PRODUCTION AND OPERATIONS MANAGEMENT POMS

Vol. 17, No. 3, May–June 2008, pp. 267–284 doi 10.3401/poms.1080.0034

issn 1059-1478
eissn 1937-5956
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0267 © 2008 Production and Operations Management Society

New Service Development Competence and

Performance: An Empirical Investigation
in Retail Banking
Larry J. Menor
Richard Ivey School of Business, University of Western Ontario,
London, Ontario, Canada N6A 3K7, lmenor@ivey.uwo.ca

Aleda V. Roth
College of Business and Behavioral Science, Clemson University, Clemson,
South Carolina 29634, aroth@clemson.edu

W hat can service firms do to improve their ability to offer new services? In this paper we argue that new ser-
vice development success results from building a competence in the management of service development
resources and routines. We conceptualize new service development competence as a multidimensional, second-
order latent construct that is represented by a system of four interrelated and complementary dimensions: (1)
formalized new service development processes, (2) market acuity, (3) new service development strategy, and
(4) information technology use and experience. We hypothesize that the growth of new service development
competence is related to improved new service development performance. Using structural equations model-
ing, we analyze survey data from 166 retail banks and report three key empirical findings. First, we show that
the four hypothesized dimensions are statistically significant in defining new service development competence.
Second, contrary to conventional wisdom in new product development, we find that formalized processes play
a lesser role in the success of new service development compared with the other three dimensions. Instead,
market acuity—which captures the firm’s ability to see the competitive environment clearly and to anticipate
and respond to customers’ evolving needs and wants—was the most important new service development com-
petence indicator. Finally, we demonstrate the positive effect of new service development competence on new
service development performance and show that new service development competence is also significantly
related to business-level performance. Together, our empirical results suggest that complementary benefits arise
from the adoption of a more holistic approach to the management of new service development at the program
level.
Key words: new service development; service operations management; competencies; structural equations
modeling
History: Received: April 2005; Revised: January 2006; Accepted: January 2006 by Michael Pinedo.

1. Introduction Ulrich 2004, Krishnan and Ulrich 2001); however,

With the emergence of heightened competition,
increased heterogeneity of customer demands, and
shortened product life cycles, service firms across
many industries are increasingly faced with the chal-
lenge of determining how best to manage their
development of new service offerings. Additionally,
the criticality of new services in the portfolio of
offerings of traditional manufacturers has noticeably
increased. Firms such as IBM, General Electric, and
Hewlett-Packard have begun to shift their strategic
directions from solely producing “tangible” goods to
delivering “intangible” services. There is a rich tradi-
tion of empirical research on new product develop-
ment (NPD), where the focus is on physical product
attributes (e.g., features and usability) and efficient
and effective innovation processes (see Shane and
267
empirical insights on new service development (NSD)
are not well developed or advanced (Froehle and
Roth 2007, Menor and Roth 2007, Menor et al. 2002,
Froehle et al. 2000, Johnson et al. 2000, Johne and
Storey 1998). In response, service management schol-
ars have recognized the importance of, and need
for, NSD research that addresses how firms’ service
offerings and delivery systems remain attuned to the
constantly changing marketplace demands and com-
petitive environment (Roth and Menor 2003, de Jong
et al. 2003, Tidd and Hull 2003, Fitzsimmons and
Fitzsimmons 2000).
This research investigates the NSD phenomenon,
especially as it applies to financial services (Lyons
et al. 2007) and to the nascent empirical investiga-
tions in service operations strategy (Menor et al. 2001,
 Menor and Roth: New Service Development Competence and Performance
268 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
Soteriou and Zenios 1999, Roth and Jackson 1995).
Specifically, we introduce and operationally define
NSD competence, a term used to reflect the bundling
of complementary dimensions related to the service
firm’s (1) use of formalized processes, (2) understand-
ing of markets and competition, (3) strategic thinking
about new services, and (4) deployment and expe-
rience with information technology (IT). According
to the resource-based view of the firm (RBV), com-
plementarity exists when the value of one resource
(i.e., whether practice or routine based) is enhanced
by the presence of another resource (Powell and
Dent-Micallef 1997, Rivkin 2000). These four dimen-
sions are equivalent to innovation “best practices”
that interrelate and capture important aspects of new
service planning, analysis, and implementation at the
development program level.
We operationally define our NSD competence con-
struct as the service firm’s internal expertise—or
capacity—to deploy resources and routines, usually
in combination, to effect a desired innovation-related
or new service end. We argue that although aspects
of effective NSD and NPD differ primarily because
of the intangible nature of service offerings and
the service mindset, other aspects underlying effec-
tive innovation may be common to both. Whereas
some of the extant NSD research continues to focus
on the differences between NSD and NPD practices
and processes (e.g., Cooper and Edgett 1999), other
research suggests that a common set of strategic, pro-
cess, market/environment, and organizational factors
affect NPD performance (Krishnan and Ulrich 2001,
Schilling and Hill 1998, Brown and Eisenhardt 1995)
and NSD performance (Froehle and Roth 2007, Hull
2004, Froehle et al. 2000, Meyer and DeTore 1999).
Thus, examining theoretically supported commonal-
ities among practices and processes is an important
first step in advancing NSD theory.
Toward that end, we report a theoretically driven,
empirical study of NSD competence and performance
based on the resource-based view (RBV) (Barney
1991). The RBV is particularly useful in understand-
ing the competencies required to succeed in a service
environment (Bharadwaj et al. 1993), and it has been
meaningfully employed by service operations man-
agement researchers (e.g., Menor et al. 2001, Roth and
Jackson 1995). In prior related research, we developed
and empirically evaluated the psychometric prop-
erties of measurement items and multi-item scales
for each of the four dimensions of NSD competence
examined in this paper (Menor and Roth 2007). This
paper builds on and extends that work by conceptu-
alizing and validating NSD competence as a second-
order, latent variable. We model NSD competence as
a nomological net of four dimensions: (1) formalized
NSD processes, (2) market acuity, (3) NSD strategy,
and (4) IT experience. Furthermore, we examine the
complementary effects of these four dimensions on
NSD performance in terms of their covariation and
influence on performance.
Our research contributes to the emerging but
understudied topic of NSD in the service opera-
tions management literature in several ways. First,
to our knowledge, this is the first study to subject
to rigorous empirical scrutiny the multidimensional
nature of NSD. The empirical model is tested using
a sample of 166 retail banks. Because of their chang-
ing and information-intensive environments, financial
services—and retail banks specifically—provide an
excellent laboratory for studying service competitive-
ness issues such as innovation (Thomke 2003, Harker
and Zenios 2000, Melnick et al. 2000, Allen and Gale
1999). Roth and van der Velde (1992), for example,
empirically linked service innovation to market lead-
ership for retail banks. More recently, Menor et al.
(2001) used the retail banking industry to demonstrate
the importance of operations agility on performance.
Second, contrary to conventional wisdom, we show
that formalized processes, while being significant,
play a lesser role in NSD compared to its promi-
nence in the NPD literature. This result provides
some empirical support for differences between pro-
cess management for service development versus for
product development, as suggested by Behara and
Chase (1993, p. 87). These authors stated:
If we [services providers] designed cars the way we
seem to design services, they would probably come
with one axle and five wheels.
In addition, our empirical results indicate that each
of the remaining dimensions—possessing a market
acuity, utilization of IT-based communication chan-
nels, and having a NSD strategy—are essential for
developing new retail banking products. To the extent
that these results are generalizable to other services,
they reinforce the criticality of a cross-functional
management approach in NSD. Moreover, we find
that RBV arguments are useful in understanding
NSD phenomena, because our findings support the
logic for managing interrelated NSD resources and
routines. This logic is in line with Dierickx and
Cool’s (1989) embeddedness of resources, Powell and
Dent-Micallef’s (1997) complementary resources, and
Bromiley’s (2005) complex systems arguments.
The rest of the paper is organized as follows. Sec-
tion 2 outlines our theoretical approach, using RBV to
develop our hypotheses and research model. This is
followed in §§3 and 4 by a discussion of the research
methods and a presentation of results. Finally, in §5
we discuss our research contributions to both NSD
theory and practice before concluding.
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
2. Resource-Based View of the Firm
and NSD Competence
At the core, high-impact service operations manage-
ment research attempts to explain how and why
performance differs among service firms. The RBV
focuses internally on competitive advantages con-
ferred by unique, inimitable resources and provides
a theoretical lens through which to understand firm
heterogeneity. According to the RBV, the firm con-
sists of a bundle of resources, competencies, and capa-
bilities that form the basis to achieving competitive
advantage (Barney and Arikan 2001, Barney 1991).
Resources include all tangible and intangible assets,
including organizational and operational processes,
information, and knowledge, that enable the firm to
formulate and implement strategies that improve its
efficiency and effectiveness (Barney 2001). Resources
are the basis of any operating strategy that builds core
competencies; these competencies, in turn, form the
basis for competitive advantage.
The RBV is increasingly utilized to focus atten-
tion on the importance of managing firm resources
in the context of operations management research.
For example, operations management scholars have
employed the RBV to frame the development of
emerging technologies (Coates and McDermott 2002)
and the examination of operations strategy (Schroeder
et al. 2002, Roth 1996, Roth and Jackson 1995). Within
the innovation literature, RBV arguments have also
been applied in the study of NPD (Verona 1999,
McGrath et al. 1996). Consistent with that, the RBV is
a useful perspective for understanding NSD compe-
tence and whether this competence provides a basis
from which a competitive advantage can be obtained
and sustained. The RBV emphasizes the importance
and relatedness of resources and competencies resid-
ing within the firm. Adopting Coates and McDer-
mott’s (2002, p. 436) definition, a competence accord-
ing to the RBV logic is a “bundle of aptitudes, skills,
and technologies that the firm performs better than its
competitors, that is difficult to imitate and provides
an advantage in the marketplace.” A NSD compe-
tence is not passively acquired; like all strategic assets
(Dierckx and Cool 1989), developing a NSD compe-
tence requires a deliberate managerial emphasis on
resource and routine choices relating (in our research
context) to NSD planning, analysis, and implementa-
tion activities.
2.1. NSD Competence
NSD competence reflects a system of development
practices, processes, and routines that interrelate (i.e.,
covary) to influence a firm’s ability to develop new
services effectively. More formally, drawing on Menor
and Roth (2007), NSD competence is operationalized
269
by four dimensions: NSD process focus (PF), mar-
ket acuity (MA), NSD strategy (ST), and IT experi-
ence (IT). Each has been individually identified in the
extant NSD research literature as being an important
organizational resource or routine for NSD success
(de Jong et al. 2003). (See the appendix for the concep-
tual definitions and measurement items comprising
each dimension.)
First, NSD process focus is conceptualized as the
availability and use of systematic NSD practices and
routines, and it indicates the existence of a formalized
process for conducting innovation efforts. Our defi-
nition is consistent with that developed by Cooper
et al. (1994), who were among the first to recognize
the importance of breaking down the NSD process
into stages. Underlying this view is the belief that
a strategic advantage in development efficiency and
effectiveness likely accrues to service firms with spe-
cific formalized processes in place for NSD (Stevens
and Dimitriadis 2005, Johnson et al. 2000, Froehle
et al. 2000).
Second, market acuity has been defined as “the abil-
ity of the service organization to see the competi-
tive environment clearly, and thus to anticipate and
respond to customers’ evolving needs and wants”
(Roth 1993, p. 22). Sunbo (1997), for example, found
that the consideration of customers, competitors, and
market possibilities is the foundation for innovation
efforts in services. Market acuity is valuable because
it requires the service firm to continuously search for
information on customer needs and competitor offer-
ings, and, at the same time, have the capability to use
this information to create superior new services (Kirca
et al. 2005).
Valuable sources of relevant NSD information
emanate from both external and internal “customers.”
Indeed, conventional wisdom in service management
indicates that employees frequently act as NSD agents
to facilitate the efficient and effective completion of
front-end innovation process activities (cf. Verona
1999). In contrast to the goods-producing sector,
where employees are typically buffered from cus-
tomers (Chase and Tansik 1983), service employ-
ees have direct-contact interactions and high levels
of involvement with customers in the coproduction
of services (Sampson and Froehle 2006). Employ-
ees’ firsthand knowledge of customers through daily
direct contacts—either face-to-face or technology-
mediated (Froehle and Roth 2004)—provides insights
into changing needs and wants and the context and
dynamics of the local marketplace. Many firms utilize
external customer input as a source for new prod-
uct/service ideas, such as through the use of online
feedback systems and blogs.
Third, NSD strategy appropriately positions the role
of development within the overall business strat-
egy and enables management to plan for and to
 Menor and Roth: New Service Development Competence and Performance
270 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
make available adequate resources for specific NSD
efforts. NSD strategy also ensures that new service
offerings match customer expectations and demands.
Perhaps the most consistently held prescription for
NSD success is the alignment of the firm’s develop-
ment strategy with the firm’s overall business strategy
(Cooper and Edgett 1999, Sunbo 1997, Cooper and
Kleinschmidt 1995).
Fourth, IT experience captures the use of informa-
tion technology for facilitating or improving interor-
ganizational and intraorganizational coordination of
activities and information processing during the NSD
effort. It also enables the creation of services that
are more responsive to customer needs. IT experi-
ence represents a system or tool (Froehle et al. 2000)
that makes greater NSD competence possible through
improved information processing (Mata et al. 1995).
Most studies have explored the individual effects
of critical success factors in NSD (Menor et al. 2002,
Johne and Storey 1998). However, we believe that
theoretically it is the covariation, or complementar-
ity, among the four dimensions that characterizes
NSD competence that matters. Similarly, Hull (2004),
while focusing on distinct NPD issues such as the
importance of using in-process design controls and
early simultaneous influence, argues for the need to
examine the joint impact of development practices
when examining service development effectiveness.
In our conceptualization (see Figure 1), covariation—
parsimoniously represented as a second-order, multi-
dimensional construct (Edwards 2001)—implies that
all four dimensions are important indicators, or mani-
festations, of a firm’s NSD competence. Each comple-
ments the other. Consider the following: NSD strat-
egy defines the goals and leadership; market acuity
designates customers and market needs that feed into
the goals; IT experience facilitates communication and
is the primary technologic resource for information-
intensive processes; and process focus is the struc-
tured means of implementing NSD within the firm.
These dimensions are highly interrelated and rein-
forcing in influencing NSD programmatic activities.
Arguably, having a strategy without market acuity
provides little advantage in effecting service innova-
tion, or having market acuity or strategy without a
way to communicate and implement it within the
organization is not helpful. Thus, the logic of com-
plementarity is posited to be a necessary condition of
NSD competence.
Indeed, the complementarity of these NSD resource
dimensions is the basis for strategic value (Amit and
Schoemaker 1993) because it creates a more com-
plex innovation strategy (Bromiley 2005). Comple-
mentarity exists when the value of one resource is
enhanced by the presence of another resource (Powell
and Dent-Micallef 1997). The managerial mandate
Figure 1 Conceptual Model of NSD Competence and Performance
NSD
process focus H1A+
NSD
Market
effectiveness
H1B+
acuity H3+
NSD
H4+
H1C+ competence
NSD
strategy H1D+ H2+ NSD
competitiveness
IT
experience
is to “fit the pieces together” to exploit relation-
ships among these complementary resources. The
importance of complementarity is also supported in
Dierickx and Cool’s (1989) concept of the embed-
dedness of resources—where the value of a resource
is linked to the presence of another resource—and
their emphasis on the need for accumulating resource
portfolios that produce economic value. Our NSD
competence construct, given its underlying “com-
plex complementarities” (Rivkin 2000), is not easily
imitable, given that highly competent firms must do a
large number of NSD-related activities and practices
well even if none of these resources are individually
inimitable. Because firms that are more effective in
developing new services are posited to possess higher
levels of each of these resource dimensions, NSD
competence is modeled as a multidimensional reflec-
tive indicator construct (Jarvis et al. 2003). Hence, we
hypothesize:
Hypothesis 1A–D (H1A–D). NSD competence is
multidimensional and is reflected by and positively related
to NSD process focus, market acuity, NSD strategy, and
IT experience.
2.2. Influence of NSD Competence
on Performance
We posit that this covariation among the NSD compe-
tence dimensions offers a theoretical explanation con-
sistent with the RBV on how these distinct develop-
ment resources influence performance (Sanchez et al.
1996). Although each of the dimensions individually
may be prone to easy imitation, the synergies from the
set are less apt to be imitable or transferable; hence,
covariation provides a competitive advantage.
Our views are also supported by the literature
on core competencies (Prahalad and Hamel 1990,
Dierickx and Cool 1989) and first-mover advan-
tage (Lieberman and Montgomery 1988). Specifically,
developing an early expertise in generating new ser-
vice offerings (Gatignon et al. 2002, Schmidt and
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
Porteus 2000) provides a gateway to new opportuni-
ties and the creation of customer value. Thus, it is the
bundling of the competence dimensions that provides
the most powerful, and difficult to replicate, means of
achieving the desired level and type of performance
(Rivkin 2000). In other words, the internal expertise
required to develop new service offerings is not easily
imitable.
Highly successful NSD development efforts pro-
duce multiple benefits. Managers typically evaluate
development efforts based entirely on financial crite-
ria (e.g., revenue, profit, or profit margin) or other
measurable outcome metrics such as sales volume
and market share (Griffin and Page 1993). Yet there is
growing recognition of the need to explore a broader
array of managerially relevant nonfinancial perfor-
mance outcomes associated with the production of
new offerings (cf. Ray et al. 2004). For example, one
important process performance measure examined in
the literature is development timeliness (Hendricks
and Singhal 1997, Kessler and Chakrabarti 1996). As
service firms struggle to be responsive to customer
needs (Krishnan et al. 1999), timeliness will be a trait
of the successful NSD effort. Indeed, Schilling and
Hill (1998) identified the minimization of time to mar-
ket and the maximization of fit between customer
requirements and product characteristics as being crit-
ical objectives for NPD processes (cf. Cohen et al.
1996, 2000).
These two objectives are just as important for
the management of NSD. Investigation of nonfinan-
cial performance measures is informative, given that
they may be important leading indicators of a firm’s
financial performance (Ittner and Larcker 1998). As
depicted in Figure 1, NSD competitiveness and effec-
tiveness metrics are two distinct performance out-
comes (Cooper and Kleinschmidt 1995). NSD com-
petitiveness captures issues related to development
speed and quality (e.g., meeting customer require-
ments). NSD effectiveness, on the other hand, cap-
tures issues related to return-on-investment and prof-
its from new offerings. Therefore, we hypothesize:
Hypothesis 2 (H2). NSD competence will be posi-
tively related to NSD competitiveness performance.
Hypothesis 3 (H3). NSD competence will be posi-
tively related to NSD effectiveness performance.
Consistent with the RBV, a firm must possess and
deploy the requisite development resources in an
effective manner to capture innovation advantages
(McGrath et al. 1995, 1996); these advantages may
be mutually reinforcing. Brown and Eisenhardt (1995)
argued that innovation speed directly contributes to
the overall success of the firm’s development effort.
271
Cohen et al. (1996) analytically examined the trade-
off between product development speed and perfor-
mance, finding that improvement in speed does not
necessarily lead to an earlier time to market, though
it leads to enhanced products. Focusing on services,
Froehle et al. (2000) found evidence that speed of ser-
vice development is a driver of the effectiveness of
the service innovation effort, but that study was lim-
ited by the use of single-item metrics. Using multi-
faceted measures of performance, we also posit that
the speed of the development effort (i.e., NSD com-
petitiveness) should contribute to the effectiveness of
the firm’s development efforts. Thus, we hypothesize:
Hypothesis 4 (H4). NSD competitiveness will be pos-
itively related to NSD effectiveness.
2.3. Research Model of NSD Competence
and Performance
The testing of multidimensional models increases
researchers’ theoretical understanding of the rela-
tionships between constructs, especially when struc-
tural equations modeling (SEM) is used. Our research
model (see Figure 2) is patterned after the structure
of coalignment models found in the strategy (e.g.,
Venkatraman 1990) and information systems (e.g.,
Segars et al. 1998) literatures. In our coalignment
model specification, the second-order, multidimen-
sional construct (
1 ) is a parsimonious representation
of the covariation among the first-order dimensions
(1 to 4 ). This model specification is theoretically
consistent with RBV and our earlier discussion in that
it is the nomological net of relationships (i.e., covari-
ation), and not individual effects, that is important
for better development performance. Hence, the first-
order dimensions considered collectively—not indi-
vidually or in subsets of combinations—are viewed
as critical manifestations of a service firm’s NSD
competence.
In most instances, the coalignment specification
models the relationship between a multidimensional
exogenous factor (e.g., NSD competence) and a single
performance latent construct (5 or 6 ). However, we
have specified multiple performance dimensions, as
suggested by H2–H4.
3. Research Methods
3.1. Sample and Data Collection
The data sample consists of a single industry, financial
services, to control for potential contextual influences
sometimes associated with an interindustry sample
(Gerbing et al. 1994). Besides being an excellent lab-
oratory for examining service competitiveness issues
like innovation, financial services have been fre-
quently examined in NSD research because of (1) the
need for a range of products and services to meet the
 Menor and Roth: New Service Development Competence and Performance
272 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society

Figure 2 Research Model of NSD Competence and Performance where phone calls were not successful, senior oper-
ations/marketing executives identified through state
ε1 Y1 λ1
λ2
banking directories were chosen as appropriate key
η1
ε2 Y2 informants. We received 168 surveys over an eight-
γ1 week period in 1999, representing a 24% response
λ9 Y9 ε9
rate. However, two observations had sizable miss-
ε3 Y3 λ3
η5 λ10 ing responses that appeared to be nonrandom and
λ4 η2
ε4 Y4 γ2 γ5
Y10 ε10 were deleted from the data sample prior to analysis
ζ5
ξ1 β56 (Muthén et al. 1987). Nonresponse bias was assessed
ζ6 λ11 through comparisons of early and late respondents
γ3 γ6 Y11 ε11
ε5 Y5 λ5
(Armstrong and Overton 1977), and no statistically
λ6 η3 η6 λ12
ε6 Y6 significant differences were detected on key bank-
Y12 ε12 ing characteristics (e.g., number of employees, total
γ4 assets, total annual revenue). The unit of analysis
ε7 Y7 λ7 in this research is the NSD program (Johne and
λ8 η4
ε8 Y8 Storey 1998), which represents the portfolio of NSD
projects the bank initiated within the last three years.
Notes.
1 : NSD competence; 1 : NSD process focus; 2 : market acu-
These NSD projects, based on open-ended feedback
ity; 3 : NSD strategy; 4 : IT experience; 5 : NSD effectiveness; 6 : NSD
competitiveness. obtained from the key informants, ranged from the
design and delivery of new banking products to
the creation of new service delivery channels and
diverse and changing requirements of customers, and
processes.
(2) the pure service to quasi-manufacturing nature
of delivery channels and interactions with customers 3.2. Operationalization of Constructs
(Menor et al. 2002). Our research sampling frame Drawing on prior related research, the NSD compe-
consists of 696 retail banks randomly selected from tence and NSD performance dimensions are concep-
the Atlanta Region Federal Deposit Insurance Cor- tualized as latent constructs (Menor and Roth 2007).
poration (FDIC) Institutions database listing of finan- We followed a two-step approach for their opera-
cial institutions. For FDIC purposes, there are eight tionalization (Roth et al. 2008). The items used to
geographic regions: Atlanta, Boston, Chicago, Dallas, tap into each of the latent constructs were Likert-
Kansas City, Memphis, New York, and San Francisco. scaled (1–5) and, along with our conceptual defini-
States are assigned to geographic regions based on tions of these constructs, are detailed in the appendix.
their closest proximity to one of these cities. The In line with the general prescriptions of Wacker (2004)
Atlanta region comprises Alabama, Florida, Georgia, and Roth et al. (2008), our conceptual definitions
North Carolina, South Carolina, Virginia, and West of these NSD constructs and their associated items
Virginia. We compared the eight geographic regions were purified using an iterative item-sorting analysis
in terms of distribution of financial institutions’ asset resulting in reliable, valid, and unidimensional sets of
size. The Atlanta region was found to provide a size multi-item scales in the presurvey development stage.
distribution profile similar to that of the entire pop- Given that the survey responses represented a data
ulation of FDIC institutions. Furthermore, based on sample separate from that used for item purification
discussions with academic experts and financial ser- (not reported for the sake of brevity), we adopted
vices executives, we concluded that the Atlanta region confirmatory-based analyses to establish the reliabil-
was a reasonable choice for our study because of (1) ity and validity of our NSD competence and perfor-
the presence of large multistate banks headquartered mance measures. We next describe the data-related
in the area, (2) the existence of sufficient variance and modeling issues involved in our testing of the
in the types of demographic and geographic mar- research hypotheses.
kets served by institutions in this region, and (3) the
strategic orientation toward new service development 3.3. Analysis, Check of Statistical Assumptions
being pursued by that region’s banks at the time of Adequacy, and Model Identification
data collection. The proximity of the banks in this In this section, we discuss our statistical analysis strat-
region allowed us to conduct on-site interviews for egy given our empirical data.
the pilot study and for follow-up discussions. 3.3.1. Partial Disaggregation. Given our moder-
Systematic sampling of the sampling frame was ate-sized sample (n = 166) (Hoyle 1999) and con-
employed (Kerlinger and Lee 2000). We contacted cerns over model estimation and statistical power
each financial institution by telephone to identify (Raykov and Widaman 1995), we used a partial disag-
an appropriate key informant who could accu- gregation modeling approach in estimating the mea-
rately assess the bank’s NSD efforts. In instances surement and structural models. By default, most
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society 273

SEM analyses use a total disaggregation approach in Table 1 Item Parcel Descriptive Statistics
which each item is treated as a separate indicator of
Item Standard
the relevant construct (Bagozzi and Edwards 1998, Construct parcel∗ Mean deviation Skewness Kurtosis
Marsh and Hocevar 1985). The total disaggregation
approach provides the most detailed level of analy- NSD process focus PF1 243 082 −043 −080
PF2 217 070 010 −019
sis for construct testing. However, “in practice it can
Market acuity MA1 298 069 −017 −017
be unwieldy because of the high levels of random
MA2 342 090 −067 009
error in typical items and the many parameters that
NSD strategy ST1 366 090 −028 −063
must be estimated” (Bagozzi and Heatherton 1994, ST2 351 091 −016 −062
pp. 42–43). In contrast, the total aggregation of items IT experience IT1 310 078 007 −062
within dimensions offers little advantage over tradi- IT2 312 103 015 −059
tional multivariate analysis. NSD competitiveness COMP1 334 073 016 −059
A compromise between the two is the partial dis- COMP2 341 069 −081 040
aggregation approach, which allows for SEM analy- NSD effectiveness EFF1 310 052 −019 051
sis through the combining of items into composites, EFF2 318 061 −006 044
or item parcels; reduction of random errors while ∗
The survey questions contained within each item parcel are reported in
retaining the advantages of accounting partially for the appendix.
measurement error; examination of multiple multi-
dimensional variables; and testing hierarchical fac-
tor structure (Gribbons and Hocevar 1998). Partial None of the item parcels exhibits skewness or kurtosis
disaggregation is achieved by randomly aggregating values in excess of
20
. Although there is no estab-
items that relate to a given construct so that there are lished cutoff indicating when the data deviate appre-
two or three combined indicators instead of several ciably from multivariate normality, previous research
single-item indicators. The aggregated items should has noted some significant problems arising when
be determined to be unidimensional a priori, which univariate skewness approaches
20
and kurtosis
attenuates the risk of misspecifications and biased approaches
70
(Curran et al. 1996).
estimates (Kim and Hagtvet 2003). All items or indica- Two variants of Mardia’s (1970) coefficient are used
tors related to a latent variable should correspond in to further assess multivariate kurtosis (and normal-
the same way to that latent variable. Thus, any com- ity). Mardia’s coefficient (G2, P) was 5.046, whereas
bination of these items should yield the same model the normalized estimate was 1.536. These results sug-
fit (Hall et al. 1999). gest that the statistical and distributional assumptions
We randomly assigned the items for each of the of the maximum likelihood estimator, chosen for this
constructs into one of two combined indicators. The analysis, appear to hold (Raykov and Widaman 1995).
use of item parcels as indicators serves generally as a Pearson correlations between these item parcels are
way to address problems of large sample size require- reported in Table 2.
ments, unreliability, and nonnormal or coarsely mea-
sured item-level data (e.g., Gribbons and Hocevar 3.3.3. Identification. In building and testing
1998, West et al. 1995) and is a preferred approach covariance models, it is important to formally assess
in latent variable analysis (Coffman and MacCallum the identification of the hypothesized models. Model
2005). Finally, our use of item parcels—drawn, based identification guarantees that the proposed speci-
on our item-sorting analysis, from unidimensional fication has a unique solution, because a separate
sets of items—allows us to focus on the relation- and unique equation exists for the estimation of
ships among the latent, structural variables of interest each path coefficient (Bollen 1989). The identification
(Little et al. 2002). of the proposed coalignment model is established
3.3.2. Multivariate Normality and Estimation. using the two-step identification rule (see Figure
SEM estimation is sensitive to departures in mul- 3). The first step involves transforming the overall
tivariate normality. A lack of multivariate normal- model into a measurement model to establish that all
ity tends to inflate the  2 statistic and create an variances and covariances of  and x are identified.
upward bias for critical values used in determining The two-indicator rule establishes the identification
significance (West et al. 1995). Because multivariate for
= and x . The second step requires that the
normality implies that the individual variables—and latent variable model be constructed as if all
s and
their combinations—are univariate normal, it is rec- s are perfectly measured. From Figure 3, the null B
ommended that univariate normality of the variables rule establishes the identification of the coalignment
be initially assessed. Variable (i.e., item parcels) skew- structural model. The two-step identification rule
ness and kurtosis values resulting from the estima- is a sufficient condition for establishing model
tion of the measurement model are found in Table 1. identification (Bollen 1989).
 Menor and Roth: New Service Development Competence and Performance
274 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society

Table 2 Pearson Correlations for NSD Competence and Performance Item Parcels

COMP1 COMP2 EFF1 EFF2 PF1 PF2 MA1 MA2 ST1 ST2 IT1 IT2

COMP1 100
COMP2 071 100
EFF1 051 059 100
EFF2 028 051 063 100
PF1 004 020 012 015 100
PF2 001 012 007 013 065 100
MA1 022 028 029 028 014 018 100
MA2 019 026 021 020 021 022 055 100
ST1 028 025 022 011 −001 −005 028 032 100
ST2 030 022 022 010 −004 −001 042 036 063 100
IT1 010 019 025 021 009 004 027 035 033 031 100
IT2 −001 012 021 025 −006 −006 027 035 031 021 075 100

Notes. n = 166. Correlations ≥ 010 are statistically significant at the p < 010 level, correlations ≥ 013 are
statistically significant at the p < 005 level, correlations ≥ 018 are statistically significant at the p < 001 level,
and correlations ≥ 029 are statistically significant at the p < 0001 level.

Establishing identification for the research model 4. Results

is straightforward whether one allows the residu-
als of the performance endogeneous constructs to
correlate or one includes a causal path between
these endogenous constructs. Given that the relation-
ship between the endogenous performance constructs
remains recursive, one could use the recursive rule,
instead of the null B rule, in step 2 to establish iden-
tification of the structural component of the research
model (Edwards 2001).
Prior to estimating the hypothesized coalignment
model, we tested the measurement model of the
NSD competence construct using confirmatory fac-
tor analysis. This estimation resulted in an accept-
2
able fit (14df = 2536 (p = 0031), NFI = 095, GFI =
097, AGFI = 091, 1 − RMSEA = 093). The measure-
ment model loadings (see the appendix) indicate that
all of the factor loadings are statistically significant
and in the direction anticipated. In Table 3 we report

Figure 3 Application of Two-Step Identification Rule

Step (1)

NSD
process Market NSD IT NSD NSD
focus acuity strategy experience competitiveness effectiveness
ξ1 (= η1) ξ2 (=η2) ξ3 (=η3) ξ4 (=η4) ξ5 (= η5) ξ6 (= η6)

1 λ2 1 λ4 1 λ6 1 λ8 1 λ10 1 λ12

X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 X11 X12

(PF1) (PF2) (MA1) (MA2) (ST1) (ST2) (IT1) (IT2) (Comp1) (Comp2) (EFF1) (EFF2)

Step (2)

NSD
competence
ξ

γ1 γ2 γ3 γ4 γ5 γ6

NSD Market NSD IT NSD

NSD
process acuity strategy experience competitiveness effectiveness
focus η2 η3 η4 η5 η6
η1

Notes. Step (1): Factor complexity = 1,  diagonal, two indicators per factor, C(
i

j  = 0 for at least one i = j pair. Two-indicator rule establishes identification
for  and x . Step (2): B = 0, null B rule establishes identification of latent variable model.
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society 275

Table 3 Composite Reliability and Average Variance Extracted the construct relative to the amount of variance due
Estimates to measurement error. The estimation of the full
Composite Average variance research model used to test the hypotheses is shown
Construct reliability∗ extracted∗∗ in Figure 4.
Overall, the measures of model fit suggest a good
NSD process focus 079 050
fit. Whereas the  2 statistic is significant, all other
Market acuity 077 052
NSD strategy 078 053 measures of model fit are above their thresholds.
IT experience 085 056 There is general consensus against the sole use of the
NSD competitiveness 079 053  2 statistic to assess model fit (Bollen and Long 1993).
NSD effectiveness 077 052 In its place, the ratio of the  2 statistic to degrees of
Notes. Individual item loadings and critical ratios are reported in the freedom is found to be instructive in assessing model
appendix. fit; a  2 per degree of freedom of less than two, as
∗
Composite reliability is a measure of the internal consistency of the con- is the case here, indicates reasonable fit (Marsh and
struct indicators. Hocevar 1985). Examination of the structural model
∗∗
Average variance extracted reflects the overall amount of variance in the
focuses on the estimated coefficients for their practical
indicators accounted for by the latent construct.
and theoretical implications. Standardized estimates
and critical ratios are reported in Table 4.
the respective construct composite reliability (Bagozzi In support of H1A–D, we find that four of the
and Yi 1988) and average variance extracted (Fornell latent variable relationships are statistically significant
and Larcker 1981) for each NSD competence dimen- (2 = 090, 3 = 066, and 4 = 054, each at p < 0001,
sion and NSD performance construct. and 1 = 23, p = 003) (see Table 4). This result shows
The composite reliability values exceed the sug- empirically that, on average, higher levels of NSD
gested 0.70 standard, demonstrating that these indi- process focus, market acuity, NSD strategy, and IT
cators are sufficient in their representation of their experience reflect a higher level of NSD competence.
respective constructs. The average variance extracted Examination of the influence of NSD competence
values also meet and exceed the suggested 0.50 cut- on performance supports H2 and H3. NSD compe-
off, indicating that more variance is captured by tence is positively related to both competitiveness and

Figure 4 Estimated Model of NSD Competence and Performance

PF1 λ1 = 0.80
η1
NSD
process focus
PF2
λ2 = 0.81

EFF1
λ9 = 0.88
γ1 = 0.23 η5
MA1 λ3 = 0.74
NSD
η2
effectiveness
Market
MA2 acuity
λ4 = 0.75
γ2 = 0.90 λ10 = 0.72
γ5 = 0.19 EFF2
ξ1
NSD β56 = 0.64
competence
ST1 λ5 = 0.74 γ3 = 0.66
η3 γ6 = 0.43 COMP1
λ11 = 0.75
NSD
strategy γ4 = 0.54 η6
ST2 λ6 = 0.86 NSD
competitiveness

IT1 λ12 = 0.95

λ7 = 0.92 COMP2
η4
IT
experience
IT2 λ8 = 0.81
2
Notes. Overall fit: 47 df = 8738 p = 0000. NFI = 090; CFI = 095; IFI = 095; GFI = 092; AGFI = 087; RMR = 004; 1 − RMSEA = 093. Standardized
estimates statistically significant at p < 005 level.

276 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
Table 4 Standardized Estimates and Critical Ratios
Latent variable Standardized
relationship loading
1 —NSD competence to NSD process focus 023
2 —NSD competence to market acuity 090
3 —NSD competence to NSD strategy 066
4 —NSD competence to IT experience 054
5 —NSD competence to NSD effectiveness 019
6 —NSD competence to NSD competitiveness 043
56 —NSD competitiveness to NSD effectiveness 064
∗ of America, recognized as an exemplar for innova-
For one-tailed tests of significance, critical ratio (CR) =
165
, p < 005;
CR =
233
, p < 001; CR =
310
, p < 0001.
effectiveness performance outcomes (5 = 043, p <
0001 and 5 = 019, p = 003, respectively). Finally, the
causal path between NSD effectiveness and NSD com-
petitiveness (
56 = 064) is statistically significant (p <
0001). The positive relationship between NSD com-
petitiveness and NSD effectiveness supports H4. The
total effect of NSD competence on NSD effectiveness
is 0.47.
Although the RBV supports our coalignment model
specification of the NSD competence and NSD per-
formance relationship, we also conducted a post hoc
SEM analysis of a competing direct-effects model
in which the first-order constructs were allowed to
covary (i.e., interactions of exogenous factors are
modeled) and their independent, direct effects on
NSD performance were estimated. None of these
direct effect parameter estimates was statistically sig-
nificant, suggesting that the first-order factors have
a limited independent effect on NSD performance.
However, most of the correlations between the first-
order constructs were meaningfully strong and sta-
tistically significant (p < 001). Given that the second-
order NSD competence construct is a more parsimo-
nious representation of the covariances in the direct
effects model (Edwards 2001, Venkatraman 1990), this
analysis reinforces the overall importance of the inter-
related, complementary effect of the NSD competence
indicators and lends further support to our coalign-
ment model specification.
Additionally, we conducted a post hoc analysis
that controlled for the impact of firm size, which
can affect the amount of available resources allo-
cated toward NSD efforts (Chandy and Tellis 2000).
Although firm size can be operationalized in a num-
ber of ways, with the number of employees being
most widely used in organizational research (Kim-
berly 1976), we measured firm size in terms of the
retail banking unit’s (RBU) total assets as reported by
survey respondents. Including this single indicator of
firm size as an exogenous variable in the SEM struc-
tural model, and through estimating its direct influ-
ence on the NSD competitiveness and NSD effective-
ness constructs, yielded nonsignificant parameter esti-
mates for this control variable.
Menor and Roth: New Service Development Competence and Performance
An examination of additional survey data helps,
in part, to explain this result. Although 81% of our
Critical
ratio∗ sample banks had total assets exceeding $100 million
(with 11% reporting total annual revenue exceeding
198 $100 million), only 2.4% of these had an average
706
annual NSD expenditure exceeding $1 million. Based
541
567
on follow-up conversations with retail banking exec-
194 utives, the generally held belief associating bankers
421 with risk-averse decisions appears to hold when it
669 comes to the management of NSD. For example, Bank
tion in retail banking (Thomke 2003), typically invests
an extremely small percentage of its annual revenues
(e.g., <01%) on its ongoing R&D efforts. Our find-
ing of a nonsignificant impact of firm size on our
research results, along with the subsequent expla-
nation offered by practitioners about the generally
risk-averse culture found in many banks, deserves
additional research scrutiny.
We also reestimated our research model, controlling
for other factors that may directly impact NSD perfor-
mance including geographic market focus, strategic
importance of NSD given RBU goals, the size of the
reported annual NSD budget, and the RBU’s empha-
sis on mergers and acquisitions. As with the firm
size control variable, none of the estimated parame-
ters for these factors was statistically significant. We
did find a marginally significant (p = 008) direct effect
on NSD effectiveness when we used the perceptual-
based strategic emphasis variables “develop new ser-
vices and products for existing markets” and “create
new services and products to enhance existing offer-
ings” as separate exogenous factors tapping product
mix, suggesting that NSD efforts that complement
current market or product foci are likely to be effec-
tive. However, the pattern of statistical significance
and relative magnitudes of the other model parame-
ters were robust to the inclusion of these product mix
variables.
We note that our model did not explicitly include
a dimension of NSD competence that encompasses
employees’ knowledge, skills, and involvement.
Clearly, because of the defining nature that customer
contact plays in characterizing services, the role of
human resources in the effective delivery of services
and in the management of the service encounter
cannot be ignored. This leads to the question of
how those employees who have firsthand knowledge
about customers and their changing needs may con-
tribute to NSD competence. As was posited in §2.1,
a post hoc analysis of the survey data showed that,
on average, the retail banks sampled relied most fre-
quently on their front-room employees for informa-
tion when determining new service requirements and
that employee ability to use information was associ-
ated with market acuity. We found statistically signif-
icant correlations between our MA factor—based on
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
averaging the scores of the market acuity scale items
for each key informant—and the sources of informa-
tion utilized, such as front-room employees (r = 037,
p < 00001), customer feedback from Internet and/or
commercial online e-services (r = 035, p < 00001),
internal service development staff (r = 018, p = 002),
and customer mail surveys (r = 017, p = 003). There-
fore, our study supports the conventional wisdom
in service management that employees’ overall abil-
ities matter. Absorptive capacity theory (Cohen and
Levinthal 1990) would suggest that how employ-
ees are deployed and their overall abilities may be
important antecedents to MA, which was found to be
the most important dimension of NSD competence.
Clearly, the extension of our model to include the
role of employees and other factors as key operational
antecedents to NSD dimensions would be a valuable
area for future research.
4.1. Business-Level Performance
We also assessed the impact of NSD competence on
business-level performance using accounting-based
objective/archival financial performance data col-
lected by the FDIC in 1998 and 1999. We first com-
puted an overall composite index of NSD competence
for each of the 166 banks by averaging the item-
level responses for each of the four, first-order dimen-
sions (Grice 2001). This yielded individual bank mean
scores on PF, MA, ST, and IT, respectively. Next, we
averaged each bank’s four mean scores to determine
the overall NSD competence index. We then corre-
lated these NSD competence index scores with the
banks’ return on assets (ROA). ROA, calculated as
net income (including gains or losses on securities
and extraordinary items) as a percentage of average
total assets, represents a basic yardstick of bank prof-
itability. We use the difference in ROA as a mea-
sure of financial business performance to capture the
time-lagged effect associated with NSD competence.
The Pearson correlation between the NSD competence
index and the absolute difference in ROA from 1998
to 1999 is 0.20 (p = 001). Hence, a higher NSD compe-
tence index is associated with larger increases in ROA.
Furthermore, the correlations between NSD compe-
tence index scores and respondent-reported objective
measures of the percentage of RBU revenues derived
from new service offerings introduced within the past
three years and anticipated in three years are 0.29
(p < 0001) and 0.46 (p < 0001), respectively. These
results, using primary and secondary data, suggest
that higher levels of the NSD competence index are
associated with higher levels of RBU performance.
There are several reasons for this observed rela-
tionship between NSD competence and RBU perfor-
mance. First, higher NSD competence may lead to
better accounting returns. This occurs because higher
277
NSD competence most likely results in faster and
more productive NSD efforts compared with those of
competitors. Second, higher NSD competence results
in outcomes—whether product- or process-focused—
that create greater customer value through improve-
ments in quality or the ability to better meet market
needs. Additional empirical scrutiny of the compet-
itive advantages attributable to the development of
NSD competence is warranted.
4.2. Common Method Bias
Given that all of the survey data were collected using
single key informants, common-method bias poses a
potentially serious issue in interpreting these results
(Podsakoff et al. 2003, Doty and Glick 1998). For
example, one alternative explanation for our observed
NSD competence and performance findings is that
our key informants’ responses to the perceptual sur-
vey measures used to operationalize our NSD com-
petence dimensions may reflect the size of the firms’
budgets allocated toward NSD efforts, with better-
performing banks allocating more resources toward
NSD. To examine this, we used the size of the annual
NSD budget as a predictor variable in separate analy-
ses of variance (ANOVAs) with factor-based scores for
NSD competence, NSD effectiveness, and NSD com-
petitiveness, respectively, used as the criterion vari-
able. None of the ANOVA F values was statistically
significant, lending credence to our view that the size
of the annual NSD budget was not related to key
informants’ perceptions used to operationalize NSD
competence or NSD performance.
Doty and Glick (1998) noted that although the level
of bias is a cause for concern, it does not invali-
date many of the research findings. The impact of
common-method bias is “assumed to be minimal in
terms of affecting the final results” (Venkatraman
1990, p. 32), and one can utilize SEM to test its poten-
tial influence. This requires the formation of a rival
hypothesis in which all of the first-order factors con-
tained in the structural model reflect one superordi-
nate construct, akin to Harmon’s single-factor test.
Estimating this rival model using the effectiveness
2
performance parcels results in a 35df = 33406 (p <
0001), GFI = 073, and NFI = 044. Estimating this
rival model using the competitiveness parcels results
2
in a 35df = 37869 (p < 0001), GFI = 071, and NFI =
041. The poor fit values, compared with those of our
coalignment research model, strongly suggest rejec-
tion of this single-factor model. Thus, the analysis
specifying the coalignment latent factor provides sup-
port for both the existence of the NSD competence
construct and its positive and significant effect on
NSD competitiveness and NSD effectiveness.
 Menor and Roth: New Service Development Competence and Performance
278 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
5. Discussion
Despite an increasing number of empirical investiga-
tions into service operations management in general
(Smith et al. 2007, Gupta et al. 2006, Roth and Menor
2003) and the NSD phenomenon specifically, the vast
majority of scholarly NSD research is descriptive and
not theory driven (Menor and Roth 2007, Froehle and
Roth 2007, Menor et al. 2002). This study attempts
to add to the study and understanding of NSD by
empirically examining a theory-based conceptualiza-
tion of NSD competence and its impact. Our analysis
of survey data collected from a sample of retail banks
offers several noteworthy NSD observations.
First, the standardized factor loadings reported in
Figure 4 suggest that a NSD process focus is war-
ranted, but it plays a much lesser role in defining
NSD competence relative to the other competence
dimensions of marketing acuity, NSD strategy, and IT
experience. This result contrasts with the conventional
wisdom in innovation, which has focused on the
importance of having a systematic R&D or NSD pro-
cess (Thomke 2003, Bitran and Pedrosa 1998). Rather,
our results lend some credence to the observation of
Roth et al. (1997, p. 6) regarding the more informal
development processes employed in services, where
they observe:
Most notable    was the lack of process emphasis,
especially in the area of new service development.
While US service firms tend to improve their existing
services on a regular basis, they generally do not have
any formal and reproducible processes for developing
new services.
Additional survey evidence collected from our
retail banking respondents indicated that whereas
81% of the respondents felt that NSD was moder-
ate to very important for achieving the RBU’s goal,
only 58% of the firms made regular use of cross-
functional teams, which are more typical in NPD. Of
those 58%, 97% treated these cross-functional teams
on an ad hoc basis. Given the primary concern of
this research regarding the complementary effect of
the NSD competence dimensions, less formal and
reproducible development processes in a NSD pro-
gram may be less of a disadvantage for service firms
like retail banks, where product offerings are more
information-intensive and scaleable (Boyer et al. 2002)
and oftentimes more amenable to fast imitation. Thus,
although our results suggest that some process struc-
ture is necessary for NSD competence, they also sug-
gest that there is a tipping point: Highly formalized
NSD process structures might add process rigidity
and bureaucracy and, in turn, become a barrier to ser-
vice innovation, whereas more loosely coupled NSD
processes are more effective. This certainly is the case
when the retail bank is able to concurrently lever-
age greater market understanding, has articulated an
explicit NSD strategy, and makes effective use of IT
in its development efforts. Nevertheless, additional
research on the role of formal and reproducible pro-
cesses, especially for those firms whose service offer-
ings are more “goods” based, is needed.
Second, the relative importance of the other
NSD competence dimensions is worth noting. Our
research shows a positive relationship between the
employment of IT to coordinate NSD activities and
communication flow—both related to development
implementation—and NSD competence. Specifically,
higher levels of NSD competence are related to
higher levels, on average, of IT experience. Other
data collected from our study support this result. The
expected impact of Internet-based technologies on
NSD is wide ranging (e.g., the ability to develop cus-
tomized offerings to target markets and to improve
the speed to market of new offerings). This is an area
worth future investigation.
As noted earlier, perhaps the most consistently held
prescription for development success is the relating of
the firm’s new service strategy to the overall business
strategy (Johnson et al. 2000, Sunbo 1997). Our results
empirically support this prescription. Roth and van
der Velde (1992, p. 3) define world-class services as:
[having] created dynamic processes that provide
distinctive value-added products and services,
competitive advantage and delight to internal and
external customers, stakeholders, suppliers, and
partners. World-class organizations have internal core
capabilities that foster accelerated improvements in
human assets, technology, methods, and information
flows. These capabilities are synergistic with the
total business, and provide a sustainable competitive
position in the firm’s target market, given a global
economy.
The importance of NSD strategy rests on the belief
that NSD success requires that resources be expended
on only those development efforts with the high-
est potential of contributing to the firm’s competi-
tive success. For planning and analysis purposes, a
NSD strategy focuses efforts on the value-added and
aligns development resources and routines in accor-
dance with firm goals.
Similar to Stalk et al. (1992, p. 63), we view mar-
ket acuity as the “ability to see the competitive envi-
ronment clearly, and thus to anticipate and respond
to customers’ evolving needs and wants.” Thus, it
should not be surprising that market acuity is clearly
the most important dimension related to a NSD com-
petence (Figure 4). This finding is consistent with
Sunbo (1997) and is also supported by Cooper et al.
(1994, p. 295), who considered a market-driven NSD
process as the “dominant success ingredient for top
performing new service products.” Consistent with
Sampson and Froehle’s (2006) unified services theory,
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
which identifies service production processes in terms
of customer inputs, our MA-related findings highlight
the criticality of market input for more effective NSD.
However, NSD competence at the program level is
not solely or necessarily market driven. Indeed, lever-
aging employees’ firsthand knowledge, skills, and
involvement with customers to identify opportunities
for developing innovative service offerings or deliv-
ery processes may be an important antecedent to mar-
ket acuity.
Third, the NSD program performance measures
used in this analysis captured several aspects
of development success. Availability of objective
development-process-related data is a dilemma in the
study of NPD and NSD (cf. Gatignon et al. 2002,
McGrath et al. 1996). Clark et al. (1987, p. 738) state
that “any study of the development process faces sev-
eral problems in acquiring data. Publicly available
information on R&D is not project-specific or does not
provide evidence on the outcomes of the development
process or the operating characteristics of the firm. A
study of this kind thus requires collection of data in
the field.”
One natural question arising from this empirical
study is: does NSD competence affect business-level
(RBU) performance? Although support for the rela-
tionship between innovation and firm performance
has been found to some degree in the product devel-
opment literature (see Capon et al. 1990, Boulding
and Staelin 1995), there is little support for this rela-
tionship in service development research. We ini-
tially suspected that finding a relationship between
NSD competence and business-level performance
might be difficult for several methodological rea-
sons. Cross-sectional studies ignore the possible time-
lagged impact of development on performance. Fur-
thermore, the accounting-based performance indica-
tors available for analysis potentially confound mul-
tiple units of analysis, because objective and reliable
development performance measures are difficult to
obtain. Despite these thorny performance measure-
ment issues, our study showed a statistically sig-
nificant relationship between NSD competence and
objective measures, including firm ROA.
In summary, our findings support the covariation
specification of the nomological net of constructs
that manifest a NSD competence and its hypothe-
sized relationship with NSD performance. Consistent
with RBV, excess economic rents from NSD programs
require a holistic management approach to the devel-
opment of a set of NSD practices that competitors
would find difficult to imitate. Indeed, as Barney and
Arikan (2001, p. 173) observe,
to the extent that a firm’s competitive advantage
is based on causally ambiguous resources, managers
279
in the firm cannot know, with certainty, which of
their resources actually generates the competitive
advantage.
Our study reveals the criticality of market acuity, com-
bined with a NSD strategy, the utilization of IT-based
communication channels, and the employment of for-
malized processes; and, in turn, it suggests the impor-
tance of a cross-functional approach to the manage-
ment of NSD efforts. These four competence dimen-
sions represent, in short, an interrelated development
practices approach to managing NSD. The NSD com-
petence measure represents an index of the cover-
age of best practices, processes, and routines required
for development planning, analysis, and implementa-
tion. This research supports our theoretically driven
hypotheses that NSD competence represents an inter-
nal expertise that contributes to development perfor-
mance at the NSD program level (and business level)
of retail banks.
6. Limitations and Conclusion
Although this research makes a valuable contribution
to the understanding of the strategic management of
NSD, several limitations are worth noting. First, based
on RBV arguments, we specified our NSD compe-
tence construct as a multidimensional reflective indi-
cator construct. The four first-order indicators exam-
ined as manifestations, as opposed to determinants,
of NSD competence have been individually recog-
nized in various studies as critical antecedents of NSD
performance. However, there may be other viable first-
order indicators of NSD competence not examined
here that merit future empirical scrutiny. Importantly,
the multidimensional reflective indicator specification
used in this analysis allows for the interchangeability
of first-order indicators with similar content or themes
without altering the conceptual domain of the second-
order construct (Jarvis et al. 2003).
A second potential limitation is the moderate size of
the data sample used for our SEM analyses. This mod-
erate size relative to the complexity of the research
model may result in a lack of statistical power, a
problem faced in many empirical research studies
(see Parasuraman et al. 2005). Heeding Matsueda and
Bielby (1986), we planned for the possibility of trade-
offs between issues of statistical power and model
complexity by using techniques to ensure that ade-
quate measurement items were used and that the sta-
tistical modeling effort remained feasible (e.g., using
the partial disaggregation strategy).
Third, the collection of data from single key infor-
mants raises concerns over potential common method
bias. The results of our post hoc statistical tests indi-
cated that common method bias is not a critical mea-
surement issue in this analysis. Furthermore, addi-
tional analyses employing archival bank ROA data
 Menor and Roth: New Service Development Competence and Performance
280 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
provided some criterion validity to the NSD compe-
tence and NSD performance relationship we studied.
Finally, the generalizability of our empirical find-
ings, especially the relation between NSD competence
and NSD performance, may be limited by our deci-
sion to sample only from the Atlanta FDIC region.
We have used proxies to statistically control for ser-
vice competitiveness issues such as market scope and
product/customer mix and other salient factors such
as the size of the bank’s annual NSD budget, in
addition to controlling for these issues through our
sampling design choice. There may be other impor-
tant operating environment factors not considered
here that deserve formal consideration in future NSD
research studies.
Harker and Zenios (2000) and Melnick et al. (2000)
argue for the importance of new service offerings
in the creation of value in financial services. More
pointedly, Drucker (1999, p. 25) notes the importance
for financial services to “innovate or die.” Our study
provides insight into the intricacies of managing the
effort involved in carrying out such a mandate. Fur-
thermore, our results add to the nascent RBV-based
literature in service operations strategy.
Our study also calls into question the need for a
separate field of study in new service development,
because the utility of treating NSD as distinct from
NPD has been debated (cf. Meyer and DeTore 1999).
Some argue against the differentiation between NPD
and NSD, and others argue that NPD and NSD differ
in their degree of customer interaction and intangi-
bility for most service offerings (Thomke 2003). As a
result, the development of a new service is usually
far more complex conceptually than the development
of a new tangible product (Johne and Storey 1998,
Johnson et al. 2000). However, the differentiation per-
spective appears largely to be based on the outcome
of the NSD effort (i.e., the degree of “tangible” char-
acteristics that differentiate products from services)
and elements of coproduction of the service with cus-
tomers (Sampson and Froehle 2006). This research
implicitly tests the assumption that NPD determi-
nants of success apply to NSD efforts; we are among
the first to empirically verify that assumption for new
services that are largely intangible and information
intensive. In addition, the finding that loosely coupled
NSD processes may be optimal is consistent with the
coproduction argument, namely, that customer input
and heterogeneity can be important drivers of service
innovation, which formalized, rigid processes may
not capture.
Focusing specifically on what is involved in man-
aging a NSD program, which encompasses product
and process innovations, this research confirms that
there are comparable managerial issues involved with
both NSD and NPD. Moreover, our empirical results
provide some guidance for manufacturers pursuing
services, namely, to “loosen up” a bit on the require-
ment for formalized service development processes
and focus more intensely on cross-functional commu-
nications aligned to markets and strategy. Finally, we
provide evidence suggesting that, instead of devel-
oping separate disciplines in the study of NPD and
NSD, it may be more prudent to characterize future
research endeavors in these areas as investigations
into “new product/service development.” Our results
indicate that there should be synergistic advantages
to the study of the development practices and pro-
cesses for both service firms and manufacturers. The
NSD competence construct examined in this research
may be one such critical development-related charac-
teristic that contributes to the advancement of man-
agerial understanding and scholarly theory in either
area given its makeup of planning-, analysis-, and
implementation-related dimensions. In the end, one
fact remains: new services, and products, do happen.
Possessing a competence in the development of either
should contribute to a firm’s ability to build and sus-
tain a competitive advantage.
Acknowledgments
The authors would like to thank the editor-in-chief, the
special issue’s guest editors, and two anonymous review-
ers for their insightful comments and suggestions. Their
input has resulted in notable improvements to the reported
research.
Appendix
The operationalizations of the first-order, latent NSD com-
petence dimensions and NSD performance constructs are
summarized in this appendix. The survey asked informants
to “indicate, by circling the corresponding number, the
extent to which you agree or disagree with the follow-
ing statements as they pertain to your retail banking unit’s
new service and product development activities.” (Scaled
1–5 where: (1) Strongly Disagree to (5) Strongly Agree.)
Item parcels (e.g., PF1 , PF2 , MA1 , MA2 , etc.) were averages
created based on random assignment of items to parcels
after item content validity and scale unidimensionality were
demonstrated (see Menor and Roth 2007).
NSD Process Focus—Table A.1. NSD process focus is an
indicator of having a formalized process of conducting NSD
efforts. It represents the availability and use of systematic
service development practices (Menor and Roth 2007).
Market Acuity—Table A.2. Market acuity describes the
ability for the service organization to see the competi-
tive environments clearly and to anticipate and respond
to customers’ evolving needs and wants (Menor and
Roth 2007).
NSD Strategy—Table A.3. NSD strategy defines the role of
new service development within the overall business strat-
egy and enables management to plan for and make avail-
able appropriate NSD resources and routines necessary to
develop new services (Menor and Roth 2007).
Menor and Roth: New Service Development Competence and Performance
Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society 281

IT Experience—Table A.4. IT experience refers to the Table A.3 NSD Strategy (Composite Reliability = 078)
use of information technology for facilitating or improv-
Std. Critical
ing inter- and intra-organizational coordination of activities
Parcel Item loading ratio
and information processing in the NSD process (Menor and
Roth 2007). ST1 Current service capabilities are 058 651
NSD Performance—Tables A.5 and A.6. NSD performance, critical factors in determining the
instead of focusing on the performance of individual NSD “go/no go” decision for the
projects, focuses on the performance of the NSD program. development of new
services/products
The NSD program refers to the portfolio of NSD projects
the service organization has initiated within the last three ST1 Our retail bank’s NSD strategy 082 798
years. The survey asked informants to “indicate, by cir- and new offering decisions are
always formulated with the overall
cling the corresponding number, the extent to which your
RBU business strategy in mind
retail banking unit’s new service/product development pro-
ST2 Ideas for new service/product 074 —
gram performance over the last three years (i) fell short of or
development (NSD) are largely
exceeded goals and expectations or (ii) was low or high relative
driven by the retail banking
to competitors.” (Scaled 1–5 where: (1) Significantly fell short unit’s (RBU) overall business
of goals/Significantly lower to (5) Significantly exceeded strategy
goals/Significantly higher.) ST2 Senior managers are always willing 059 663
to commit resources to promising
service/product development
Table A.1 NSD Process Focus (Composite Reliability = 079) (NSD) projects
Std. Critical
Parcel Item loading ratio∗
Table A.4 IT Experience (Composite Reliability = 085)
PF1 Our new service/product 075 —
Std. Critical
development (NSD) efforts are
Parcel Item loading ratio
comprised of formal stages
of development activities IT1 Information technologies are used 047 —
PF1 Our retail banking unit (RBU) 049 645 to speed up the introduction of
employs standard resources new services and products
and routines in all NSD IT1 IT is used to identify and diagnose 064 440
projects customer needs
PF2 Our RBU employs formalized 090 908 IT1 IT is used to share information that 086 475
processes for all NSD coordinates NSD activities
projects
IT2 Communication flow within the 091 479
PF2 All NSD projects are planned 048 622 NSD project group is facilitated
based on a fixed sequence through IT-based channels
of development activities
IT2 Our RBU utilizes technology to facilitate 082 470
∗
For one-tailed tests of significance: critical ratio (CR) =
165
, p < 005; the flow of information to people
CR =
233
, p < 001; CR =
310
, p < 0001. participating in the NSD process

Table A.2 Market Acuity (Composite Reliability = 077) Table A.5 NSD Competitiveness (Composite Reliability = 079)

Std. Critical Std. Critical

Parcel Item loading ratio Parcel Item loading ratio

MA1 Our RBU actively seeks out 048 632 COMP1 Overall speed to market performance 074 714
information about our company’s of NSD projects for offerings
business environment introduced within the past three years
MA1 Our retail banking unit (RBU) uses 079 877 COMP1 Percentage of NSD projects launched 062 635
collected information to respond within the past three years that
quickly to changes in the competitive achieved marketplace success
environment COMP2 The degree to which the RBU’s NSD 076 723
MA2 New offerings are designed based on 084 885 program has been successful in
information actively collected on meeting customer requirements
evolving market shifts and customer for new offerings
demand for these new offerings COMP2 Overall performance of the new 066 —
MA2 Customers, both internal and external, 072 — service/product development
are viewed as potential and valuable (NSD) program relative to
sources of new offerings ideas competitors over the past
and opportunities three years

282 Production and Operations Management 17(3), pp. 267–284, © 2008 Production and Operations Management Society
Table A.6 NSD Effectiveness (Composite Reliability = 077)
Std. Critical
Parcel Item loading
EFF1 The degree to which the RBU’s 044
NSD program has been successful
in meeting corporate profit
objectives for new offerings
(on average)
EFF1 Percentage of profits provided by 074
new offerings less than three years old
EFF2 ROI for the NSD programs, initiatives, 082
or activities for the past three years
EFF2 The profitability of the retail bank’s 067
NSD program, initiatives, and
activities relative to its competitors
over the past three years
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