Academic journal article Journal of Business Strategies

The Effects of Customer-Firm Interaction on Innovation and Performance in Service Firms

Academic journal article Journal of Business Strategies

The Effects of Customer-Firm Interaction on Innovation and Performance in Service Firms

Article excerpt


Understanding innovation in services has always been complicated by the intangibility of the underlying offering and hence the ease of imitation by rivals. This study extends the transaction cost approach by investigating how the switching costs created by the interaction between a service firm and its customers impact the level of innovation activity by the organization. Using data obtained from a sample of 221 service firms, the findings suggest that when organizations structure their service production processes in a manner that requires a high degree of direct face-to-face interaction with the customer, the resulting impact is an increase in customer switching costs. This, in turn, acts as competitive protection for these firms, inducing them to pursue greater levels of innovation. In addition, we found that certain combinations of customer-firm interaction and innovation activity led to superior performance.


Numerous studies in the management literature have supported the idea that an emphasis on innovation can increase firm performance by leveraging dynamic capabilities (Pittaway, Robertson, Munir, Denyer, & Neely, 2004); capturing market share (Kerin, Varadarajan, & Peterson, 1992), exploiting experience and learning curve effects (Lee, Smith, Grimm, & Schomburg, 2000; Porter, 1985), preempting scarce resources (Lieberman & Montgomery 1988), creating reputation effects (Hitt, Bierman, Shimizu, & Kochhar, 2001), and adopting a service dominant logic (Lusch, Vargo, & O'Brien, 2007). However, scholars also acknowledge that such an emphasis may not always result in higher levels of firm performance (Lieberman & Montgomery, 1998; Lumpkin & Dess, 1996). This contrasting stream of research suggests that when rivals are able to imitate the products or services of a first-mover, it can adversely affect the ability of the innovator to sustain an advantage, as the imitator may be able to avoid development costs, pricing mistakes, and learn from the first mover's experience (Lee, et al., 2000; Lieberman & Montgomery, 1998; Porter, 1985).

The extant services literature proposes that this is of particular concern for innovators within service organizations because protecting new service innovations is difficult due to the intangibility of the offering (i.e., the service is typically a process, not a tangible product) (e.g., Song, Di Benedetto, & Zhao, 1999). As a result, these types of firms typically cannot depend on patents or other legal protections to ensure the efficacy of their innovations (e.g., Sundbo, 1997). Thus, in order for these firms to increase their commitment to innovation, other barriers must be in place to reduce the impact of ease of imitation by rivals.

One competitive barrier in services that has received much attention in the literature is the existence of a relationship between the service firm and the customer (Gotlieb, Levy, Grewal, & Lindsey-Mullikin, 2004; Klemperer, 1995; Lehmann & Neuberger, 2001: Mills & Margulies, 1980). In this study we are specifically interested in the direct face-to-face interaction between service firms and their customers. A customer-firm interaction (CFI) occurs when there is direct face-to-face contact between the consumer and the service firm (Mills, 1986; Mills & Margulies, 1980). Interaction to varying degrees is typical for service organizations, since the simultaneous production and consumption of the offering requires these firms to interact with their customers to a greater degree than manufacturing firms (Mills, 1986; Normann, 1984). With today's technological advances, however, there are many different ways for firms to interact with customers (i.e. Internet or automated communication). Organizations must decide upon the level of direct face-to-lace (CFI) interaction they will have with customers during service production. Thus, the degree of CFI is a firm-level decision and is the result of how a service organization structures its production process (Skaggs & Huffman, 2003). …

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