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Proceedings of Engineering and Technology Innovation, vol. 1, 2015, pp. 05 - 09

Innovation Management in Services Industries: The Impacts of

Innovative Capacity and Transformative Learning

Wen-Hai Chih
1
, Ling-Chu Huang

1
, Tsung-Ju Yang

2,*

1
Department of Business Administration, National Dong Hwa University, Hualien, Taiwan, ROC.

2
Institute of Service Industries and Management, Minghsin University of Science and Technology, Hsinchu, Taiwan, ROC.

Received 18 June 2015; received in revised form 11 July 2015; accepted 28 July 2015

Abstract

This study highlights the innovation management and

learning perspective of a firm’s innovative capability. The

model proposed in this study examines the relationships

among competence exploitation, competence exploration,

transformative learning, innovation, and performance.

This study presents empirical results from 225 service

industry in Taiwan. First, the innovative capability factors

positively affect transformative learning include compe-

tence exploitation and competence exploration. Trans-

formative learning in turn has positive effects both on

innovation and performance. Secondly, the rank order

effects on innovation are competence exploitation, com-

petence exploration, and transformative learning, respec-

tively. The rank order effects on performance are compe-

tence exploration, competence exploitation, and trans-

formative learning, respectively. Finally, transformative

learning is the mediating effect of competence exploitation

and competence exploration on innovation and perfor-

mance.

Keywords: competence exploitation, competence
exploration, transformative learning,
innovation, performance

1. Introduction

As the innovation management is associated with

learning capacity. Innovation is embedded in market- or

learning-oriented firms. An innovative firm culture can

guide an organization to develop new abilities (Hurley &

Hult, 1998). Ability to learn quickly and high internaliza-

tion of knowledge are key competitive advantages in the

firms (Lee, Liang, & Liu, 2010). As a result, managing

knowledge transfer has become a challenge for inter-firm

(Zahra & George, 2002). Recently, firms have faced a

strategic dilemma in developing new customized products

or services. Atuahene-Gima (2005) showed that exploiting

existing competencies may provide short-term benefits,

but ultimately becomes a hindrance to the firm’s long-term

viability by stifling the exploration of new competencies

(Levinthal & March, 1993). For example, many compa-

nies seek to develop their existing capabilities but hesitate

to develop new abilities (O’Reilly & Tushman, 2004).

This Capability-rigidity Paradox indicates that the ex-

ploitation of competence tends to crowd out the explora-

tion of competence (Leonard-Barton, 1992). In general,

learning-oriented firms are more likely to exhibit this

element of firm culture (Hult & Ketchen, 2001).

The RBV indicates that learning development and

innovation is a distinctive capacity of organization (Day,

1994). The innovation characteristics contribute to the

creation of greater firm value and achieving better organ-

izational performance (Hurley & Hult, 1998). However,

data on learning-oriented firms suggests that innovation

management is more complex than previously depicted

(Lichtenthaler, 2009). Further investigation is required to

compensate for a lack of previous research. Previous

studies have paid scant attention to services or how the

mediating role of organizational learning influences in-

novation and performance.

The purpose of this study was to discuss the relation-

ships among competence exploitation, competence ex-

ploration, transformative learning, innovation and per-

formance. Innovative capability includes competence

exploitation and competence exploration. The service

innovation of Taiwan was used as the background, to

ensure compliance with innovation management ap-

proaches (Hult & Ketchen, 2001). Secondly, data was

collected on benchmark enterprises in service, to gain an

understanding of how innovative capability drives trans-

formative learning through innovation and performance.

And explored in-depth the high-level learning process

(Slater & Narver, 1995). Thirdly, the integration of

learning-oriented and innovation was supported by key

references (Hurley & Hult, 1998). This study also believe

that the absorptive capacity as the process-based using the

service innovation (Lichtenthaler, 2009). Referring the

viewpoint of transformative learning proposed by Slater

and Narver (1995), the dual theory is applied to the study

of innovation and performance

2. Method

2.1. Innovative Capability

Firms have faced a strategic dilemma in developing

new customized products or services. Many companies

seek to develop their existing capabilities but hesitate to

develop new abilities (O’Reilly & Tushman, 2004). This

type of innovative capability is related to the absorptive

capacity proposed by Cohen and Levinthal (1990) (Hurley

& Hult, 1998). Absorptive capacity has a significantly

positive influence on the internalization of knowledge

(Lee et al., 2010). Absorptive capacity is the ability of a

firm to assimilate and apply innovative information or

elements (Lichtenthaler, 2009). An innovative corporate

culture promotes the combination of organizational re-

sources and the internalization of knowledge to cultivate

even greater innovative capacity. Companies with greater

innovative capacity are better able to develop and maintain

competitive advantage, and achieve stronger organiza-

tional performance (Day, 1994). Based on the above, firms

*Corresponding author, Email: morgan4117@gmail.com

Proceedings of Engineering and Technology Innovation, vol. 1, 2015, pp. 05 - 09

tend to enhance the two capabilities to increase the

chances of simultaneous success for competence exploi-

tation and competence exploration (Atuahene-Gima,

2005).

2.2. Transformative Learning

Organizational learning is vital to corporate success

(Day, 1994; Hult & Ketchen, 2001). Maintaining learning

capacity stronger than that of competitors is vital to main-

taining competitive advantage (Dickson, 1992). Continual

learning drives behavioral and operational changes, which

in turn leads to improve firm performance (Sinkula, 1994).

A successful learning organization must be equipped with a

suitable organizational structure and a high-level learning

processes (Argyris, 1977), in order to promote the devel-

opment of knowledge. The development of new knowledge

or insight during the process of organizational learning can

potentially influence behavior (Hurley & Hult, 1998) and

contribute to improve firm performance (Slater & Narver,

1995). Based on the above, this study posited that trans-

formative learning plays a mediating role in processing the

flow of innovation information.

2.3. Innovation

Innovativeness is embedded in market- or learn-

ing-oriented firms. The cultures of these firms are more

exploratory, discovering the expressed and latent needs of

customers (Slater & Narver, 1999). The deepest manifes-

tations of market and learning orientations appear at the

cultural level (Schein, 1985). A firm with an innovative

culture adopts or implements new ideas, products, and

processes through management innovation. The goal of

this approach is to achieve high performance for the firm

(Slater & Narver, 1995). Based on the above, this study

defines innovation as a firm’s receptivity to new ideas and

innovation as part of organizational competitive advantage

(Hurley & Hult, 1998)

2.4. Competence Exploitation, Competence Exploration,

Transformative Learning and Innovation

Focus on the service industry, firms are increasingly

relying on external knowledge to foster innovation and

enhance their performance. Hurley and Hult’s (1998)

organization and market driven innovation model points

out the innovative capacity to competitive advantage and

performance. Innovative capacity is related to absorptive

capacity (Cohen & Levinthal, 1990; Lichtenthaler, 2009).

Due to the managerial challenges of inter-firm knowledge

transfer, absorptive capacity is a major source of compet-

itive advantage (Zahra & George, 2002). Such pro-

cess-based capacity is a firm’s ability to utilize external

knowledge through the sequential processes of exploita-

tive, exploratory, and transformative learning (Lane, Koka,

& Pathak, 2006). Therefore, competence exploitation

involves the application of external knowledge through

realized absorptive capacity. Competence exploration is

the acquisition of external knowledge through potential

absorptive capacity (Zahra & George, 2002). Transform-

ative learning links these two competences to maintaining

knowledge over time (Garud & Nayyar, 1994). A pro-

cess-based firm is better able to engage in innovation and

achieve higher performance (Day, 1994). Based on the

above, this study proposes Hypotheses 1, 2, and 3:

H1: Competence exploitation has a positive effect on

innovation.

H2: Competence exploration has a positive effect on in-

novation.

H3: Transformative learning has a positive effect on in-

novation.

2.5. Competence Exploitation, Competence Exploration,

Transformative Learning and Performance

Atuahene-Gima (2005) stressed that innovative ca-

pacity is a measure of organizational capability and com-

petitiveness. Firms face a strategic dilemma in the devel-

opment of customized new products or services. Exploit-

ing competence may provide short-term success, but it can

become a hindrance to the firm’s long-term viability by

stifling the exploration of new competencies (Levinthal &

March, 1993). The number of innovation organization is

able to successfully adopt or implement can measure the

definition of innovative capacity. The degree to which the

culture within a firm is open to innovation, combined with

its resources and other organizational characteristics, in-

creases the capacity for innovation. Firms develop a

greater capacity for innovation, develop a competitive

advantage, and can achieve higher levels of performance

(Day, 1994). Based on the above, this study proposes

Hypotheses 4, 5, and 6:

H4: Competence exploitation has a positive effect on

performance.

H5: Competence exploration has a positive effect on per-

formance.

H6: Transformative learning has a positive effect on per-

formance.

2.6. Antecedents of Transformative Learning

According to the capacity-based resource advantage is

scarce, relatively non-transferrable, and difficult for

competitors to understand or imitate (Reed & DeFillippi,

1990). In cultivating innovative capacity, knowledge has

become a management challenge for inter-firm, and rapid

learning capacity is a key competitive advantage (Zahra &

George, 2002). Innovative capacity of a firm is related to

its learning ability (Hurley & Hult, 1998), strong firms

tend to apply external knowledge to conduct processes of

exploitation, exploration, and transformative learning

(Lane et al., 2006). The variability generated by the con-

tinuous learning and transformation process puts pressure

on the organization and development (Levitt, 1980). Based

on the above, this study proposes Hypotheses 7 and 8:

H7: Competence exploitation has a positive effect on

transformative learning.

H8: Competence exploration has a positive effect on

transformative learning.

3. Methods

After the atlas of new designs is obtained, a detailed

design can be carried out by selecting one from the atlas.

3.1. Sample, Pretest and Data Collection

This study collected a sample from the China Credit

Information Service Limited. (CCIS) published by the top

5000 largest corporations in Taiwan, which selects the top

2000 service. This study, according to Lichtenthaler

Proceedings of Engineering and Technology Innovation, vol. 1, 2015, pp. 05 - 09

(2009), proposes absorptive capacity as the process-based

with a focus on specific topics using the service innovation.

General services finance, and information firms are typical

representative of the service industry.

This study mailed questionnaires to firms. To increase

the return rate, the following steps were taken: 1) Ac-

cording the latest corporation directory published in 2010

by CCIS, a postage-paid return envelope was included the

questionnaire directly mailed to the general managers; 2)

return letter to advertising; 3) research institutions, re-

searchers and contacts were listed; 4) released in August to

avoid releasing peak. Before mailing the questionnaires,

this study used convenient sampling to select 60 service

firm managers and 60 EMBA students. A pretest was

conducted in one month. There were 118 valid samples.

The results of the reliability analysis of Cronbach’s α were

all higher than the standard value of 0.7 recommended by

Nunnally (1978) for each dimension initiated a large-scale

release.

3.2. Measures

The respondents of this study consisted of general

managers for each firm. Except for the demographics (age,

capital, employee, turnover, and listed/OTC company), the

questionnaire used a Likert 7-point scale for the survey,

with 1 indicating “strongly disagree” and 7 indicating

“strongly agree”.

This study operates as a multidimensional described as

the following: The definition of innovative capacity is the

organizations invest in service innovation and the pursuit

of knowledge, skills, and processes, which converted to

core competencies. Two dimensions based on Atua-

hene-Gima (2005) included competence exploitation (five

items) and competence exploration (five items). The def-

inition of transformative learning is the firm with innova-

tive capacity uses organizational learning to connect with

the outside-in process. The items based on Lichtenthaler

(2009) included one dimension is transformative learning

(eight items). The definition of innovation is the culture of

a firm with innovativeness to implement new ideas,

product, or processes successfully. The items based on

Hurley and Hult (1998) included one dimension is inno-

vation (four items). A firm evaluates the organizational

performance by using subjective performance indicators to

analyze firm-level performance. The items based on Kirca,

Jayachandran, and Bearden (2005) included one dimen-

sion is performance (three items).

4. Generalization and Number Synthesis

4.1. Sample, Pretest and Data Collection

This study mailed questionnaires to the top 2000 service

in Taiwan. 241 of these firms replied (12.0%) and after

removing the invalid ones, a total of 225 valid question-

naires (11.2%) remained. Non-Response bias test was ap-

plied (Armstrong & Overton, 1977). The following is the

basic data of this study. More than half of the service firms

in the sample have been in operation for more than 21 years

(52.4%), and have capital of under 500 million NTD

(56.0%), turnover under 5 billion NTD (79.1%), less than

500 employees (76.9%). A smaller percentage was

listed/OTC companies (23.5%). These results reflect the

status of the service in Taiwan.

The Cronbach’s α of the competence exploitation,

competence exploration, transformative learning, innova-

tion, and performance are 0.797, 0.912, 0.916, 0.849, and

0.735, respectively, which were all higher than the standard

of 0.7 suggested by Nunnally (1978). This indicates that the

internal consistency of measuring each dimension is good

(Table 1).

Table 1 The reliability of the variables examined

Variables Items Mean Std. α CR AVE Reference

CEi 5 5.8 3.33 0.797 0.892 0.652
Atuahene-Gima (2005)

CEr 5 5.8 3.38 0.912 0.932 0.732

TL 8 5.8 5.41 0.916 0.938 0.655 Lichtenthaler (2009)

IN 4 5.8 3.19 0.849 0.867 0.627 Hurley & Hult (1998)

PM 3 5.7 2.37 0.753 0.785 0.552 Kirca et al. (2005)
Note: CEi=Competence Exploitation; CEr=Competence Exploration; TL=Transformative Learning;

IN=Innovation; PM=Performance. Std. =Standard Deviation; α=Cronbach’s α; CR=Composite Relia-

bility; AVE=Average Variance Extracted.

Table 2 Matrix of the related coefficients

Variables 1 2 3 4 5

CEi (0.807)

CEr 0.805* (0.856)

TL 0.733* 0.744* (0.809)

N 0.705* 0.684* 0.697* (0.792)

PM 0.557* 0.541* 0.552* 0.435* (0.743)
Note: Number in brackets is AVE square values; *p<0.001

The measurement of the validity in this study refers to the

development of literature for theoretical basis. The results

indicated that the factor loadings of all items were significant,

with composite reliability (CR) between 0.785~0.938,

which was higher than 0.7, and average variance extracted

(AVE) between 0.552~0.732, which was higher than 0.5.

This study showed convergent validity of measurement

items (Fornell & Larcker, 1981). The variables were refer-

enced with a number of indicators to measure fitness. The

model showed good convergent validity. The discriminant

validity is the measurement of the discriminant extent

among dimensions suggested by Fornell and Larcker (1981).

The result showed that the correlation between any two

dimensions in this study was less than the AVE square of

each dimension, which means that there is discriminant

validity among these dimensions (Table 2).

4.2. Hypotheses Testing

The structural equation modeling (SEM) was conducted

using maximum likelihood estimation (MLE). The good-

ness of fit index of the whole model of this study is

χ2=756.508, d.f.=260, χ2/d.f.=2.910, GFI=0.806,

AGFI=0.758, CFI=0.847, RMSR=0.082, RMSEA=0.092,

Proceedings of Engineering and Technology Innovation, vol. 1, 2015, pp. 05 - 09

NFI=0.822，PNFI=0.712. A number of goodness-of-fit

indexes fit the acceptable standard, which meant that the

model fit was good (Fig. 1 & Table 3).

Fig. 1 The research model

An empirical study of the service innovation in Taiwan

found that the effects of competence exploitation, compe-

tence exploration, and transformative learning were signif-

icant for innovation. The path coefficients were 0.320

(p<0.001), 0.294 (p<0.001), and 0.392 (p<0.001), respec-

tively. Hypotheses 1, 2, and 3 of this study were supported.

Next, the effects of competence exploitation, competence

exploration, and transformative learning were significant

for performance. The path coefficients were 0.268

(p<0.005), 0.275 (p<0.004), and 0.273 (p<0.016), respec-

tively. Hypotheses 4, 5, and 6 of this study were supported,

respectively. Finally, the effects of competence exploitation

and competence exploration were significant for trans-

formative learning. The path coefficient was 0.463 (p<0.001)

and 0.511 (p<0.001). Therefore, hypothesis 7 and 8was also

supported.

Table 3 Results of hypothesis testing

Hypotheses Relationship Path p-value Results

H1 CEi → IN 0.320 0.001 supported

H2 CEr → IN 0.294 0.001 supported

H3 TL → IN 0.392 0.001 supported

H4 CEi → PM 0.268 0.005 supported

H5 CEr → PM 0.275 0.004 supported

H6 TL → PM 0.273 0.016 supported

H7 CEi → TL 0.463 0.001 supported

H8 CEr → TL 0.511 0.001 supported

Table 4 Impacts of variables

Variables
Direct impact Indirect impact Total impact

IN PM IN PM IN PM

CEi 0.320 0.268 0.181 0.126 0.501 0.394

CEr 0.294 0.275 0.200 0.140 0.494 0.415

TL 0.392 0.273 - - 0.392 0.273
Note: CEi=Competence Exploitation; CEr=Competence Exploration;

TL=Transformative Learning; IN=Innovation; PM=Performance.

This study analyzes the effects of each antecedent on

innovation and performance (Table 4), including direct and

indirect effects. Among all of the antecedents of innovation

in the service, the total effect of competence exploitation

has the greatest effect (0.501) on innovation, including

direct effect (0.320) and indirect effect (0.181), respectively.

Next, the total effect of competence exploration has the

greatest effect (0.415) on performance, including direct

effect (0.275) and indirect effect (0.140), respectively. The

results show that competence exploitation and competence

exploration have the greatest effect on service innovation in

the service.

5. Conclusions and Discussion

This study gathered data on service in Taiwan to un-

derstand the effects of the service innovation, and con-

ducted theoretical and practical discussion of research re-

sults. First, the outcome of the analysis described above

demonstrates that competence exploitation, competence

exploration, and transformative learning each has signifi-

cant and positive effect both on innovation and performance.

This result corresponds to the concept of “absorptive ca-

pacity” advocated by Lichtenthaler (2009). Apart from

proving that innovative capacity is an important factor in the

development of innovation and adaptation to varying busi-

ness environments, this result also reveals that transforma-

tive learning has significant explanatory power with regard

to organizational performance. This study also shows that

competence exploitation and competence exploration has

significant and positive effect on transformative learning,

respectively. This complies with the conceptual model

proposed by Hurley and Hult (1998) and matches some

aspects of the organizational learning mechanism proposed

by Bell, Whitwell, and Lukas (2002).

Secondly, many studies on innovation management

promote the viewpoint that learning orientation positively

contributes to firm performance. This study found that with

regard to service, transformative learning plays an im-

portant role both in innovation and performance. The ser-

vice industry has implicit subsequent costs (Anderson,

Fornell, & Rust, 1997), which indicates that apart from

promoting the development of knowledge as a method of

influencing behavior, firms should also emphasize innova-

tive development and explorative capacity. Transformative

learning has direct effect both on innovation and perfor-

mance; these results echo the concept of “absorptive ca-

pacity”, which is a point of particular emphasis in the ser-

vice industry.

Thirdly, most services are intangible, heterogeneous,

and inseparable (Parasuraman, Zeithaml, & Berry, 1985).

Services need a flexible organizational learning to avoid the

capability-rigidity. This study verifies the service innova-

tion in Taiwan show that transformative learning has sig-

nificant and positive effect both on innovation and perfor-

mance in service industries. Although previous studies have

mainly emphasized manufacturing industries, this study

showed that elements of innovative capacity (including

competence exploitation and competence exploration) are

antecedents of transformative learning. The effect of com-

petence exploitation on innovation is the largest, and the

effect of competence exploration on performance is the

largest. Transformative learning plays an important medi-

ating role in enhancing both innovation and performance.

Competence

exploitation

Performance

0.392***
0.463***

0.511***

Transformative
learning

Competence

exploration

0.268**

0.294***

0.275**

0.320***

0.273*

Innovation

Note: * p<0.05, ** p<0.01, *** p<0.001

Proceedings of Engineering and Technology Innovation, vol. 1, 2015, pp. 05 - 09

5.1. Limitations and Future Research

The results of this study may have the following bias.

First, this paper conducted an empirical study of the service

industries in Taiwan, by mailing questionnaires to conduct

surveys of firms. Due to limited time, budget, and limited

number of replies, the study results may not be generaliza-

ble for use in other industries or countries. Future studies

could analyze other industries or countries to make the

results more generalization. Second, the relationship of both

competence exploitation and competence exploration on

performance may differ in economic or competitive envi-

ronments in service firms, and this study did not consider

these environmental factors. Future studies could also inte-

grate political, economic, legal, and industrial factors. Third,

future empirical studies could examine the relative contri-

bution of innovative capacity on the firm’s competitive

advantage. Factors such as innovativeness, capacity to in-

novate, learning orientation, and market orientation are all

known to affect a firm’s competitive advantage (Hult &

Ketchen, 2001; Hurley & Hult, 1998). Fourth, transforma-

tive learning is an important mediator for achieving inno-

vation and performance on service firm. Future studies can

continue to develop relations with the high-level learning

process. Fifth, this study was a cross-sectional research and

future studies can use a longitudinal method to observe the

long-term relationships among variables.

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