1 years to 3 years 4 3.3
Years of firm established Over 5 years to 10 years 26 21.7
Over 20 years 60 50.0
Aggregate 120 100
Less than USD 0.3 million 5 4.2
USD 0.3 million to 1.6 million 32 26.7
USD 1.6 million to 3.3 million 23 19.2
Firm capital (1 US dollar ≒ 30
USD 3.3 million to 16 million 10 8.3
NT dollars)
USD 16 million to 33 million 12 10.0

Over USD 33 million 38 31.7
Aggregate 120 100
100 and fewer 11 9.2
100 to 500 37 30.8
500 to 1000 12 10.0
Number of employees 1000 to 2000 15 12.5
2000 to 3000 10 8.3
Over 3000 35 29.2
Aggregate 120 100
Notes: “Rate” in % means the frequency divided by the total valid response number
1
Table II. Operational definitions of observed variables
Constructs Operational definition
1. Can be trusted.
Business
2. Continuously manage working conditions.
partner Partner reliability
3. Effectively manage working conditions.
selection
4. Involve in reciprocal/exchange behavior.
1. Eliminating deficiencies in each other's portfolio of resources.
2. By pooling partner firm’s resources and capabilities, firms can
initiate projects that they could not have successfully done alone.
Partner complementarity 3. Two firms’ resources are mutually supportive, different and
interdependent.
4. The value of one resource is enhanced by the presence of another
resource.
1. Possessing capabilities to do competitive analysis, strategy
formulation, and new product development.
Partner expertise 2. Possessing the mastery of relevant competencies in service

delivery.
3. Providing accurate and pertinent information.
1. Congruence in organizational philosophies, goals, and values.
1. Congruence in procedural capabilities.
2. Compatible operating systems.
Service delivery New activities that are executed to connect with customers and to
New communication encounters
co-innovation promote and propel dialogues.
New methods that customer practices with product or service and
New usage encounters
include the services that support usage.
New ways in which customers interact with customer service
New service encounters
personnel or service applications.
1. Entering a new market.
Competitive
Market-based competitive advantage 2. Satisfying customers’ need.
advantage
3. Providing better services quality than competitors
1. Increasing staff job satisfaction.
Employee-based competitive advantage 2. Enhancing staff experience and domain knowledge.
3. Uplifting staff innovative capability
2
Table III. Results of measurement properties
Factor Cronbach’s Composite
Construct name Items AVE
loading alpha reliability (ρc)
Business partner PR1 0.82
selection PR2 0.84
PR3 0.82
Partner reliability PR4 0.74 0.88 0.91 0.63
PR5 0.73
PR6 0.79
PC1 0.74
Partner PC2 0.84
0.81 0.87 0.63
complementarity PC3 0.75
PC4 0.84
PE1 0.80
PE2 0.81
PE3 0.77
Partner expertise PE4 0.80 0.91 0.93 0.65

PE5 0.85
PE6 0.82
PE7 0.79
PCP1 0.86
PCP2 0.87 0.81 0.89 0.73
PCP3 0.81
PCP4 0.90
PCP5 0.85 0.81 0.89 0.73
PCP6 0.80
Service delivery NCE1 0.79
New communication
co-innovation NCE2 0.91 0.82 0.90 0.75
encounters
NCE3 0.88
NUE1 0.86
New usage NUE2 0.92
0.87 0.91 0.72
encounters NUE3 0.82
NUE4 0.79
NSE1 0.92
New service
NSE2 0.95 0.93 0.96 0.89
encounters
NSE3 0.95
Competitive Market-based MCA1 0.87
advantage competitive MCA2 0.91 0.87 0.92 0.80
advantage MCA3 0.89
Employee-based ECA1 0.91
competitive ECA2 0.94 0.92 0.95 0.86
advantage ECA3 0.92
PR = partner reliability; PC = partner complementarity; PE = partner expertise; PCP = partner compatibility;
SDCI = service delivery co-innovation; NCE = new communication encounters; NUE = new usage encounters;
NSE = new service encounters; MCA = market-based competitive advantage; ECA = employee-based
competitive advantage
3
Table IV. Means, SD, and correlations (N = 120)
Construct Mean SD FA FC FS PR PC PE PCP NCE NUE NSE MCA ECA
FA 4.96 1.26 NA
FC 3.88 1.73 .23 NA
FS 3.67 1.82 .20 .31 NA
PR 3.90 .55 .15 .03 .00 0.79
PC 3.83 .59 .11 .07 .00 .11 0.79
PE 3.83 .61 .19 .01 .01 .12 .15 0.80
PCP 3.35 .68 .12 .01 .05 .14 .10 .13 0.85
NCE 3.54 .91 .09 .10 .08 .22** .26** .37** .38** 0.86
NUE 3.42 .85 .06 .11 .10 .20** .38** .35** .36** .11 0.84
NSE 3.77 .87 .02 .00 .05 .25** .23** .25** .34** .06 .08 0.94
MCA 3.50 .68 .01 .21* .11 .12 .13 .06 .11 .23* .22* .18* 0.89
ECA 3.46 .82 .05 .22* .15 .15 .08 .03 .09 .19* .18* .24* .04 0.92
FA = firm age; FC = firm capital; FS = firm size; PR = partner reliability; PC = partner complementarity; PE =
partner expertise; PCP = partner compatibility; SDCI = service delivery co-innovation; NCE = new
communication encounters; NUE = new usage encounters; NSE = new service encounters; MCA = market-based
competitive advantage; ECA = employee-based competitive advantage; NA = Not Applicable; Figures in diagonal
are values of the square root of the AVE; * p < .05, ** p < .01
4
Table V. Results of PLS analysis
Paths/Hypotheses Path coefficient Results

Hypothesized relationships
Partner reliability → SDCI (H1) 0.25** Supported
Partner complementarity → SDCI (H2) 0.36** Supported
Partner expertise → SDCI (H3) 0.30** Supported
Partner compatibility → SDCI (H4) 0.20** Supported
SDCI → Market-based competitive advantage (H5a) 0.37*** Supported
SDCI → Employee-based competitive advantage (H5b) 0.30*** Supported
2
R
SDCI 0.30
Market-based competitive advantage 0.42
Employee-based competitive advantage 0.28
Average R2
0.33
Average communality 0.62
Goodness-of-Fit1 0.45
* p < .05, ** p < .01, *** p < .001; SDCI= service delivery co-innovation
Table VI. Results of PLS analysis (II)
Paths Path coefficient

Partner reliability → MBCA 0.25**
Partner complementarity →MBCA 0.20**
Partner expertise → MBCA 0.27**
Partner compatibility → MBCA 0.20**
Partner reliability → EBCA 0.23**
Partner complementarity →EBCA 0.20**
Partner expertise → EBCA 0.22**
Partner compatibility → EBCA 0.19**
Notes: * p < .05, ** p < .01
MBCA: market-based competitive advantage
EBCA: employee-based competitive advantage
1
Goodness-of-Fit = [(average communality) × (average R 2 )]
5
Figures
Input Process Output
Business partner selection Service delivery co-innovation Competitive advantage
Partner New
reliability communication
encounters
Market-based
competitive
Partner advantage
complementarity
New usage
encounters
Partner
expertise
Employee-based
competitive
advantage
Partner New service
compatibility encounters
Figure 1. The conceptual model
1
Year
PR
-0.09
0.25**
MCA 0.04
PC 0.36** 0.37***
SDCI R2 = 0.42 0.28
0.30** Capital
2
PE R = 0.30 0.30*** ECA 0.23
0.20**
R2 = 0.28 -0.05
0.36*** 0.43***
PCP 0.34*** 0.01
Size
NCE NUE NSE
Figure 2. Results for PLS analysis (PLS model index: Goodness-of-Fit = 0.45)
PR = partner reliability; PC = partner complementarity; PE = partner expertise; PCP = partner compatibility;

SDCI = service delivery co-innovation; NCE = new communication encounters; NUE = new usage encounters;
NSE = new service encounters; MCA = market-based competitive advantage; ECA = employee-based
competitive advantage

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Management Decision

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firms’ competitive advantage, leading to sustainable market success.

appropriate business partners to co-innovate new products/services leaves this question

selection influences service delivery co-innovation.

to significantly impact firms’ competitive advantage. However, while a number of academics

is important to distinguish the constructs of competitive advantage for service delivery

co-innovation. This is because, according to Chen et al. (2009), service delivery

co-innovation not only provides a common competitive advantage that is superior to

competitive advantage of service delivery co-innovation between market-based competitive

advantage and employee-based competitive advantage.

selection: partner reliability, partner complementarity, partner expertise, and partner

market-based competitive advantage and employee-based competitive advantage.

Following the input–process–output model developed by Deeter-Schmelz et al. (2003),

service delivery co-innovation, and competitive advantage. Results of a survey of 120 IT

and employee-based competitive advantages.

how a manager selects appropriate business partners to enhance service delivery

delivery co-innovation research by explaining how some companies’ inter-firm collaboration

study moves strategy research beyond the traditional aggregate conceptualization of

competitive advantage by distinguishing competitive advantage into two types: market-based

analysis are presented. We conclude with a discussion of theoretical and managerial

implications and directions for future research.

inter-organizational relationships (Pfeffer and Salancik, 1978). RDT has emerged as a

powerful approach to explaining organizational behavior and inter-organizational

to acquire more autonomy and freedom (Oliver, 1991).

According to the logic of RDT, establishing such collaborative relationship constitutes a

relationships with other organizations in order to obtain critical resources. Accordingly,

organizations seek to reduce uncertainty by means of establishing formal or semiformal

views service delivery co-innovation as a strategic response to conditions of uncertainty and

to situations where firms lack necessary self-resources.

survival (Pfeffer, 1982). Organizations are constrained by their environments because

organizational survival is dependent upon resources located in the environment. These

inter-organizational relationships. In other words, the RDT is helpful in identifying forces

self-resources. Second, in response to environmental uncertainties, firms build partnerships

regarded as a strategic response to dealing with conditions of uncertainty, and as a resolution

Business partner selection

in practice, we identified four criteria to select business partners.

effective collaboration process: relational alignment, technological alignment, and strategic

compatibility as one of the antecedents to service delivery co-innovation.

Technological alignment describes a partnership where each partner possesses unique

to identify partners who possess unique expertise for co-innovation practices.

The second part of technological alignment is resource complementarity. As Emden et al.

Therefore, we propose partner complementarity as another important antecedent to

on commitment. Therefore, we propose that, when a partner is able to contribute specifically

expertise, and partner compatibility.

Service delivery co-innovation

through a series of encounters, including communication encounters, usage encounters, and

service encounters (Payne et al., 2008).

videoconferences, or deliver post-sales service, such as 24-hour call centers.

Co-innovation is defined as an innovation that is co-created by a partnership between

In addition, as discussed earlier, service delivery is a series of two-way interactions. Therefore,

service delivery co-innovation is explicitly characterized as a type of encounter that includes

capabilities, and may be viewed, externally, as outcome performance, and, internally, as

competitive advantage in different ways, such as innovation-based, cost-based, market-based,

employee-based, or relationship-based competitive advantages (e.g., Barney, 1995; Dyer and

As discussed earlier, we employ two competitive advantages to describe the

effectiveness of service delivery co-innovation: (1) market-based competitive advantage,

employee-based competitive advantage, through the development of employees’ unique skills

The conceptual model

According to the input–process–output model (Deeter-Schmelz et al., 2003), organizational

inputs influence organizational effectiveness entirely through organizational processes. This

partner selection, which includes partner reliability, partner complementarity, partner

consists of market-based competitive advantage and employee-based competitive advantage.