Journal of Services Marketing

Customer and employee co-creation of radical service innovations

Horace Melton Michael D. Hartline
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Horace Melton Michael D. Hartline , (2015)," Customer and employee co-creation of radical service innovations ", Journal of
Services Marketing, Vol. 29 Iss 2 pp. 112 - 123
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 Customer and employee co-creation of radical
service innovations
Horace Melton
Illinois State University, Normal, Illinois, USA, and
Michael D. Hartline
Florida State University, Tallahassee, Florida, USA

Abstract
Purpose – The study demonstrates that firms can effectively involve customers in new service development (NSD) to create radically innovative,
high-performing new services. Prior research found no effect of customer involvement on radicalness in NSD programs, but the current study provides
evidence that customer involvement in the design stage of NSD projects can increase the radical innovativeness of a new service.
Design/methodology/approach – Surveys from 160 firms captured information on the development process, participants and outcomes of recent
service innovation projects. Direct effect and mediation hypotheses were tested using structural equation modeling.
Findings – Customer involvement in the NSD process increases the innovativeness of a new service when customers are involved in the design stage
and when the influence is mediated by process complexity. Customer involvement in the development stage has no significant effect on service
innovativeness. Process complexity also mediates the positive influence of frontline employee and cross-functional team involvement in the NSD
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process on service innovativeness.

Practical implications – To produce radically innovative new services, managers should: focus on customer involvement in the design phase and
build an understanding of how the customer creates value-in-context, and use a detailed but flexible development process and provide extensive
opportunities for interaction of customers, frontline employees and cross-functional teams throughout the NSD process.
Originality/value – The study draws on complexity theory to explain how a complex NSD process enhances participants’ creativity and learning
and increases the innovativeness of a new service.
Keywords Service-dominant logic, Cross-functional teams, Customer involvement, Frontline employees, Process complexity,
Radical service innovation
Paper type Research paper

Introduction Witell et al. (2011) found that allowing customers to create

ideas in real-life settings led to more innovative service ideas.
Radical innovations use a substantially different core
Gustafsson et al. (2012) argued that companies should focus
technology and provide substantially higher customer benefits
on getting customers’ reactions to concepts and avoid their
compared to prior products in the category (Chandy and
ideas about content for a new service. A primary argument
Tellis, 2000). Examples of radical service innovations are
against customer involvement in new service development
streaming movie content as a replacement for renting DVDs,
(NSD) is that they are not necessarily good at suggesting or
use of telematics to monitor driving behavior and reduce auto
envisioning product concepts that are outside of their
insurance premiums and scanning checks for immediate
experiences. When Steve Jobs led Apple, he believed strongly
deposit via smartphones. Although the uncertainty of outcome
that customers were incapable of expressing their needs for
increases with higher levels of innovativeness, the financial
new products because they only wanted more of what they
reward for commercializing a radical service innovation
currently had at a lower cost (Burlingham and Gendron,
concept can often be substantial (Ordanini and Parasuraman,
1989; Elmer-DeWitt, 2012; Reinhardt, 1998).
2011).
The equivocal role for customers in prior radical service
Prior research has produced great inconsistency in findings
development research needs to be re-examined to determine
related to the role of customer involvement in the
how customer co-creation for others (Witell et al., 2011) can
development process for radical service innovations. Ordanini
have a positive effect on radical service development and
and Parasuraman (2011) found that collaborating with
performance. Other organizational resources such as
customers did not increase the radicalness of new services, but
cross-functional teams (CFTs), frontline employees (FLEs)
and learning orientation have previously been found to have
The current issue and full text archive of this journal is available on an influence on service innovation outcomes (Melton and
Emerald Insight at: www.emeraldinsight.com/0887-6045.htm Hartline, 2013; Ordanini and Parasuraman, 2011), but prior
research has not studied the mechanisms by which these
resources enable the development of radical service

Journal of Services Marketing

29/2 (2015) 112–123 Received 10 February 2014
© Emerald Group Publishing Limited [ISSN 0887-6045] Revised 17 June 2014
[DOI 10.1108/JSM-02-2014-0048] Accepted 13 July 2014

112
 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
innovations. This study addresses that gap by modeling an
important factor that affects the way customers and key
personnel work together to create successful, radically
innovative new services.
The current study proposes and tests a model in which the
effect of customer, FLE and CFT involvement on service
innovativeness is mediated by process complexity. In other
words, having customers and employees as participants in a
service innovation project is necessary, but not sufficient to
bring about a radically innovative outcome. Further, a radical
service innovation is more likely to arise from deployment of
these resources in an elaborate, multi-faceted process with
many opportunities for creative interaction of CFT members,
FLEs and customers.
Literature review
Radical service innovation
In their study of innovation programs in the Italian hotel
industry, Ordanini and Parasuraman (2011) found that
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customer collaboration in the NSD process positively
influenced innovation volume (i.e. capacity to produce new
ideas), but did not produce a significant effect on innovation
radicalness. Moller et al. (2008) argue that a balanced strategy
combining the competencies of client and service provider
leads to more complex, more radically innovative service
offerings. They argue that developers of radical service
innovations should “acquire a comprehensive understanding
not only of the reason why clients are using the service, but
also of the processes and competencies they employ to render
the value for themselves” (Moller et al., 2008, p. 46). Further,
they reason that collaborative service co-creation has the
potential for creating the most successful new services. The
current study proposes that, within an individual project,
the extensive collaboration of customers with other key
organization personnel will indeed have a positive effect on
innovation radicalness.
Customer co-creation
Gustafsson et al. (2012) define customer co-creation of new
services as a communication process characterized by:
● high frequency;
● evenly distributed two-way communication between
provider and customers during development;
● face-to-face communications throughout all critical
portions of development; and
● customers idea generation occurring in settings where the
innovation would ultimately be used (i.e. field-generated
ideas).
Service providers need to communicate with customers to
understand their needs, as well as the context and other
resources they use in meeting those needs. Further, the
attractiveness of a new service is determined by customers
based on the service’s value-in-context, and value is
co-created by the customer when they combine their resources
(skills, abilities and competencies) with the resources of the
service provider and others (Vargo et al., 2010). The challenge
to understand customer context is even greater with radical
innovations that address unexpressed, latent customer needs.
The Gustafsson et al. (2012) study argues that service
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Volume 29 · Number 2 · 2015 · 112–123
providers should seek customer feedback on product concepts
(design stage activities), but not press them for ideas on
content (functionality and features in the development stage)
because their limited experience “makes it difficult to suggest
solutions that are truly radical”.
Witell et al. (2011) distinguish between customer
co-creation for use (resource integration for the customer’s
own benefit) and co-creation for others (participating in
developing services that can benefit other customers). With
co-creation for others, the service provider actively involves
customers in the idea generation stage to provide information
about needs, context and resources, and to suggest new
product concepts. Using an experimental design, the
researchers found that customers can generate highly
innovative ideas when given the opportunity to experiment
and create in a context similar to the environment in which
they would actually use the new product or service. Working
in a natural setting over an extended time frame, customers
were able to assess value-in-context and were better able to
imagine how the product could be changed to meet their
needs, resulting in more innovative ideas.
Knowledge interfaces
Knowledge interfaces enable the gathering, dispersion and
meaningful integration of knowledge by an organization, and
are important drivers of radical service innovation. Two key
knowledge interfaces – FLEs and CFTs – are important to
service innovation due to their roles in capturing and
integrating information from the external environment, a
benefit that ultimately improves the marketability of the new
service (Melton and Hartline, 2013). As knowledge interfaces,
FLEs and CFTs also contribute to increasing the radicalness
of service innovations (Ordanini and Parasuraman, 2011).
Their findings suggest a need for additional research to
uncover the means by which FLEs and CFTs affect the
radicalness of service innovations and their market
performance.
NSD process
Most process models in the NSD literature contain the four
general stages of design, analysis, development and full
launch. Design involves generating and screening new service
ideas that are consistent with the organization’s service
strategy and objectives. In the analysis stage, managers assess
the project’s potential return on investment and likelihood of
meeting the stated objectives, and obtain the organization’s
approval to proceed. In the development stage, the business
develops and tests the core service, delivery system and
marketing program, trains operational and frontline personnel
and gets user and FLE feedback to improve the offering. The
full-scale launch stage introduces the new service to the target
market, and the post-launch review evaluates performance
and modifies the initiative, as needed (Johnson et al., 2000).
While a detailed and formal NSD process can increase the
number of innovations, increase the speed of development and
lead to higher sales (de Brentani, 1991; Edvardsson et al.,
2013; Froehle et al., 2000), such formality can also diminish
creativity and reduce the flow of market intelligence critical to
ideation and concept development (Chen et al., 2010).
 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
This study accepts the possibility that process formalization
(i.e. rigid procedural guidelines) inhibits creativity and service
innovation. However, we argue that process complexity (i.e.
elaborateness of the process expressed as the number and
variety of activities at each stage and the completeness of the
multi-stage process) has a significant, positive direct impact on
service innovation radicalness. CFTs, FLEs and co-creating
customers must interact and work creatively through the many
stages and activities of a fully formed innovation process to
avoid incrementalism and instead produce a truly novel,
distinctly innovative service with substantially higher customer
benefits and substantially different core technology than
competitive offerings.
Process complexity
We define process complexity as the extent to which the NSD
process has a substantial number and variety of activities that
allow participants to interact creatively. In their recent study of
new product development trends, Barczak et al. (2009) found
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that “processes for radical projects are more complex than for
incremental projects” (p. 14). Formal planned activities for
idea generation are more likely to be used for radical and more
innovative projects than for incremental projects. Based on
prior research, we expect different effects for process
formalization (characterized by rigidity and inflexibility) and
process complexity (elaborateness) on service innovativeness.
Formalization inhibits information flow and potentially harms
development capabilities needed to produce innovative
services (Lievens and Moenaert, 2000). Process complexity
has a positive effect on innovativeness because it accounts for
the need to develop new competencies, explore new
opportunities and overcome unexpected obstacles in the
development and implementation of radically new service
concepts.
Complexity theory explains why an elaborate and
interactive development process can lead to a radically
innovative service. Desai (2010) applies complexity theory to
learning co-creation in a value network, which he likens to a
complex adaptive system. Interactions among participants and
the combination of assets in a value network produce
synergies, so that value produced by the whole system is
greater than sum of value produced by the individual parts.
Desai (2010) argues that:
[. . .] actors of a value network interact, adapt to one another, collectively
learn [. . .] [and] behaviors and interactions of these diverse actors are
productive of emergent creativity and learning. (p. 391).
As the interactions continue, they produce “even more
complex ideas and knowledge” (p. 393). Desai (2010)
proposes that the interplay of forces in a value network
produces a driving force (adaptive leadership) that facilitates
co-creation of learning, creativity and adaptive outcomes.
Complexity theory highlights the roles of adaptive tension,
enabling leadership, interconnectedness between people to
enhance cooperation and learning and boundary spanning
with actors outside the system to bring new thinking and
perspectives into the system (Borzillo and Kaminska-Labbe,
2011).
NSD can be thought of as “learning co-creation in a value
network” and a complex adaptive system. NSD as a complex
adaptive system involves non-linear processes with positive
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(destabilizing) and negative (stabilizing) feedback loops which
can drive the system away from equilibrium toward
discontinuous change (Wollin and Perry, 2004). Sethi et al.
(2001) argue that passive acceptance of customer input
without further evaluation results in incremental innovation,
but investigation of customer needs, consumption context,
value perception and extensive concept testing lead to
significantly more innovative products. Their study suggests
that customer impact on innovativeness is substantial when
customer input is gathered as part of a multi-faceted and
interactive development process. Therefore, we expect that a
NSD process that covers the primary stages, includes a
number of diverse activities within each stage and provides
substantial opportunities for interaction of diverse actors will
produce substantially more innovative new services than a
process that is less elaborate and interactive.
As an example, in a qualitative business-to-business case
study, Nicolajsen and Scupola (2011) found that high levels of
project engagement by employees and customers, and close
collaboration between those parties, gave the service firm a
better understanding of customer needs which resulted in a
radically innovative method for finding new water sources.
The project leader spoke directly about the outcomes of close
customer and team collaboration saying:
[. . .] when the customer is engaged, and has a professional level [. . .] they
communicate to me about their needs and I might think creatively and I
know what the possibilities are, and thereby find solutions to their problems;
in these instances good synergy arise[s] (p. 372).
The authors found that continual dialogue and
experimentation increase innovativeness by bringing up new
issues and building understanding of the problem and possible
solutions.
Also, Bessant and Maher (2009) describe the new-to-
the-world innovation space as “the ‘edge of chaos’ – a complex
environment where innovation emerges as the result of
complex interactions between many independent elements”
(p. 558). In their case study of a project designed to improve
delivery of health-care services to diabetic patients, they found
successful use of ethnographic design methods to segment
study participants according to the way they managed their
condition. The project team then worked extensively with the
patients and their caregivers and used prototyping and
experimentation to develop new peer-to-peer support
programs, training and other tools to help patients cope with
diabetes.
Hypotheses
Ordanini and Parasuraman (2011) used the service-dominant
logic (SD logic) perspective when developing their integrative
framework of service innovation antecedents and outcomes.
Under the SD logic framework, customers are co-creators of
value who integrate their own resources and competence with
those provided by others and assess the overall benefits and
costs associated with consuming the service when determining
its value for them (Vargo and Lusch, 2008). Ordanini and
Parasuraman (2011) found that greater collaboration with
customers leads to greater volume of innovation in NSD
programs, but did not improve the radicalness of the
innovations. However, the work of Desai (2010) suggests that
the complexity theory might explain why prior research has
 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
found no direct effect of customer co-creation on radicalness
of service innovations. NSD is a value network, and greater
interaction of resources leads to adaptation of the perspectives
of diverse actors and ultimately to new concepts, learning and
more complex knowledge. Therefore, involving customers at
the appropriate NSD stages in varieties of activities that
stimulate interaction and creativity may improve the
innovativeness of the service offering. Melton and Hartline
(2010) found that customer involvement in the design stage
significantly affects service marketability and launch
preparation, but customer involvement in the development
stage only affects launch preparation and not the service
marketability characteristics that set the service apart from
others.
For the firm to more fully understand and integrate
customer insights, extensive customer involvement in NSD
requires a multi-faceted process that gives customers an
opportunity to interact with other organizational resources.
Substantial design input by customers provides valuable
insights during idea generation, concept development and
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screening. When customers are heavily involved in the design
stage of any NSD project, they are likely involved in a large
number and variety of activities that provide substantial
opportunities for creative interaction. Our study excludes
consideration of customer involvement in the development
stage because prior research has suggested that customers
make greater contributions to service distinctiveness in the
design stage (Melton and Hartline, 2010; Gustafsson et al.,
2012). Therefore:
H1. The extent of customer involvement in the design stage
positively affects the process complexity of the NSD
project.
Ordanini and Parasuraman (2011) imposed the same
limitations on FLEs as they do on customers, and reason that
the insights of FLEs are limited to what they observe about the
needs of customers. FLE experiences and observations reflect
readily apparent customer needs, and not latent or
unanticipated future needs. Their study did not hypothesize a
significant effect of FLE involvement on innovation
radicalness, but surprisingly they did find equally strong
effects of FLE involvement on both innovation volume and
radicalness. We reason that greater FLE involvement
throughout the process requires a more elaborate and complex
process to absorb, disseminate and integrate their input.
Therefore:
H2. The extent of FLE involvement in the design,
development and full launch stages positively affects the
process complexity of the NSD project.
Edvardsson et al. (2013) reason that knowledge provided by
customers and FLEs should be analyzed, interpreted and
utilized by a CFT possessing diverse perspectives, knowledge
and resources that enable a coordinated, creative response to
identified needs. The authors found a positive impact of CFTs
on NSD performance and on the relationship of customer
co-creation to NSD performance. Ordanini and Parasuraman
(2011) reasoned that CFTs are an important mechanism for
knowledge integration, and found their use, along with a
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Volume 29 · Number 2 · 2015 · 112–123
variety of other knowledge integration mechanisms, to have a
significant effect on innovation radicalness. This study isolates
the knowledge integration effect of CFTs and reasons that the
greater their use across the stages of the NSD process, the
more elaborate the process becomes. Greater varieties and
number of activities occur at each stage to make use of their
diverse skills and perspectives and to enable them to effectively
draw on organizational and external resources. Therefore:
H3. The extent of CFT involvement in the design, analysis,
development and full launch stages positively affects the
process complexity of the NSD project.
Complexity theory applied to learning co-creation reasons that
diverse actors interacting synergistically in a value network will
co-create new ideas, learning and knowledge, and their
continuing interaction produces even more complex ideas and
knowledge. Repeated interaction of diverse participants in an
elaborate, multi-stage, multi-faceted process provides an
opportunity to develop many creative ideas, among which may
be discontinuous approaches to addressing a known or latent
customer need. A rich, interactive process provides more
opportunity to develop and commercialize concepts with
higher customer benefits and superior core technology than
customer offerings. Therefore:
H4. Process complexity of the NSD project positively
affects the service innovativeness of the NSD product.
The current study models phenomena at the project, and not
the program level. Therefore, unlike Ordanini and
Parasuraman (2011), we do not model the impact of
antecedents on the quantity of a business’ innovations and
their radicalness.
The product and service innovation literatures generally
support the positive link between innovativeness and financial
performance (Chandy and Tellis, 1998; Chen et al., 2009;
Han et al., 1998). At the service innovation program level,
Ordanini and Parasuraman (2011) found a positive effect of
innovativeness on revenue and profit growth. Here, we explore
the relationship of innovativeness to financial performance at
the NSD project level. Therefore:
H5. Service innovativeness is positively associated with sales
performance of the NSD product.
The purpose of this study is to more fully explain the means by
which internal and external operant resources affect the
innovativeness and performance of new services. We contend
that having various resources as part of the development
process is necessary, but not sufficient to get the desired high
level of innovativeness. It is also critically important to know
when and how to use those resources to get the intended
effect. We maintain that process complexity mediates the
effect of customer, FLE and CFT involvement on service
innovativeness. Extensive use of those resources results in a
complex process consisting of creative interactions that yield
more radically innovative services. A simple, scaled-down
development process is less likely to yield a service that stands
apart from the competition. We argue that the external and
internal operant resources must first impact the level of
complexity of the process, which then positively affects
 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
innovativeness, which ultimately influences sales performance.
The final hypothesis formally indicates that the effects of
customer and employee collaboration and knowledge
integration mechanisms on service innovativeness at the
project level are mediated by process complexity. Therefore:
H6. Process complexity mediates the relationship of (i)
customer involvement in the design stage, (ii) FLE
involvement, and (iii) CFT involvement to service
innovativeness.
Figure 1 depicts a model of the hypothesized relationships.
The following sections present the methods, results,
theoretical and managerial implications, and opportunities for
future research.
Research method
Sample and data collection
The study targeted service innovation activity in a variety of
service domains. The sampling frame included businesses in
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the financial, health care, education, technology, legal,
transportation, government, agricultural, public records
research and entertainment service sectors. A list was
compiled from online resources of key contacts likely to have
responsibility for service innovation activities in their
organization. The executives received a survey with cover
letter asking them to choose a new service developed and
introduced by their organization within the prior three years.
All recipients were offered a summary of study findings as an
incentive for completing the survey.
Surveys were distributed by mail or e-mail to over 3,700
service executives in a broad variety of service firms and in
all major regions of the USA. The sampling frame was a
listing of key contacts obtained from business Web sites and
a separate listing of marketing officers from a national list
provider. The researchers received 160 substantially
completed surveys, yielding a 4.2 per cent response rate.
The response is similar to other recent studies (Edvardsson
et al., 2013) that have been also challenged by recent trends
of declining response rates to all types of surveys (Cook
Figure 1 Hypothesized model: antecedents and performance of radical service innovations
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Journal of Services Marketing
Volume 29 · Number 2 · 2015 · 112–123
et al., 2000). A test for non-response bias indicated no
significant difference in responses to key measures between
groups of early and late respondents (Armstrong and
Overton, 1977). Therefore, the low response rate should
not threaten the validity of the study findings.
Data were collected from a diverse sample of firms, and the
largest representation came from the education, health care,
and financial services sectors. Typical positions held by survey
respondents included dean, vice president, director,
administrator, president, CEO, or owner. In answer to the
question “How long have you been involved in service
innovation?” the average response was 17.3 years, with a range
from six months to 40 years. Survey respondents directing
radical service innovation projects (rated 7 or higher on the
enhanced technology or customer benefits scales) had been
involved in service innovation for an average of 18.5 years,
whereas respondents directing more incremental innovations
reported an average of 15.6 years involvement in service
innovation activities. Surveys were received from across the
USA, with most responses coming from Florida, Illinois and
New York. The sample included both large and small
enterprises, with over two-thirds of respondents reporting
annual revenue of $10 million or more.
Measurement
The Customer Involvement, CFT and FLE involvement
scales were based on measures developed by Alam (2002) and
adapted by Melton and Hartline (2010, 2013). The process
complexity scale was developed from a listing of NSD
activities identified by Johnson et al. (2000). The service
innovativeness measure was adapted from the Chandy and
Tellis (1998) definition of radical innovation and from the de
Brentani (1991) measures of service innovativeness and
service newness to the firm. The sales performance scale was
adapted from the de Brentani (1991) NSD performance
measures. The study assessed psychometric properties and
unidimensionality of all measures through the use of
confirmatory factor analysis (CFA).
Data collected for the six scales were assessed for the extent
of missing values. Of the 21 items in the survey, values were
 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
missing for 110 of the 3,360 possible responses (3.3 per cent),
and a review of the data determined that values were missing
completely at random. Therefore, the mean substitution
method was used to replace missing values. Using Mplus
version 7.1, all measures were tested simultaneously on a
confirmatory factor model with each item allowed to load on
only one factor and the pattern coefficient of one item per
factor fixed at 1.0. The items were evaluated based on the
significance of the indicator’s estimated pattern coefficient on
its construct factor, whether the standardized regression
weight exceeded ⱍ0.5ⱍ (Anderson and Gerbing, 1988), and
whether the standardized residual covariances exceeded ⱍ2.5.ⱍ
The CFA model demonstrated good fit, with statistical
significance for all item loadings and all but one standardized
regression weight above ⱍ0.5.ⱍ Eleven standardized residual
covariances exceeded ⱍ2.5ⱍ, and the largest value was ⱍ3.12ⱍ.
Scale items, their factor loadings and a listing of NSD
activities are found in Table I.
Fornell and Larcker (1981) procedures for assessing
construct reliability and discriminant validity were applied to
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the scale data. Construct reliability for all scales exceeded 0.70
(minimum threshold recommended by Nunnally, 1978). The
average variance extracted (AVE) for four scales exceeded
0.50 (the minimum threshold recommended by Fornell and
Larcker, 1981), and for two newly developed and previously
untested scales (process complexity and service
innovativeness) the AVE was 0.45. Prior research deems lower
reliability scales acceptable when they are new measures used
in a new theoretical model for the first time, and when there
are no discriminant validity issues (Ping, 2009). The AVE for
each of the six scales exceeded the shared variance for the
construct with every other construct, thereby demonstrating
discriminant validity. The overall fit of the CFA model was
acceptable (chi-square/df ⫽ 1.33), and other fit indices were
within the recommended ranges (TLI ⫽ 0.921, CFI ⫽ 0.936,
RMSEA ⫽ 0.065). Construct reliabilities, correlations, AVE,
shared variance and model fit statistics are reported in
Table II.
In assessing the measures for potential common methods
bias, we found no evidence of a single factor to account for all
or most of the covariance among the variables. Using the
marker-variable technique (Lindell and Whitney, 2001) to
remove the potential effect of a common method factor, we
found that the differences between the original (ru) and
corrected correlations (ra) were small (all ru ⫺ ra ⱕ 0.069)
(Malhotra et al., 2006). Due to our use of relatively lengthy
scales with varying numbers of scale points; scale items that
are concrete, clear and unambiguous (see Podsakoff et al.,
2003) and evidence from the marker-variable test, we
conclude that common methods bias does not significantly
influence the parameter estimates of this study.
Structural model results
Having determined that the measurement model possessed
generally sufficient levels of validity and reliability (Fornell
and Larcker, 1981; Hu and Bentler, 1999; Nunnally, 1978),
we then assessed the structural model. The variables were
assessed for multicollinearity using the variance inflation
factor (VIF) measure. The mean VIF for the five independent
and mediator variables was 1.62. All VIF values were below
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Volume 29 · Number 2 · 2015 · 112–123
the threshold of 10 recommended by Hair et al. (2006), and
below the cutoff of 4, where the standard error would double
due to multicollinearity. Due to the low VIF measures, we
concluded that multicollinearity was not a problem in this
study.
The analysis continued with an assessment of the structural
model by freeing paths in accordance with the five
non-mediation hypotheses. The hypothesized model was
assessed by examining the t-values of the paths and their
standardized regression weights. All five paths were significant
at p ⱕ 0.05, and each had modest to moderately strong
standardized regression weights (0.256 – 0.629). The fit
statistics indicated a good fit of the model to the data, with
chi-square ⫽ 342.52, df ⫽ 219, p ⱕ 0.001, chi-square/df ⫽
1.34, TLI ⫽ 0.921, CFI ⫽ 0.932, and RMSEA ⫽ 0.065. As
the structural model had acceptable fit statistics and all paths
were significant, we accepted this as the final structural
equation modeling model.
The data supported all five non-mediation hypotheses.
The three paths leading to process complexity were all
significant, indicating that greater customer, FLE and CFT
involvement in the NSD process increases process
complexity. The paths from customer involvement in the
design stage, FLE involvement and CFT involvement to
process complexity were significant at p ⱕ 0.023 and the
standardized regression coefficients ranged from a modest
0.256 for FLEs to a moderately strong 0.575 for CFTs.
Therefore, H1-H3 are supported. The path from process
complexity to service innovativeness was significant (p ⬍
0.001) with the strongest standardized regression
coefficient of the model at 0.629. Also, as expected, the
path from service innovativeness to sales performance was
significant (p ⫽ 0.005) and moderately strong at 0.349.
Therefore, H4 and H5 are supported. Participant
involvement drives process complexity, which positively
affects the radicalness of a new service, which in turn
improves sales performance of the new service. The final
structural model results are provided in Table III.
Mediation analysis
Recent research has demonstrated that a significant indirect
effect is the only condition necessary to establish mediation
(Preacher and Hayes, 2008; Zhao et al., 2010). Also, a
bootstrap test is recommended instead of Sobel’s z for testing
significance of the indirect effect as it generates samples of the
indirect effect and derives bias-corrected confidence intervals
from the cumulative distribution. Accordingly, we ran the
bootstrap procedure in Mplus Version 7.1 to test the
significance of all indirect paths in the final model.
The number of bootstrap samples was set to 5,000 and
confidence level set at 95 per cent. Significant total indirect
effects were found for customer involvement in the design
stage to service innovativeness (coefficient ⫽ 0.170,
p ⫽ 0.049) and CFT involvement in the NSD process to
service innovativeness (coefficient ⫽ 0.362, p ⫽ 0.016). The
indirect effect of FLE involvement in the NSD process to
service innovativeness was significant at the lower p ⬍ ⫽ 0.10
level of significance (coefficient ⫽ 0.161, p ⫽ 0.063).
Therefore, mediation H6i and 6iii are fully supported, and
Hypothesis 6ii is partially supported.
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Horace Melton and Michael D. Hartline Volume 29 · Number 2 · 2015 · 112–123

Table I Model constructs and measurement

Factor loading
Customer involvement in design
1. To what extent were customers involved in the design stage? 0.906
2. To what extent were customers involved in the design stage via one-on-one interviews? 0.801
3. The intensity of customer involvement in the design stage can be described as (check only one level of intensity) 0.880

Frontline employee involvement in the NSD process

1. To what extent were frontline employees involved in the design stage? 0.712
2. To what extent were frontline employees involved in the development stage? 0.984
3. The intensity of Frontline Employee involvement in the development stage can be described as (check only one
of the following levels of intensity) 0.808
4. To what extent were frontline employees involved in the full launch stage? 0.567

Cross-functional team involvement in the NSD process

1. To what extent were cross-functional team members
finance) involved in the design stage?
2. To what extent were cross-functional team members
finance) involved in the Analysis Stage?
3. To what extent were cross-functional team members
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(e.g. marketing, information technology, operations and
0.817
(e.g. marketing, information technology, operations and
0.790
(e.g. marketing, information technology, operations and

finance) involved in the development stage? 0.827

4. To what extent were cross-functional team members (e.g. marketing, information technology, operations and
finance) involved in the full launch stage? 0.723
a
Process complexity
1. Rate the complexity of the design stage for the project (i.e. the number and variety of activities). 0.660
2. Rate the complexity of the development stage for the project (i.e. the number and variety of activities). 0.723
3. Rate the complexity of the full launch stage for the project (i.e. the number and variety of activities). 0.626

Service innovativeness
1. To what extent does the new service incorporate substantially different core technology relative to the previous
services in the category? 0.478
2. To what extent does the new service provide substantially higher customer benefits relative to the previous 0.734
services in the category?
3. The new service is a highly innovative service, which replaces a vastly inferior alternative. 0.761

Sales performance
1. The new service exceeds sales objectives 0.875
2. The new service exceeds market share objectives 0.866
3. The new service exceeds profit margin objectives 0.891
Notes: For customer, CFT and FLE involvement, respondents indicated the extent of involvement in the NSD process using a 6-point scale ranging
from 1 ⫽ not at all to 6 ⫽ a great deal. For process complexity, respondents assessed the complexity (i.e. number and variety utilized of listed
activities) of each stage using a 6-point scale ranging from 1 ⫽ no activities to 6 ⫽ high complexity. For service innovativeness, respondents rated the
extent of difference between the new service and the previous services in the category on a scale from 1 to 9, where 1 ⫽ not at all different/higher
and 9 ⫽ substantially different/higher and indicated the extent to which they agreed or disagreed with the innovativeness statement, using a 7-point
scale ranging from 1 ⫽ strongly disagree to 7 ⫽ strongly agree. For sales performance, respondents were asked to indicate the extent to which they
agreed or disagreed with the statement, using a 7-point scale ranging from 1 ⫽ strongly disagree to 7 ⫽ strongly agree. a Listing of activities in each
stage
Design stage
Formulate new services strategy (e.g. market new services to existing customers, Generate new service ideas
existing services to new markets, or new services to new markets) Identify ideas with greatest profit potential
Describe features, benefits, and rationale for purchase of
potential new service

Analysis stage
Market assessment Senior management approval
Budget development Commitment of resources to the project
(continued)

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Horace Melton and Michael D. Hartline Volume 29 · Number 2 · 2015 · 112–123

Table I
Development stage
Service design and testing Personnel training
Process and system design and testing Service testing and pilot run
Marketing program design and testing Test marketing

Full launch stage

Roll-out of the service to the entire target market New service performance evaluation and service modifications
Source: Johnson et al., 2000

Table II CFA results

CR CI FLE CFT PC SI SP
CI 0.898 0.746 0.110 0.005 0.158 0.042 0.005
FLE 0.859 0.332 0.612 0.004 0.146 0.035 0.009
CFT 0.869 0.070 0.063 0.625 0.260 0.364 0.098
PC 0.710 0.397 0.382 0.510 0.450 0.285 0.021
SI 0.702 0.204 0.187 0.603 0.534 0.449 0.100
SP 0.909 0.069 0.096 0.313 0.145 0.316 0.770
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␹2 ⴝ 206.812, df ⴝ 155, p ⴝ 0.0034

␹2/df ⴝ 1.334, TLI ⴝ 0.921, CFI ⴝ 0.936, RMSEA ⴝ 0.065
All loadings significant; only one standardized regression weight below 0.5; no standardized residual covariances above ⱍ3.12ⱍ
Correlations are below the diagonal
AVE on the diagonal
Shared variance (r 2) above the diagonal
Notes: CR ⫽ construct reliability; CI ⫽ customer involvement in the design stage; FLE ⫽ frontline employee involvement; CFT ⫽ cross-functional
team involvement; PC ⫽ process complexity; SI ⫽ service innovativeness; SP ⫽ sales performance

Additional analyses
Table III Final path model: structural parameter estimates
Post hoc correlational analysis provides evidence of the dominant
Final model impact of CFTs on NSD outcomes. CFT involvement has a
Path Hypothesisⴱ Coefficient t-value R2 strong positive association with service innovativeness (0.603),
CI ¡ PC H1 (⫹)ⴱ 0.270 2.283 0.557 process complexity (0.510) and sales performance (0.313).
FLE ¡ PC H2 (⫹)ⴱ 0.256 2.266 Customers and FLEs have nearly equal positive association with
CFT ¡ PC H3 (⫹)ⴱ 0.575 5.347 process complexity (0.397 and 0.382, respectively).
PC ¡ SI H4 (⫹)ⴱ 0.629 5.474 0.395 In light of the dominating effect of CFTs on project
SI ¡ SP H5 (⫹)ⴱ 0.349 2.797 0.122 outcomes, we ran the mediation model without CFTs to
Goodness-of-fit statistics Final model examine the influence of only customers and FLEs on radical
␹2162 ⫽ 216.42, p ⫽ 0.003 innovation outcomes. The model had very good fit, with all
␹2/df ⫽ 1.34 paths significant, and a relatively stronger impact of customers
TLI ⫽ 0.921 (0.319) than FLEs (0.280) on process complexity, and
CFI ⫽ 0.932 stronger total indirect effect of customers (0.169) than FLEs
RMSEA ⫽ 0.065 (0.149) on service innovativeness. Interestingly, the indirect
Notes: * Hypothesis supported; CI ⫽ customer involvement in the influence of those resources on service innovativeness was
design stage; FLE ⫽ frontline employee involvement; CFT ⫽ cross- weaker in this model than in the model that included CFTs.
functional team involvement; PC ⫽ process complexity; SI ⫽ service This finding provides evidence that all three resources are
innovativeness; SP ⫽ sales performance necessary participants and should be used together to optimize
their synergistic impact on service innovativeness.
We tested the final, full mediation model for interaction of
A separate analysis found that a structural model with direct antecedents to process complexity, and found no significant
paths from the three operant resources to service interactions between CI and FLE, CI and CFT or FLE and
innovativeness had an acceptable fit (⫼2 ⫽ 208.537, df ⫽ 159, CFT. We also conducted analyses to determine the
p ⫽ 0.0051, ⫼2/df ⫽ 1.31, TLI ⫽ 0.926, CFI ⫽ 0.938, significance of process complexity as a moderator of direct
RMSEA ⫽ 0.062.). As expected, there were no significant paths between the operant resource antecedents (CI, FLE and
paths for customer involvement (p ⫽ 0.67) or FLE CFT) and service innovativeness. None of the interactions
involvement (p ⫽ 0.693), yet there was a significant path for were significant: CI ⫻ PC (p ⫽ 0.607), FLE ⫻ PC (p ⫽ 0.793)
CFT involvement to service innovativeness (p ⫽ 0.002). and CFT ⫻ PC (p ⫽ 0.845). Process complexity moderation
Results of the mediation analysis are reported in Table IV. is not supported, and our argument for process complexity as

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 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
Table IV Test of mediation: bootstrap test of indirect effects significance
Lower bound
Mediation hypothesis Paths Indirect effects
H6i CI – PC – SI 0.170
H6ii FLE – PC – SI 0.161
H6iii CFT – PC – SI 0.362
Notes: CI ⫽ Customer involvement in the design stage; FLE ⫽ frontline employee involvement; CFT ⫽ cross-functional team involvement;
PC ⫽ process complexity; SI ⫽ service innovativeness; SP ⫽ sales performance
a mediator of the operant resource to service innovativeness
relationship is further strengthened.
Prior research (Gustafsson et al., 2012; Witell et al., 2011)
suggests that there is no direct or indirect effect of customer
involvement in the development stage on service
innovativeness. To test a hypothesis of no effect, we added a
customer involvement in the development stage construct as
an antecedent to the final structural model. The model had
acceptable fit (TLI ⫽ 0.913, CFI ⫽ 0.925, RMSEA ⫽ 0.066),
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but the customer involvement in the development stage to
process complexity path was not significant (p ⫽ 0.89).
Therefore, we conclude that customer involvement in the
design stage has a significant, positive indirect effect on service
innovativeness, and customer involvement in the development
stage has no effect on service innovativeness. Developers of
radically new services should emphasize customer
involvement in the design stage.
Discussion
Prior research has examined the influence of customers, FLEs
and CFTs as success factors in NSD, but few studies have
empirically studied their influence, separately or as a group, on
radical new service innovation. We were particularly
interested in the effect of customer involvement on service
innovativeness because customers’ insights are limited by their
prior experiences, thereby making their ideas less useful for
exploring bold new service solutions (Baker and Sinkula,
2007). As prior empirical research provided mixed results of
the impact of customers on service innovativeness, we
proposed that a process which provides extensive interaction
of diverse operant resources leads to greater creativity and
more complex ideas which result in a more innovative new
service and better sales performance.
Our study shows that process does matter, and that the
more elaborate the NSD process, the more innovative the new
service. More importantly, the greater the extent of customer,
FLE and CFT involvement in the NSD process, the more
elaborate and complex the process becomes to effectively
accommodate their involvement. Our study provides
empirical support for all hypotheses, and we found that
process complexity enables customers and FLE contributions
to increase the radical innovativeness of the new service.
Process complexity provides a context that allows for not only
the capture of customer and FLE ideas and feedback but also
their effective dissemination and integration with other
resources to yield a more innovative, “out-of-the-box” service
solution. Greater process complexity (not process rigidity or
formalization) means more activities at each stage of the
development process, which increases interaction of operant
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Upper bound
95% CI 95% CI p value Hypothesis supported
0.028 0.312 0.049 Fully
0.018 0.304 0.063 Partially
0.114 0.610 0.016 Fully
resources in ways that lead to greater creativity, more complex
ideas and generative learning.
The primary finding of the study is that customers, FLEs
and CFTs do have significant indirect positive influences on
new service innovativeness. Customer and FLE involvement
in the NSD process increases the innovativeness (radicalness)
of a new service when their effects are mediated by the
complexity of the NSD process. An important contribution to
the NSD literature is the finding that customer involvement in
the NSD process only impacts service innovativeness
(radicalness) when customers are involved in the design stage,
but not in the development stage. On radical service
innovation projects, service designers should involve
customers extensively in idea generation, concept and early
prototype testing, but not press for their ideas on the details of
functionality, features and other specifications.
Previous research has shown the substantial impact of CFTs
on NSD outcomes (Froehle et al., 2000; Melton and Hartline,
2013), so our discussion focuses primarily on the effect of
customer and FLE involvement on radical innovation outcomes.
The current study adds to the literature by demonstrating the
positive influence of all three operant resources on service
innovativeness in a single model. Customers and FLEs can make
significant contributions to radical service innovation projects in
addition to the contributions of CFTs.
Theoretical implications – was Steve Jobs wrong?
Our study contributes to the service innovation and SD logic
literatures by using complexity theory to explain how
customer and employee co-creation affect service
innovativeness in NSD projects. Contrary to the beliefs of the
iconic innovator Steve Jobs, customers are not bound by their
past experiences and can offer insights leading to novel
solutions. However, organizations must utilize an expansive
co-creation development process that moves beyond
traditional marketing research techniques (e.g. surveys and
focus groups) to get more creative ideas from customers
(Witell et al., 2011). David Kelly, founder of IDEO, a leading
design firm and developer of many radically innovative
products and services, has suggested that a firm needs to come
up with a lot of ideas to find the one concept that leads to the
successful radical innovation. Complexity theory applied to
learning co-creation (Desai, 2010) suggests that the synergies
of a complex adaptive system generate more ideas and yield
more creative solutions. Higher levels of NSD process
complexity have the characteristics of a complex adaptive
system, and the synergistic interactions of the diverse operant
resources in the development process produce more radically
innovative services. The current study empirically supports
 Co-creation of radical service innovations
Horace Melton and Michael D. Hartline
the notion that the synergistic interactions of a complex NSD
process transform the contributions of customers, FLEs and
CFTs to yield more innovative service products and processes.
Managerial implications
Our study provides managers with the following practical
ideas of how to make customer co-creation of radically
innovative new services a reality. Managers should:
● focus on customer involvement in the design phase and
supplement traditional marketing research methods (e.g.
surveys and focus groups) with techniques that build an
understanding of how the customer creates value-
in-context;
● use ethnographic methods to observe customer use of
services in context to better understand how the service
might be transformed to increase benefits or improve
customer efficiency and productivity;
● utilize the innovator’s toolkit or provide customers
materials with which to experiment and devise new
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product concepts (von Hippel and Katz, 2002; Witell
et al., 2011); and
● use a detailed but flexible development process (with a
strategic focus toward radical innovation) and provide
extensive opportunities for interaction of internal and
external resources (customers, employees and even
suppliers) throughout all stages of the NSD process.
Importantly, the stimulus to creativity is the interaction of
diverse participants in the NSD process. Ideally, there will be
extensive collaboration of customers, FLEs and CFTs in the
design stage, and ongoing collaboration of FLEs and CFTs in
the development and full launch stages to increase service
innovativeness. The repeated, creative interactions of diverse
participants in the NSD complex adaptive system should yield
more imaginative service product concepts, superior
technology solutions and distinctly higher customer benefits.
A guide for the process format is the Johnson et al. (2000)
activities format (see Table I). The guide is not meant to be a
rigid step-by-step process, but primarily a listing of activities
for gathering, assessing and integrating input from important
external and internal resources.
Our study shows that involving customers in NSD does not
stifle the creative process, but instead can lead to novel
solutions. Project teams can work effectively with customers
by using design methods to understand the context of the
service problem and work iteratively through the development
process to co-create the best solution. Appropriate design
tools for radical service innovation include frame-breaking,
creative problem solving techniques, lateral thinking,
scenarios and futures, ethnographic approaches, empathetic
design, extreme user methods, prototyping and simulations
(Bessant and Maher, 2009).
The current study provides empirical evidence that
greater involvement by customers, FLEs and CFTs in a
broad variety of NSD activities yields a more distinctive,
and radically innovative new service. Innovativeness, in
turn, enhances sales performance because the new service is
perceived by the marketplace as possessing substantially
superior customer benefits compared to other service
offerings in that category.
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Strengths and limitations
This is among the first studies to combine the concepts of SD
logic and complexity theory to better understand how key
NSD resources affect the radicalness of service innovations.
The study applied updated techniques to assess mediation and
measure the indirect effect of various antecedents on service
innovativeness. The sample was of adequate size to conduct
reliable and valid SEM analysis, and the sample was diverse
enough to enable generalization of findings across service
sectors. A limitation of the study is the somewhat weak AVE
for the process complexity and service innovativeness scales.
Their construct reliability was adequate, the measures
demonstrated discriminant validity, and the t-values
associated with parameters based on those scales were all near
or above 2.3. Therefore, we have confidence in the findings
developed utilizing those measures. Work should continue in
future research to build even more reliable scales for those
constructs.
Future research
NSD research should continue to apply theories and
perspectives from various disciplines to better understand
and predict relationships in the radical service innovation
domain. The complexity theory speaks to how co-creation
learning enhances creativity in the service development
process. Other learning theories and perspectives may also
shed light on the creative process and provide insights on
how businesses can better organize their resources and
capabilities to design and deploy successful new services.
Additional research is needed to further refine the process
complexity construct, and better understand how the
non-linear, synergistic interactions of diverse actors
engender creativity, learning and radically innovative
outcomes in the design, development and launch of new
services. Researchers might utilize longitudinal studies to
observe the interaction of participants over time, and more
completely determine conditions and contingencies
influencing the effectiveness of customers, FLEs, CFTs and
other operant resources in radical NSD.
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123
Journal of Services Marketing
Volume 29 · Number 2 · 2015 · 112–123
About the authors
Horace Melton (PhD, Florida State University) is an
Associate Professor of Marketing in the College of Business at
Illinois State University. His research focuses on new service
development, planning and implementation issues in service
firms, supply chain management, marketing education, digital
piracy and service sectors of emerging markets. His research
has been published in the Journal of Service Research, Journal of
Marketing Education, International Journal of Entrepreneurship
and Innovation Management, International Journal of Physical
Distribution & Logistics Management, Journal on Excellence in
College Teaching and the conference proceedings of the
American Marketing Association. Horace L. Melton is the
corresponding author and can be contacted at: hlmelto@
ilstu.edu
Michael D. Hartline (PhD, The University of Memphis) is
Associate Dean for Strategic Initiatives and the Charles A.
Bruning Professor of Business Administration in the College
of Business at Florida State University, where he is responsible
for external relations, executive education and strategic
programs. He also serves as Vice President of Development
for the Academy of Marketing Science. Dr Hartline teaches
courses in marketing strategy, corporate affairs management
and services marketing. His research appears in the Journal of
Marketing, Journal of Service Research, Journal of Business
Research, and others. He also coauthors Marketing Strategy, a
widely used textbook.
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