Uncovering the Link from Customer Heterogeneity to Innovation-based Competitive Strategy

Abstract

This study examines the nexus between downstream resources (in particular customer heterogeneity) and innovation-based competitive strategy, focusing on the role of knowledge integration in achieving modular and architectural innovation. In the innovation literature, there has been a two-pronged discussion that relates to the use of customer-related downstream resources – one concerns the use of customer resources in service design and organisational structure-related aspects (such as involvement of customers in new service development); the other concerns the use of customer resources towards development of organisational capabilities (such as knowledge integration). However, from an organisational standpoint both these perspectives are valuable and make sense, as they are interconnected – an organisation’s service design or structure can facilitate or hinder the effective functioning of capabilities or the flow of knowledge – thus both need to be examined together. This study addresses this knowledge gap by examining the interrelationships between customer heterogeneity, integrative capabilities, service design-related innovations (i.e., modular and architectural innovations) and firm performance together to understand how customers can be a productive resource for a firm. We conducted a survey in the Australian services sector and the data were analysed using SmartPLS. The findings supported the notion that customer heterogeneity-based strategies generate competitive advantage.