Accepted Manuscript

Title: Competitive Advantage and Simultaneous Mutual

Influences between Information Technology Adoption and
Service Innovation: Moderating Effects of Environmental
Factors

Authors: Chia-Nan Chiu, Cheng-Liang Yang

PII: S0954-349X(17)30194-7
DOI: https://doi.org/10.1016/j.strueco.2018.09.005
Reference: STRECO 750

To appear in: Structural Change and Economic Dynamics

Received date: 25-6-2017

Revised date: 26-8-2018
Accepted date: 15-9-2018

Please cite this article as: Chiu C-Nan, Yang C-Liang, Competitive Advantage and
Simultaneous Mutual Influences between Information Technology Adoption and
Service Innovation: Moderating Effects of Environmental Factors, Structural Change
and Economic Dynamics (2018), https://doi.org/10.1016/j.strueco.2018.09.005

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 Service Innovation Performance: Moderating Effects of Environmental Factors

Competitive Advantage and Simultaneous Mutual Influences between Information Technology

Adoption and Service Innovation: Moderating Effects of Environmental Factors

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Chia-Nan Chiu,Cheng-Liang Yang

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Chia-Nan Chiu

Graduate Institute of Information Management ,Tatung University

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Coauthor：Cheng-Liang Yang

Department of Information Management .,Tatung University

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E-mail：clyang@ttu.edu.tw
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Author Note

Correspondence concerning this sample paper should be addressed to Chia-Nan Chiu

Graduate Institute of Information Management, Tatung University

No.40, Sec. 3, Zhongshan N. Rd., Taipei City 104, Taiwan (R.O.C)

 Service Innovation Performance: Moderating Effects of Environmental Factors

E-mail：jackal20004@gmail.com

Highlights

 Review the literature in the streams of “service innovation”, constructs the public sector service innovation

model.

 The first formal study evaluating service innovation in a benchmark water utility company in Taiwan.

 Add detail to the prevailing understanding between information technology adoption and competitive advantage.

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 Establishes the research framework different from previous studies can be found.

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 Shows the correlation of service innovation, competitive advantage, and the moderator roles of environmental

factor.

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Abstract
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Although the effect of information technology (IT) adoption on competitive advantage is well documented, the
mechanism that explains this effect and the magnitude of the effect that is contingent on other variables remain unclear.
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The objective of this study is to quantify the reciprocal causation between IT adoption and service innovation, determine
the respective roles of service innovation and IT adoption in competitive advantage and to estimate the moderating
effects of environmental factors. Data analysis reveals a bidirectional relationship between IT adoption and service
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innovation. In contrast to the findings of most related studies, service innovation has a positive effect on competitive
advantage; however, IT adoption has a negative effect on competitive advantage. A high level of environmental factors is
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more likely to increase the positive effect of service innovation on competitive advantage, but it is also more likely to
decrease the negative effect of IT adoption on competitive advantage.
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Key Words: Information Technology Adoption, Service Innovation, Environmental Factor, Competitive Advantage,
Simultaneous Reciprocal Influences
 Service Innovation Performance: Moderating Effects of Environmental Factors

Introduction
Given its growth around the world, service innovation has become an indispensable element to ensuring competitive

advantage. Government organizations, such as those in the public sector, are now expending significant effort on

information technology (IT) and service to increase their market competitiveness and to upgrade themselves.

External relationship networks have become an essential prerequisite for an organization to achieve the capabilities

and knowledge required to serve the holistic needs of customers (Kandampully, 2002). Studies have argued that

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environmental dynamism and competitiveness are likely to moderate the effect of both types of innovations on

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performance (Jansen et. al., 2006).

Although studies have suggested that the public sector generally does not face competitive pressure because public

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organizations tend to be monopolistic, De Angelis (2013) stated that the public sector is influenced by a growing need for

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“competition, performance standards, monitoring, measurement, flexibility, emphasis on results, customer focus, and

social control”. However, compared with the private sector, few studies have focused on public sector service innovation.

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Furthermore, relatively few studies have investigated the appropriate service innovations that influence competitive
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advantages in the Taiwanese public sector. This gap was the research motivation for this study, which examines whether
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the findings of relevant studies in the literature can be applied to research subjects in Taiwanese public sectors.

To enhance competitiveness, the Taipei Water Department (TWD) has begun to focus on IT adoption and service
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innovation. In its 2016 yearbook, the commissioner announced that “In the future, we will continue with the above
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programs, such as a smart water management system, pipeline network improvement, Taipei Wonderful Water direct

drinking, water conservation, and earthquake-resistant and disaster-prevention policies, in order to keep Taipei Wonderful

Water sustainable and efficient and to eventually make Taipei one of the most livable cities.”
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The TWD has implemented a customer relationship management system (CRM) to improve customer service by

collecting big data from customers to analyze and deduce their actual requirements. This implementation entails many
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investments in IT and improves the service delivered to customers. Moreover, the TWD has established an employee
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innovation proposal mechanism to strengthen their service innovation by combining it with a performance measurement

system, such as the balanced scorecard (BSC) and key performance indicators (KPI), to improve service innovation and
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thus enhance the organization’s competitive advantage. To encourage IT adoption abilities, the TWD provides employees

with access to in-service education, on-the-job training, and opportunities to study abroad; it also cooperates with

professional cram schools to help employees enhance their IT abilities within a short time and without other distractions.

Demonstrating the courage required to face challenges, the TWD has represented the Taipei City Government in

various competitions. In 2016, the TWD represented the Taipei City Government in the Central and Local Government
 Service Innovation Performance: Moderating Effects of Environmental Factors

Proposal Contest and received the Innovative Technology Development Award. The TWD also won the Taipei Computer

Association’s 2016 Smart City Innovative Applications Award in the Smart Home category.

As the TWD is regarded as a benchmark of the public sector in pursuing competitive advantages, it can help answer

the following questions: (1) Do IT adoption and service innovation simultaneously affect each other? (2) Does service

innovation exert a significant positive effect on competitive advantage? (3) Does IT adoption exert a significant positive

effect on competitive advantage? (4) Does the effect of service innovation and IT adoption on competitive advantage

depend on their individual environmental factors? In sum, the current study proposes a novel model for investigating the

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causal relationship between these questions.

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Literature Review

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Relevant Literature

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IT Adoption. The importance of IT to current business practices has long drawn the attention of practitioners and

academicians. IT plays a fundamental role in an organization’s ability to enhance business performance through

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innovations in products, channels and customer segments (Sambamurthy et al., 2003). Chen and Tsou (2007) discussed
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and analyzed IT adoption at the organizational level and conceptualized IT adoption based on the following four

elements:
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IT Infrastructure. IT infrastructure has been broadly defined as a set of IT components that are the foundation of an
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IT service, which typically include physical components (computer and networking hardware and facilities) and various

software and network components (Laan, 2011). Adequate investment and management of IT infrastructure is the
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foundation of IT adoption (Weill et al., 2002).

Strategic Alignment. Strategic alignment suggests that the effect of IT on performance depends on how well the IT
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strategy and corporate strategy complement each other (Palmer and Markus, 2000). According to Piccoli and Ives (2005),

organizations such as Harrah’s Entertainment, Walmart, and Dell have gained tremendously by aligning their IT
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strategies accurately with their own business strategies.

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Organizational Structure. Organizational structure refers to the methods through which tasks are formally

segregated, classified, and coordinated. Ghani et al. (2000), as cited in Liao et al. (2011), defined organizational structure
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as the formal allocation of work roles and administrative mechanisms to control and integrate work activities. The social

aspect of organizations can be viewed as a social network assumed to be composed of hierarchy, density, and

connectivity that establishes contact and ease of accessibility among employees exchanging knowledge (Inkpen and

Tsang, 2005).

Individual Learning. The acceptance of new IT may hinge on the proper assessment and identification of
 Service Innovation Performance: Moderating Effects of Environmental Factors

organizational divisions that would benefit the most, which may subsequently influence others’ adoption behavior. In

addition, technology displaces low-skilled labor from the traditional workplace and offers new opportunities for skilled

labor with higher levels of knowledge (Kandampully, 2002). The use of group goals or group rewards enhance the

achievement outcomes of cooperative learning if and only if the group rewards are based on the individual learning of all

group members (Slavin, 2013).

Service Innovation. In an current era of fierce competition, ever-shortening development cycles of new technologies,

and increasingly demanding customer expectations, organizations are in constant need of new approaches to service

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design and delivery (Smith et al., 2007). The literature on service innovation is burgeoning into a diverse and

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multidisciplinary body of knowledge spanning economics, marketing, organizational science, and management

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perspectives (Rubalcaba, 2012; Ostrom et al., 2010; Miles, 2005).

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According to Den Hertog et al. (2010), service innovation can be assessed through a dynamic capability lens of six

major constructs:

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New Service Concept. Also known as service offering (Frei, 2008), service concept or offering describes the value

that is created by the service provider in collaboration with the customer. The innovation is often a new idea that
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organizes a solution to address a customer’s problem or need.
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New Customer Interaction. This dimension relates to the role customers play in the creation of value and to new
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ways in which service providers and customers interact, communicate (generating cues for new services), codesign,

customize, or even coproduce (Normann, 2002) new service experiences.

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New Value System or New Business Partners. Service innovations require increasingly new combinations of

business partners cooperating in new value systems. By adding a new business partner, or more importantly, managing
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the temporary or more permanent coalition of service providers, a successful service provider is abl e to provide an

innovative, more complete, or more specialized service experience, and therefore, differentiate the actual service offer.
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New Revenue Models. To develop the right revenue model, fitting a new service concept may require considerable
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ingenuity. Successful innovators seem to be able to cannibalize their current product portfolio and make room for new

generations of innovative goods and services. Therefore, introducing a new revenue model can be a powerful way to
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innovate services and considerably affects the other dimensions included in the six-dimensional model.

New Service Delivery System (Organizational Component). New services require new organizational structures,

(inter)personal capabilities, and team skills. A complicating factor, especially in massive service operations, is that

potential clients expect to be serviced in similar ways around the world, which is a challenge for global service players

particularly when rolling out new services worldwide.

 Service Innovation Performance: Moderating Effects of Environmental Factors

New Service Delivery System (Technological Component). A major challenge for innovative service organizations

and their management involves creating the intelligence function within an organization to assess new technological

opportunities and what scope they offer for developing new services. In addition, diffusing these state-of-the-art service

delivery systems effectively and efficiently throughout the wider organization is another related challenge for service

innovation managers.

Competitive Advantage. The growth of research on service innovation–based competitive advantage signals the high

interest among academics and practitioners in this topic (Menor and Roth, 2008). An organization’s ability to sense and

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respond strategically to opportunities and threats enhances competitive advantage (Li & Liu, 2014). Recent discussions on

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competitive advantage have broadened the scope from the perspectives of value chain and value creation capabilities

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(Piccoli and Ives, 2005) and suggest that competitive advantage is gained through outstanding organizational conditions

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and strong value creation capabilities.

Chen and Tsou’s study (2007) contributed significantly to these discussions; they identified two categories of

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competitive advantage: external and internal advantage. This study endeavors to measure the following two constructs of

competitive advantage:
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External Competitive Advantage. The measure of external competitive advantage was mainly modified from
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Avlonitis et al. (2001), using three items to assess how an organization uses new services to increase competitive
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advantage, enter new markets, and provide better service quality than competitors.

Internal Competitive Advantage. The measure of internal competitive advantage was mainly adopted from Van Riel
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et al. (2004); it has three items: improvements in employee innovation, domain knowledge, and job satisfaction.

Environmental Factors. Organizational decision-making is influenced by environmental complexity and volatility

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(May et al., 2000). Organizations reacting to existing trends and demands by modifying or expanding current products,

services, and markets are likely to enhance their performance in competitive environments (Lumpkin and Dess, 2001).
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Jansen et al. (2006) argued that environmental dynamism and competitiveness are likely to moderate the effect of both types
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of innovations on performance. Although there are many more classifications of environmental factors, this study addresses

the perspective of environmental factors and focuses on the following two dimensions:
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Environmental Dynamism. Environmental dynamism refers to the rate of change and the factor instability level

within an environment. It can therefore be defined with reference to technological change and instability or

unpredictability in the environment (Tegarden et al., 2005). Environmental dynamism is defined as the rate of change and

the degree of instability in the environment (Jansen et al., 2006). Dynamic environments make current products and

services obsolete and require new ones to be developed (Jansen et al., 2005; Sorensen and Stuart, 2000).
 Service Innovation Performance: Moderating Effects of Environmental Factors

Environmental Competitiveness. Environmental competitiveness is the extent to which external environments are

characterized by intense competition (Jansen et al., 2006). Organizations reacting to existing trends and demands through

modifying or expanding current products, services, and markets are likely to enhance their performance in competitive

environments (Lumpkin and Dess, 2001). They pursue innovations to better cater to existing customers and build

customer loyalty.

Relationship between Dimensions

Interrelationship between IT Adoption and Service Innovation. Numerous information systems researchers have

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posited IT as an important ingredient of innovation development (Dewett and Jones, 2001; Xu et al., 2005). Miles (2005)

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further likens the pervasiveness of IT-based service innovation to the power of energy-based technology, such as steam

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engines and electric power, to manufacturing innovation.

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Services act as a source of technology due to the production or coproduction of technology (Gallouj and Gallouj,

2000). Innovation in services is the interplay of service concepts, service delivery systems, client interfaces, and

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technologies (Den Hertog, 2000). Service innovation has suggested the need for organizations to coordinate

complementary innovations at different technology layers from third-party vendors to gain maximal benefits in market
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share and profits (Adner, 2006; Gawer and Cusumano, 2002).
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Relationship between Service Innovation and Competitive Advantage. Piccoli and Ives (2005) suggested that
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competitive advantage is gained through outstanding organizational conditions and strong value creation capabilities in

an organization; that is, competitive advantage is achieved by fully deploying and using idiosyncratic, valuable, and
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inimitable resources and capabilities (Bhatt and Grover, 2005). Service innovation is crucial because it allows the

sustenance of competitive advantage (Miller et al., 2007). Because many innovation activities involve the addition of new
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services, expanding existing services, and/or improving the service delivery process, the success of an organization

hinges on how well it implements its service innovation to create new markets (Berry et al., 2006). Vargo et al. (2008)
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indicated that the service organizations must look for innovations within the service system to create competitive
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advantage.

Relationship between IT Adoption and Competitive Advantage. Organizational motivation to use IT as a means
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of gaining competitive advantage is driven by their need to achieve the low-cost delivery of products and services,

delivery of differentiated products and services, and ability to focus on a specific market segment and improve on the

innovative practices of the organization. Breznik (2012) found that the possibility that IT can contribute to an

organization’s performance and help them gain competitive advantage has received considerable attention in recent years.

While IT is being adopted, the organizational structure is often re-examined and adjusted to improve performance
 Service Innovation Performance: Moderating Effects of Environmental Factors

through pooled resources, innovation, and collaboration across organizational boundaries (Dewett and Jones, 2001). It is

worth noting that while IT can contribute to an organization’s competitive advantage, there seems to be several

prerequisites. For example, Liviu (2015) proposed that the best performance could be achieved when IT investments are

aligned with the internal capabilities and organizational processes within the organization strategy. This implies that the

advantage of using IT is closely linked to the use of organization resources in general. Consoli (2012) also argued that

investment into the use of IT by most organizations is inhibited by high financial costs of investments, absence of the

required infrastructure to support the IT, lack of skilled staff and the evolution of technology without users having

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adequate training.

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The Moderating Effects of Environmental Factors. Environmental factors can encourage the creative process and

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facilitate creativity and innovation in individuals, departments, and organizations (Sawyer, 2006; Amabile et al., 2002;

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Goldenberg and Mazursky, 2002; Nalebuff and Ayres, 2003; Michalko, 2006). Regarding exploratory and exploitative

innovations, studies have argued that environmental dynamism and competitiveness are likely to moderate the effect of

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both types of innovations on performance (Jansen et al., 2006). However, the moderating effects of environmental factors

in the relationship between IT adoption and service innovation and between IT adoption and competitive advantage
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remain unsolved.
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Gaps in the Literature and the Expected Contribution of this Study
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The extant literature on service innovation, both in the broader management field and in IT, has some critical gaps.

First, the reciprocal causal relationship between IT adoption and service innovation remains unclear, and no studies have
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examined the simultaneous mutual influences of IT adoption and service innovation. Second, although Jansen et al. (2006)

proposed that environmental factors moderate the effect of innovations on performance, the literature that analyzes the
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moderating effects of environmental factors in the relationship between IT adoption and competitive advantage and

between service innovation and competitive advantage is scarce.

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Furthermore, there is little theoretical work on the development of nomological relationships among IT adoption,
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service innovation, competitive advantage, and environmental factors, which include environmental dynamism and

environmental competitiveness. For example, Avlonitis et al. (2001) proposed that the performance outcome of a new
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service is the result of the development process that is followed, which in turn is influenced by the innovativeness of the

new service. However, Chen and Tsou (2007) developed a research framework and empirically investigated the effect of

IT adoption on competitive advantage through service innovation practices. Den Hertog et al. (2010) adopted a dynamic

capability view to develop a six-dimensional framework for the service innovation strategy. However, the first of these

three studies lacked IT adoption and environmental factors. The second study accounted for IT adoption but not
 Service Innovation Performance: Moderating Effects of Environmental Factors

environmental factors. The third study only discussed the management strategy of service innovation and did not describe

the causal relationships among the aforementioned variables.

The objective of this study was to quantify the reciprocal causation between IT adoption and service innovation, to

determine the respective roles of service innovation and IT adoption in competitive advantage and to estimate the

moderating effects of environmental factors between IT adoption and competitive advantage and between service

innovation and competitive advantage. How this study differs from previous studies is explained in Appendix A.

Hypotheses Development and Methods

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Research Hypotheses

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Based on the literature review, we consider that at any point in time, IT adoption and service innovation may be an

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aggregation of a series of influences that have occurred across time and that simultaneous reciprocal causation between

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the two is plausible. For example, once an organization has adopted and adapted a technology, the organization begins to

use it in a comprehensive and integrated manner to support organizational work and innovative practices. IT can help

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organizations quickly identify customer needs from customer profile analysis and can be used to frequently interact with
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customers and to deliver innovative services. Therefore, innovative services lead to IT adoption, which in turn improves

services. This process of mutual influence between IT adoption and service innovation occurs continually. Therefore, the
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study proposes the following hypothesis:
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Hypothesis 1: IT adoption and service innovation have simultaneously positive mutual influences.

Considering the relationship between service innovation and competitive advantage, service innovation is crucial
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because it leads to competitive advantage (Miller et al., 2007). For example, offering innovative services to fit customer

needs would enable organizations to keep pace with the shifting desires of customers and help improve the brand image.
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Competitive advantage can be gained when an organization provides these new services better than its competitors do.

Therefore, this study proposes the following hypothesis:

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Hypothesis 2: Service innovation has a significant positive effect on competitive advantage.

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IT can contribute to an organization’s performance and help them gain competitive advantage. For example, IT

applications, such as information management and business intelligence, enable employees to access past service
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innovation projects, thereby allowing them to learn from previous experiences and update their current market strategy.

Therefore, organizations become capable of developing new services that are better suited to market demand and offer

better postselling services to fit customer needs. This study therefore proposes the following hypothesis:

Hypothesis 3: IT adoption has a significant positive effect on competitive advantage.

Although IT adoption and service innovation are able to exert effects on competitive advantage, the size of their
 Service Innovation Performance: Moderating Effects of Environmental Factors

effects may depend on environmental factors. For example, an organization reacting to existing trends and demands by

modifying or expanding current products, services, and markets is likely to enhance its performance in competitive

environments. Moreover, organizations pursuing service innovation in competitive environments are likely to increase

their financial performance. IT adoption could influence competitive advantages; however, the decision to adopt

technology is not only based on internal factors but also influenced by environmental factors, such as community, culture,

and legitimacy concerns (Scott, 2001). Therefore, this study proposes the following hypotheses:

Hypothesis 4: Environmental factors have a significant moderating effect in the relationship between service innovation

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and competitive advantage.

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Hypothesis 5: Environmental factors have a significant moderating effect in the relationship between IT adoption and
competitive advantage.

Research Framework

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Based on the foregoing five hypotheses, this study proposes a brand-new architecture (Figure 1).

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Moderating

U Environmental Factor
Environmental dynamism
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Environmental competitiveness
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Predictor
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Service Innovation
Predictor H4
New service concept

IT Adoption New customer interaction Outcome

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Information technology infrastructure

H1 New value system Competitive Advantage
Strategic alignment (New business partners)
External advantage
New revenue models H2
Organizational structure Internal advantage
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New service delivery system

Individual learning (Organizational component)

New service delivery system H5

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H3 (Technological component)
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Figure 1: Research Framework

This study argues that, as independent dimensions, IT adoption and service innovation spur each other simultaneously
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and that competitive advantage is a dependent dimension. In addition, this study employs a moderating model by

positioning environmental factors as a moderator. This study establishes the research framework based on the correlations

observed in the relevant literature.

The operational definition, measured variables, and sources of the measured dimensions in this study’s questionnaire

are illustrated in Appendix B. The variables are measured using a five-point Likert scale, with 1 denoting strong
 Service Innovation Performance: Moderating Effects of Environmental Factors

disagreement and 5 denoting strong agreement.

Research Method

The case study method is highly effective when there is limited knowledge about the examined phenomenon and

when the purpose of the research is to generate a framework of knowledge to facilitate the understanding of how

problems can be solved. Over the last 40 years, case study research has undergone substantial methodological

development. This evolution has resulted in a pragmatic, flexible research approach that is capable of providing a

comprehensive in-depth understanding of a diverse range of issues across numerous disciplines (Harrison et al., 2017).

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Yin (2014) followed this progress and drew on scientific approaches to research that he gained through his background in

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the social sciences; he applied experimental logic to naturalistic inquiry and blended this with qualitative methods,

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further bridging the methodological gap and strengthening the methodological quality of case study research.

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Furthermore, advocates of case studies encourage the use of both quantitative and qualitative methods within their

designs, adding further obscurity to the methodological question (Alison, 2014; Yin, 2014). However, prominent case

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study researchers emphasize that an overarching methodology shapes a case study design and that multiple sources of

data and methods can be used (Merriam, 2009; Stake, 2006; Yin, 2014). These attributes are commonly exemplified in
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case study research. The fundamental goal of case study research is to conduct an in-depth analysis of an issue within its
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context, with the objective of understanding the issue from the perspective of the participants (Merriam, 2009; Simons,
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2009; Stake, 2006; Yin, 2014).

Data Collection
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In this study, to ensure high reliability and validity of the data collected, data were collected in four stages: identifying

data sources, sampling, questionnaire design, and questionnaire pretest and revision.
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Data Sources. The information basis for the study is organizational data, public press releases, and interviews with

highly involved subjects. Secondary data—yearbook, company materials, printed and internet press releases, and other
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publications—were used to obtain the background information. The theoretical framework was developed based on
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scholarly articles related to the topic. The importance of secondary data is in the understanding of actions and behavior in

the specified case. The main research method in this study was a questionnaire survey.
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Sampling Method. The most common method of obtaining large amounts of data in a relatively short period of time

in a cost-effective manner is through standardized questionnaires. A rigorous questionnaire design process is essential for

producing an instrument that yields reliable and valid data; accordingly, entire volumes have been written on how to

construct instruments of good quality (Dörnyei, 2010). The sample size for this study was determined according to the

criterion in Roscoe’s Rule of Thumb (Sekaran, 2003). A sample that is larger than 30 and less than 500 is appropriate for
 Service Innovation Performance: Moderating Effects of Environmental Factors

most research.

Based on information from the official website of the research object, at the end of 2015, the organization had 664

staff members in total. The finite population formula was applied to determine the sample size. A 95% degree of

confidence corresponds to d = 0.05. Thus, this study requires a sample size of at least 243 individuals (rounded up).

Study questionnaires were distributed to 330 subjects at the management level and among professional technicians,

and 281 responses were collected, yielding a return rate of 85.2%. After eliminating 19 incomplete questionnaires, the

number of valid questionnaires was 262, yielding a valid questionnaire return rate of 79.4%.

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In recent years, the professional technicians hired by the TWD have either passed the national-level Senior

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Professional and Technical Examinations or have been recruited from the private sector. These employees are elites in

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terms of their expertise and experience. Therefore, they are capable of evaluating the competitive advantages of the

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research object or even the entire industry.

Questionnaire Design. The questionnaire in this study was primarily designed based on previous studies, with

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modifications made to fit the current study. Considering the fact that the respondents were Taiwanese, the questionnaire

was translated into Chinese. To confirm the accuracy of the translation, bilingual native Taiwanese individuals who were
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fluent in both Chinese and English translated the Chinese questionnaire back into English. Any discrepancies found while
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comparing the two versions were corrected, thus ensuring consistency between the Chinese and English questionnaires.
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The complete questionnaire is presented in Appendix C.

Furthermore, to encourage higher participation, respondents were promised they would receive an executive summary
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of the study’s findings when the study was completed.

When multiple self-reported questionnaires are used to collect data simultaneously from the same participants,
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common method variance (CMV) may be a valid concern. Podsakoff et al. (2003) argued that CMV is a common

problem and that researchers must take steps to control for it. Several procedures were applied to reduce the occurrence
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of CMV in this research, one of which was to assure respondents of anonymity and confidentiality. In addition, the
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meanings of the items were not presented in the questionnaires, and reversed items were also added.

To verify whether CMV bias exists, this research first used Harman’s one-factor test to measure CMV among the
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variables (Podsakoff et al., 2003). To detect nonresponse bias, the responses of early and late respondents were compared.

Lindner et al. (2001) proposed that late responses are similar to nonresponses, allowing the late responder group to be

used as a surrogate for nonresponders.

Questionnaire Pre-Test and Revision. This study adapts scales available in the literature; however, no appropriate

scales are available. Therefore, the authors reviewed the relevant literature and generated a pool of items to tap the
 Service Innovation Performance: Moderating Effects of Environmental Factors

domain of each construct. To enhance the construct validity of the survey measures and to test the adequacy of the

measurement tool content, expert validity and content validity were evaluated; apparent validity was evaluated using the

judgment method. The current researchers invited 11 experts—employed by the research object and having more than 10

years of experience—to review and revise the questionnaire item-by-item.

Content validity index (CVI) is the most widely used index in quantitative evaluation; the score of the questionnaire

tested ranged from 1 to 3. Items in the study questionnaire with a CVI of less than 0.8 were deleted (see Appendix C).

Data Analysis

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To test the relationships between the different variables, this study conducts a structural equation modeling (SEM)

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analysis of the latent variables by using a nonrecursive and moderating model. The SEM of this study was based on

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covariance. All hypotheses were tested using the SEM process in AMOS.

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SEM is a probabilistic model that unites multiple predictor and response variables in a single causal network. They

are often represented using path diagrams, where arrows indicate directional relationships among the observed variables.

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These relationships can be captured in a series of structured equations that correspond to the pathways in the model. An

SEM statistical model can have a path for every proposition in a theory. This inclusiveness allows for the complete
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testing of multistaged theoretical relationships (Gefen et al., 2000).
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Results
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Descriptive Statistic Analysis

The structured questionnaire used in the study includes a section on employee profiles. The demographic variables of
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the subjects include gender, age, education level, service units, and work seniority.

The number of valid respondents in this study was 262. Most respondents were male (197 male, (75.2%), 65 female
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(24.8%)). Most respondents (207, 79.0%) were 41 years or older; the remaining (57, 21.0%) were younger than 55 years.

Regarding education level, 251 (95.8%) and 11 (4.2%) respondents had a higher education (college, associate degrees, and
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above) and a basic level of education (high school and below), respectively. Regarding service department, most
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respondents (178, (67.9%) were district business officers, and the remaining (84, 32.1%) worked at the headquarters.

Regarding work seniority, most respondents (201, 76.7%) were seniors (11 years and above), and the remaining (61, 23.3%)
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were juniors (11 years and below). The two groups of respondents differed significantly. The sample condition is consistent

with the current attributes of the object. Thus, these random respondents are representative of the larger population.

Measurement Model Testing

A measurement model is a part of the entire SEM process. This part, which is analogous to factor analysis, must

include all dual items, variables, or observations that “load” onto the latent variable as well as their relationships,
 Service Innovation Performance: Moderating Effects of Environmental Factors

variances, and errors. The measurement model testing results are displayed in Table 1.

Table 1: Measurement Model Testing Results

Standard SMC
Dimensions Variables AVE Cronbach's α
Factor Loading (R-square)
Information technology infrastructure .729 .531 .787
IT Adoption Strategic alignment .782 .611 .530 .779
Individual learning .669 .448 .805
New service concept .663 .440 .779
New customer interaction .798 .637 .779
Service Innovation New revenue models .621 .386 .488 .798
New service delivery system .808
.699 .487 .797
(technological component)
Environmental dynamism .610 .372 .784
Environmental Factor .533

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Environmental competitiveness .833 .694 .846
External advantage .699 .489 .778
Competitive advantage .466

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Internal advantage .666 .444 .780
Note: AVE=Average Variance Extracted, SMC=Squared Multiple Correlations

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The reliability, convergent validity, and discriminant validity of the scale were examined through confirmatory factor

analysis.

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Reliability. Reliability refers to the correctness and precision of a test. The purpose of testing reliability is to verify

the correctness or accuracy of the questionnaire. All items within the scale measurement should be internally consistent.

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The Cronbach alphas of the reliability tests in this study are all higher than 0.7 (Table 1). Lance et al. (2006) argued that
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the lowest acceptable Cronbach alpha is 0.7. Therefore, the instrument in this study shows fair stability and consistency.
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Validity. Validity indicates the goodness-of-fit of the construct with the actual thought process (Neuman, 2006).
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Validity is the degree to which an instrument measures a particular concept that requires measurement. Validity indicates

whether the researchers have measured the right concept as well as the reliability and consistency of the measurement
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(Hair et al., 2006; Sekaran, 2003).

Convergent Validity. Convergent validity can be applied to examine factor loading. All observed item factor loadings
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for the final measurement model analysis were adequate and ranged from 0.610 to 0.833 (Table 1). These results surpass

the recommended threshold of 0.5 for factor loadings (Hair et al., 2010), indicating that each variable has acceptable
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convergent validity.
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All average variance extracted (AVE) values were higher than 0.4, with most approaching or exceeding above 0.5

(Table 1), indicating marginal acceptability (Fraering and Minor, 2006).

Discriminant Validity. This study used the correlation matrix of the dimensions to test discriminant validity. The square
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root of the AVE from the various dimensions in this study was larger than the correlation between each pair of latent

variables. Therefore, the discrimination validity was adequate (Hair et al., 2010) (Table 2).

Further evidence of discriminant validity was obtained when examining the confidence intervals of the paired

correlations among the latent variables. If the computed confidence intervals do not include 1, discriminant validity is

supported (Torkzadeh et al., 2003). As seen in Table 2, all confidence intervals do not include 1.
 Service Innovation Performance: Moderating Effects of Environmental Factors

Table 2: Result of construct discriminant validity

Dimensions IT Adoption Service Innovation Environmental Factor Competitive advantage
IT Adoption .728
.643
Service Innovation .698
(.399, .544)
.260 .328
Environmental Factor .730
(.208, .312) (.233, .493)
.398 .559 .392
Competitive Advantage .682
(.228, .336) (.317, .505) (.325, .518)
Note: The diagonal line is the square root of AVE, the other is the correlation coefficient of various dimension, and ( , ) are the confidence intervals.

Overall, the reliability and validity of the study instrument is adequate for testing the relationships between the

dimensions in SEM testing.

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Structural Model Testing

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This study used the SEM process in AMOS to test the hypotheses (Figure 2).

e12 e13 e14

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SC
IT infrastructure Strategic alignment Individual learning
X X X
e1 IT infrastructure Environmental factor
Environmental factor Environmental factor

e2 Strategic alignment IT Adoption

e3 Individual learning
Ⅹ
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IT Adoption
N
Environmental factor e11
e4 New service concept
A
e5 New customer interaction
Service Innovation Competitive advantage
e6
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New revenue models

e10 External advantage Internal advantage
e7 New service delivery system
(technological component)
e8 e9
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Environmental factor Service Innovation

e19 Ⅹ
Environmental factor
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New service concep New customer interaction New revenue models New service delivery system
X X X X
Environmental factor Environmental factor Environmental factor Environmental factor
E

e15 e16 e17 e18

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Figure 2: Structural model

The variables forming the interactions were mean-centered to minimize multicollinearity among the interactions and
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their individual components (Cohen et al., 2003). The results of this study are summarized as follows:

Table 3 reveals that service innovation significantly affects IT adoption (β = .102, t = 4.88, p < .01) and that IT adoption

significantly affects service innovation (β = .573, t = 5.49, p < .01); these results support hypothesis H1 (i.e., there exist

simultaneous reciprocal effects between IT adoption and service innovation).

Table 4 shows that environmental factors have a significant moderating effect in the relationship between service
 Service Innovation Performance: Moderating Effects of Environmental Factors

Table 3: Structural model results

Dimensions Standard Beta SE t-value p-value Correlation
IT Adoption ⇆ Service innovation (H1)
Service innovation→ IT Adoption .102 .057 4.88 *** .571***
IT Adoption → Service innovation .573 .038 5.49 *** .571***

Note: ***represents that the correlations are significant at 0.01 or above, ** represents that the correlations are significant at 0.05 or above, *
represents that the correlations are significant at 0.1 or above

Table 4: Moderating effect analysis results

Dimensions Standard Beta SE t-value p-value
Environmental factor Ⅹ Service innovation →Competitive advantage (H4) .749 .075 11.04 ***
Environmental factor Ⅹ IT Adoption →Competitive advantage (H5) -.417 .016 -11.75 ***
Service innovation →Competitive advantage (H2)

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.593 .047 33.532 ***
IT Adoption →Competitive advantage (H3) -.457 .105 -7.946 ***

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Note: ***represents that the correlations are significant at 0.01 or above, ** represents that the correlations are significant at 0.05 or above,
* represents that the correlations are significant at 0.1 or above

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innovation and competitive advantage (β = .749, t = 11.04, p < .01), which supports hypothesis H4. Service innovation

SC
exerts an effect on competitive advantage conditional on environmental factors. An increase in the influence of

environmental factors significantly enhances the positive effect of innovation on competitive advantage. Furthermore,

U
environmental factors have a significant moderating effect in the relationship between IT adoption and competitive

advantage (β = −.471, t = −11.75, p < .01), which supports hypothesis H5. The size of the effect of IT adoption on
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competitive advantage depends on environmental factors. Because the coefficient of the interaction term is negative, the
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moderating effect is negative.
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Table 4 shows that service innovation has a significant positive effect on competitive advantage (β = .593, t = 33.532, p

< .01), which supports hypothesis H2. IT adoption has a significant negative effect on competitive advantage (β = −.457, t =
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−7.946, p < .01), indicating that hypothesis H3 is not supported.

Conclusions and Implications

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In light of the aforementioned results obtained through a series of statistical analyses, the scientific recommendations of

this study are as follows.

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This study chose the public sector as a research subject; therefore, it contributes to an extension of the scope of
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competitive advantage in government organizations. This study is the first formal study to evaluate IT adoption and

service innovation in a benchmark drinking water distribution sector in Taiwan. The results of this study serve as a
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reference to scholars and are useful for the management of the TWD in understanding their organization’s competitive

advantage. The results of the hypotheses in the study are summarized in Table 5.

This study found strong evidence of a reciprocal relationship between IT adoption and service innovation, verifying

that IT adoption influences service innovation and service innovation influences IT adoption simultaneously (Table 3).

To exploit new ideas into innovative products and services in order to derive profitability and growth, an organization
 Service Innovation Performance: Moderating Effects of Environmental Factors

Table 5: Path analysis results

Content of Hypothesis Result
H1: The IT adoption and service innovation have positive mutual influences simultaneously. Support
H2: Service innovation has a significant positive effect on competitive advantage. Support
H3: IT Adoption has a significant positive effect on competitive advantage. Not Support
H4: Environmental factor has a significant moderating effect between the service innovation and competitive advantage. Support
H5: Environmental factor has a significant moderating effect between the IT adoption and competitive advantage. Support

requires the maximal utilization of its physical and human resources along with technological developments (Roberts and

Amit, 2003). In addition, to achieve a higher level of innovation, all activities related to innovation made by

organizations should have a basic level of IT support (Frishammar and Hörte, 2005; Dibrell et al., 2008). In addition,

T
Karadal and Saygin (2011) concluded that the adoption and implementation of IT has significant positive effects on the

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development of new services; therefore, innovation allows organizations to make better use of IT for the generation of

R
new ideas and their implementation processes for the production of products and services demanded by customers.

SC
During IT adoption, organizational structure is often adjusted to improve service innovation. IT adoption progressively

increases the effect on enhanced service innovation. Similarly, strengthening service innovation intensifies IT adoption,

U
either in terms of equipment or capability. These reciprocal relationships are established simultaneously. TWD
N
management should pay equal attention to IT adoption and service innovation. Poor attention to one side instantaneously

causes negative effects on the other.

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Table 4 indicates that service innovation has a positive effect on competitive advantage, which is consistent with the
M

findings of Berry et al. (2006), Miller et al. (2007), and Vargo et al. (2008) that service innovation is crucial because it

allows for the sustenance of competitive advantage. Furthermore, IT adoption has a negative effect on competitive
ED

advantage, a conclusion in contrast to those of Joglekar and Yassine (2002), Valacich and Schneider (2010), and Breznik

(2012) that the usage of IT can be an important enabler of competitive advantage.

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The effects of IT performance vary according to the type of technology being used and its degree of adoption. IT can

improve competitive advantage if used appropriately. Liviu (2015) highlighted that the best performance could be
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achieved when the IT investments are aligned with the internal capabilities and organizational processes within the
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organization strategy. This may suggest that the advantage of using IT is closely linked to the use of organizational

resources in general. If an organization adopts IT without a clear understanding of the scope and implications, then
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insufficient attention may be paid to realigning business strategy. As a result, business resources needed to achieve

competitive advantage from the IT investment may not be made available and the investment in innovation may be

wasted in the end.

The TWD is a government body and has always been a political tool to support economic and industrial development.

In addition, the TWD pursues political and social benefits and works to fulfill social responsibilities. However, it is not
 Service Innovation Performance: Moderating Effects of Environmental Factors

easy to recover benefits for IT investments in social welfare (e.g., donating to remote area schools, subsidizing computer

equipment costs for vulnerable groups, and public welfare activities that promote information education). Therefore, the

TWD faces various obstacles to IT adoption partly because public sectors usually have limited resources, technology, and

capabilities.

Although IT investment has no direct effect on performance, it relieves TWD management of certain concerns

because the higher the level of IT adoption, the higher the level of service innovation, which in turn promises more

competitive advantage. This advantage offsets the diminished advantage because the coefficient of the positive effect of

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service innovation on competitive advantage is greater than that of the negative effect of IT adoption on competitive

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advantage (β =.593 vs. −.457). This implies that the TWD should continue to implement IT adoption, service innovation,

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and strategies to increase competitive advantage.

SC
The results indicate a significant moderating effect of environmental factors in the relationship between service

innovation and competitive advantage (Table 4), which supports the theory that environmental factors play a moderating

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role in the relationship between service innovation and competitive advantage. An increase in environmental factors will

significantly enhance the relationship between service innovation and competitive advantage. Furthermore, this study
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demonstrates that the more organization units pursue service innovation in competitive environments (i.e., high level of
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environmental dynamism), the more they increase their competitive advantage. Under the condition of a high influence of
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environmental factors, a high level of service innovation will achieve the best competitive advantage. This implies that

management authority should pay attention to changes in the environment. To increase effectiveness, organizations should
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define their strategic posture in line with their competitive environment, because studies have shown that the effectiveness

of a strategic orientation (including innovation) depends on environmental factors (Cao et al., 2011; Lumpkin and Dess,
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2001). Managers must make proactive changes that focus even more intensely on customer preferences, quality, and

technological interfaces to remain competitive in such a dynamic environment (Karmarkar, 2004).

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This study further reveals a significant moderating effect of environmental factors in the relationship between IT
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adoption and competitive advantage, which supports the notion that environmental factors play a moderating role in the

relationship between the IT adoption and competitive advantage.

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The study’s findings provide substantial evidence that environmental factors play a moderating role in the relationship

between service innovation and competitive advantage and between IT adoption and competitive advantage. They imply

various managerial implications regarding how organizations can successfully increase their competitive advantage in

increasingly dynamic environments by pursuing IT adoption and service innovation. Managers must constantly adapt to

powerful environmental factors that cannot be foreseen, often at an accelerating pace. To recognize opportunities for
 Service Innovation Performance: Moderating Effects of Environmental Factors

competitive advantage, managers must reshape the organization, alter its path, and change the ways it adapts and

innovates.

Research Limitations and Recommendations

Like all other studies, this study has various limitations that restrict the generalization of its findings and opens

possibilities for future research. Although this study attempts to be as rigorous and objective as possible, the following

limitations remain with respect to the literature review, research methods, data collection, and statistical analyses.

First, because this study only focused on one public sector (Taipei Water Department) in a specific country (Taiwan),

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the findings cannot be generalized to other service sectors and different geographical areas. Furthermore, this study only

IP
explores the moderator roles of environmental factors without considering other factors. Therefore, this study fails to

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enumerate all of the potential factors of all the moderator roles of IT adoption and service innovation with competitive

SC
advantage. However, the overall structure and process can be employed in an analysis and discussion in other areas. A

possible path for future research is its repetition in other geographical/cultural settings to explore the relationships

identified in this study.

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Second, this study distributed questionnaires to verify the hypotheses, which is a temporal cross-sectional approach,

and the samples were from the same period. Therefore, the causal inference in this study seems slightly weak.
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Theoretically, conducting a longitudinal study to collect data can provide better support to imply causal inference
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(Beugre and Viswanathan, 2006).

Furthermore, this study used single informant reports for the variables included in the models; therefore, the issues of
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common method bias and unobserved heterogeneity cannot be completely ruled out. However, the Harman’s one-factor

analysis reduced our concerns.

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Service Innovation Performance: Moderating Effects of Environmental Factors

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Appendix A

This study Avlonitis et al.(2001) Chen and Tsou (2007) Den Hertog et al. (2010)

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Framework Dimension Variable Dimension Variable Dimension Variable Dimension Variable

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IT infrastructure IT infrastructure
Strategic alignment Strategic alignment

A
Antecedents IT Adoption None IT Adoption
Organizational structure Organizational structure
Individual learning Individual learning

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New service concept
New customer interaction
New value system
(New business partners)
ED Service A six dimensional framework
Predictor Service Service Process Innovation
New revenue models Innovation for service innovation strategy：
Variables Innovation Innovation Product Innovation
New service delivery system Practices New service concept
(organizational component) New customer interaction
New service delivery system New value system
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(technological component) (New business partners)
NSD process New revenue models
New Service activities、 New service delivery system
Mediating
None Development formality None (organizational component)
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Variables
Process Cross-functional New service delivery system
involvement (technological component)
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Environmental
Moderating Environmental Dynamism
None None
Variables Factor Environmental
Competitiveness
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Outcome Competitive External Competitive Performance Competitive External Advantage

Variables Advantage Internal Competitive Outcome Advantage Internal Advantage
 Service Innovation Performance: Moderating Effects of Environmental Factors
Operational Definition, Measured Variables, and Sources of the Measured Dimensions
Dimensions Operational Definition
The decision, by an organization
or individual, to utilize and
IT Adoption
implement an Information
Technology.
New services developed during
Service
innovation processes which are
Innovation
valuable for customers.
An identifiable element that
Environmental
affects the survival, operations,
Factor
and growth of an organization.
The favorable position an
Competitive organization seeks in order to be
Advantage more profitable than its
competitors.
ED
E PT
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Appendix B
Variables Measure Source Measure Scale
Information technology infrastructure Laan (2011);Weill et al. (2002)
Strategic alignment Palmer and Markus (2000);
Ghani et al. (2000); Inkpen and
Organizational structure
Tsang (2005)
Individual learning Kandampully (2002)
New service concept
New customer interaction
New value system (new business
partners)
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New revenue models Den Hertog et al. (2010) 5-point Likert
New service delivery system scale
IP
(organizational component) measure
New service delivery system questionnaire
(technological component)
R
Jansen et al. (2005); Sorensen and
Environmental dynamism
Stuart (2000)
Jansen et al. (2006); Lumpkin and
SC
Environmental competitiveness
Dess (2001)
External advantage Avlonitis et al. (2001)
Internal advantage Van Riel et al. (2004)
U
N
A
M
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SC
Appendix C
Dimensions Operational Definition Variables Item

U
For the past few years, Our organization ………….
has allocated a generous budget for purchasing information technology hardware

N
Information technology has allocated a generous budget for purchasing information technology software.
infrastructure

A
has emphasized information technology staffing and training.

M
has embraced sophisticated Internet applications.
For the past few years,
ED Our information technology capability has supported business strategies that
strengthen customer service.
Our information technology projects have been implemented in compliance with
Strategic alignment business strategies.
The decision, by an
PT
organization or Our information technology applications have supported business strategies to
Information improve process management.
individual, to utilize and
Technology Adoption
implement an Our information technology applications have supported business strategies to
Information Technology. improve product/service offerings.
E

Organizational structure Content validity index (CVI) less than 0.8.

CC

For the past few years,

Our organization has provided sufficient training while implementing new
information technology systems and applications
Our employees have been able to learn new information technology applications
A

Individual learning
quickly.
Our employees have been able to adopt new information technology applications
for their work.
Our employees have been able to innovate new ideas and approaches to work
effectively by adopting new information technology applications.
Our employees have shown resistance to adopting new information systems and
applications.(R)

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Service Innovation Performance: Moderating Effects of Environmental Factors

SC
Dimensions Operational Definition Variables Item

Our organization developed new (service) experiences or solutions for customers

U
New service concept We combined existing services into a new formula.

N
We developed a new way of creating value for ourselves and our customers.

A
Our organization developed new channels for communicating with her customers.
New customer interaction

M
The way we have contact with our customers is renewed.
New services developed New value system (new
during innovation Content validity index (CVI) less than 0.8.
Service Innovation business partners)
processes which are
ED
valuable for customers. By introducing new services we changed the way we generate revenues.
New revenue models
The way we get paid (financial construction) is altered.
PT
New service delivery system
Content validity index (CVI) less than 0.8.
(organizational component)

Technology plays an important role in the renewed production of our services.

E

New service delivery system

(technological component)
We renewed our service offerings by new or different use of ICTs.
CC

Environmental changes in our local market are intense.

A

Our customers regularly ask for new products and services.

An identifiable element
that affects the survival,
Environmental Factor Environmental dynamism In our local market, changes are taking place continuously.
operations, and growth
of an organization.
In a year, nothing has changed in our market. (R)
In our market, the volumes of products and services to be delivered change fast
and often.

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Service Innovation Performance: Moderating Effects of Environmental Factors

SC
Dimensions Operational Definition Variables Item

Competition in our local market is intense.

U
An identifiable element Our organizational unit has relatively strong competitors.

N
that affects the survival,
Environmental Factor Environmental competitiveness
operations, and growth
Competition in our local market is extremely high.

A
of an organization.

M
Price competition is a hallmark of our local market.

For the past few years, our company has been successful in providing
ED new services …

to enter new markets.

External advantage
PT
to gain more competitive advantage.
The favorable position an
Service Innovation
organization seeks in to offer higher quality than competitors.
Performance
order to be more
E

(Competitive
profitable than its
advantage )
competitors. For the past few years, our company has been able to provide new services …
CC

and increase employee job satisfaction.

Internal advantage
and increase employee-related experience and domain knowledge.
A

and enhance the innovative capabilities of employees.

Notes: (R) = Negatively worded (reverse-coded) item.

Items in the study’s questionnaire with a CVI of less than 0.8 should be deleted.

28