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Service innovation: building a sustainable competitive advantage in higher

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Article in International Journal of Services Economics and Management · December 2019

DOI: 10.1504/IJSEM.2019.10026652

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Int. J. Services, Economics and Management, Vol. 10, No. 4, 2019 289

Service innovation: building a sustainable

competitive advantage in higher education

Boon Liat Cheng

Department of Marketing,
Sunway University Business School,
No. 5, Jalan Universiti, 47500 Bandar Sunway,
Selangor, Malaysia
Email: boonliatc@sunway.edu.my

Tat Huei Cham*

Faculty of Accountancy Management,
Universiti Tunku Abdul Rahman,
Bandar Sungai Long, 43000 Kajang,
Selangor, Malaysia
Email: chamth@utar.edu.my
Email: jaysoncham@gmail.com
*Corresponding author

Michael M. Dent
Department of Marketing,
Sunway University Business School,
No. 5, Jalan Universiti, 47500 Bandar Sunway,
Selangor, Malaysia
Email: michaelmd@sunway.edu.my

Teck Heang Lee

Faculty of Business, Economics and Accounting,
HELP University,
Jalan Sri Semantan 1, Bukit Damanara,
50490 Kuala Lumpur, Malaysia
Email: lee.teck.hang@help.edu.my

Abstract: The increasing pace of globalisation requires organisations to be

innovative in their service provision to remain competitive in their industry.
Higher education is one of the examples. Service innovation plays a critical
role in helping universities to sustain their operations and gain a competitive
edge. Therefore, the study examines the impact of service innovation on
student satisfaction, and the extent to which this level of satisfaction can be
translated to perceived institutional image and loyalty. The mediation effect of
the institutional image is also addressed. Data was collected from 400
respondents and were analysed using structural equation modelling. All factors
in service innovation (i.e., product, process, organisational and marketing

Copyright © 2019 Inderscience Enterprises Ltd.

290 B.L. Cheng et al.

innovations) have a significant effect on student satisfaction, which positively

relates to perceived institutional image and loyalty. Institutional image also
mediates the relationship between student satisfaction and loyalty. Implications
of the findings and limitations of the study are then discussed.

Keywords: service innovation; satisfaction; image; loyalty; consumer

behaviour; higher education.

Reference to this paper should be made as follows: Cheng, B.L., Cham, T.H.,
Dent, M.M. and Lee, T.H. (2019) ‘Service innovation: building a sustainable
competitive advantage in higher education’, Int. J. Services, Economics and
Management, Vol. 10, No. 4, pp.289–309.

Biographical notes: Cheng Boon Liat is an Associate Professor at the

Sunway University Business School, Malaysia. He has more 15 years
of work experience in the tertiary institutions in Malaysia. He lectures on
various subjects in marketing and management at both undergraduate
and postgraduate levels. His research interests are in the fields of
services marketing, customer relationship management, consumer behaviour,
entrepreneurship, and marketing management.

Cham Tat Huei is an Assistant Professor and Head of Programme (PhD and
MPhil) at the Faculty of Accountancy and Management, Universiti Tunku
Abdul Rahman (UTAR), Malaysia. His research interests focus on medical
tourism, marketing, tourism and hospitality marketing, advertising, consumer
behaviour, service industry strategy and operations, and e-commerce.
His publications are seen in various international journals which include
The Journal of Hospitality Marketing and Management, Internet Research,
Telematics and Informatics, VINE Journal of Information and Knowledge
Management Systems and Quality & Quantity, to name a few. He also involved
as a member of the editorial review board for several international journals.

Michael M. Dent is a Principal Teaching Fellow and Head of Marketing at the

Sunway University Business School in Kuala Lumpur, where his major
research interests are higher education and Islamic marketing. He previously
held senior marketing positions in a large MNC in the Americas, Europe and
latterly Asia.

Lee Teck Heang is a Senior Lecturer at the Faculty of Business, Economics and
Accounting, HELP University, Malaysia. He completed his Doctorate from the
University of South Australia. He also holds an Honours Degree in Accounting
from the University of Kent at Canterbury in UK and Master’s in Commerce in
Accounting from the Charles Sturt University in Australia. He is also a certified
practicing accountant from Australia. His main research interest is in the areas
of auditing, employability of accounting graduates, and research productivity of
accounting academics.

1 Introduction

Service innovation refers to the development of new services and practical ideas to
improve both efficiency and effectiveness in the service delivery process (Chen et al.,
2016; Chen and Tseng, 2013). Service innovation is essential for service organisations to
sustain a competitive advantage for their long-term survival in competitive and complex
 Service innovation 291

business environments (Snyder et al., 2016). As one of the most critical service
industries, higher educational institutions are forced to adopt approaches to continuously
innovate their services to achieve their long-term objectives and survive in a competitive
arena. Under these conditions, higher education institutions that neglect the vital role of
service innovation may find difficulty in gaining a competitive edge to outperform the
competition. Due to diverse changes in the global business environment and customer
demands, inactive and non-innovative organisations will easily lose their competitive
edge and face a variety of security and survival threats (Fernández-Mesa and Alegre,
2015).
Following the growth and development of the service sector in this global era, service
innovation has become challenging to both profit-oriented businesses and non-profit
organisations. Educational institutions are one of the most vital service organisations to
meet customer-orientation requirements, respond to customer needs and ultimately
commit to adopting innovative approaches in order to survive and thrive among the
competitors (Noruzy et al., 2017). A paradigm shift from traditional management
practices to the adoption of new methods processes, methods and technologies is a
necessity, and the development of service innovation can provide both a solution and
competitive advantage for the organisation. With the introduction of service innovation in
an educational institution, there is a higher likelihood of improved institutional image,
customer satisfaction, and customer loyalty. With better services offered throughout their
learning journey in students are more likely to feel attached to the university and remain
loyal.
Additionally, the higher education industry is considered an important industry in
Malaysia where it has successfully attracted high numbers of international students
(Rozana, 2018). Similarly, the growing numbers of campuses of international universities
such as the University of Nottingham, Monash University, Heriot-Watt University
Malaysia, Xiamen University and Curtin University for example have showed that
Malaysia has the potential to be a strategic education hub in the region of South East
Asia. With the growing demand for tertiary education and also the competition from the
neighbouring countries such as Singapore and Thailand, it is important for the
universities in Malaysia to be competitive and service-oriented. Hence, innovation in
service provision plays critical roles for a university to outshine its competitors and to
remain relevant to the needs of the students.
The multidisciplinary nature of service innovation enhances the effectiveness of a
revamp or enhancement of the overall system. With all stakeholders working towards the
same goal, the education institution will be able to flourish by providing the best learning
experience for students. Despite the importance of service innovation in the higher
education industry, a review of relevant literature revealed that less attention has been
given to the research in this area and it is still quite unexplored (Noruzy et al., 2017).
Therefore, this study makes an initial effort to examine the impact of service innovation
for the higher education industry; and further investigate the inter-relationships of service
innovation, student satisfaction, institution image, and loyalty. For researchers, the
findings of this research would help redefine relevant frameworks and inter-relationships
among these variables and other related variables. In terms of implications, higher
education practitioners will know how to prioritise their focus on different dimensions of
service innovation; and tailor their strategies respectively to gain an edge over their
competitors.
292 B.L. Cheng et al.

2 Literature review

2.1 Student satisfaction

Customer satisfaction is one of the essential factors leading to the success (or failure) of a
business. Oliver (1999) stated that customer satisfaction is the perception of a consumer;
it is an indication as to how successful an organisation is in delivering its promises to
meet the customer’s level of expectation. In simple terms, it is a measure of how goods
and/or services offered by an organisation meet or surpass a customer’s expectation based
on a comparison between ‘expected value’ and ‘delivered value’ (Hassan et al., 2019;
Cheng et al., 2014). According to Sanchez-Franco et al. (2019), satisfaction also refers to
the pleasurable fulfilment of a desire while consuming a good or service. Therefore,
satisfaction is the outcome experienced by the consumers against a standard for pleasure
or displeasure after consumption. In the education industry, Langan and Harris (2019)
discovered that student satisfaction is based on their subjective evaluation of different
results and education-related experiences, which are shaped by their experiences on
campus life. Satisfied students express a positive opinion about their institute, which
attracts other students to the institute (Fernandes et al., 2013).
Lan et al. (2016) proposed a positive relationship between improving customer
satisfaction, in the meantime improving process, organisational and marketing
innovation. Some researchers (e.g., Cheng et al., 2014; Cham and Easvaralingam, 2012)
stated that service providers provide a satisfactory service only if they are aware of their
customers’ requirements. In the higher education sector, institutes adapt their services
based on the students’ desires, which positively affects their satisfaction levels and
perceptions about service quality. These institutes must determine student requirements
by collecting data instead of relying only on the views of academic insiders and the
organisation’s perspective (Blass and Hayward, 2014). In addition, customer satisfaction
does not only strengthen the institution’s position, but also changes the behaviour of
competitors (Wang et al., 2016). Thus, the institutes must understand their primary
audience, and students must be approached while monitoring the education quality in
competitors (Rozana, 2018).

2.2 Service innovation

Since the 1930s, ‘service innovation’ is defined as the launch of a new service in the
market (Schumpeter, 1934). Many decades have passed since the fundamental of
service innovation expanded from Schumpeter’s (1934) creative destruction proposition,
whereby the motivation for economic development is the discontinuous appeal of new
elements (Cantner and Vannuccini, 2018). As there is no universally agreed definition for
the term, ‘service innovation’ is interchangeable with ‘service development’ (Flikkema
et al., 2007; Menor et al., 2002). Thus, innovation can refer to an organisation’s overall
innovative capability in regard to the introduction of new products and services to the
market; or opening up new markets through a combination of innovative behaviours and
processes.
Coombs and Miles (2000) have also separated the construct into three standpoints,
namely assimilation, demarcation, and synthesis. The assimilation perspective suggests
that there are no major differences between the innovative concepts implemented in the
manufacturing and service sectors (Gallouj, 2002), hence, innovative manufacturing
 Service innovation 293

concepts can be applied to the service sector and vice versa (De Vries, 2006;
Drejer, 2004). Furthermore, this perspective states that new technologies drives
service innovation (Tether, 2005) since the service sector has become a very
technology-intensive industry (Gallouj and Savona, 2009).
By focusing on integrating the two perspectives, the differences between
the manufacturing and service sectors are acknowledged and explored. Such a
neo-Schumpeterian viewpoint is based on the integrative perspective and is not restricted
to the technological innovations. Many researchers state that the combination of the
economically-viable innovations and earlier practices led to the economic development.
Blass and Hayward (2014) observed a positive relationship between the improved
customer satisfaction and better organisational practices, innovation, and marketing
strategies. While service innovation was based on multiplicity, this study focused on
components like product innovation, process innovation, organisational innovation, and
marketing innovation as proposed by Innovation Statistics (2015).

2.3 Product innovation

Product innovation is defined as the introduction of up-to-date services and goods, with
respect to their performance and function, in the market (Dodgson, 2018). According to
previous studies, internal and external innovations are required to develop a new product,
which would help in achieving a better market position and becoming more noticeable
(Jie et al., 2015; West and Bogers, 2014). Also, the commercialisation of novel and
improved goods or services would establish the uniqueness of firms in the marketplace.
According to many researchers (Slack et al., 2016; Da Silveira and Cagliano, 2006;
Hayes et al., 2005; Devaraj et al., 2004), product innovation requires firms to be more
flexible, and provide better quality, prices, and accessibility. Hence, product innovation
helps in achieving long-term profitability (Dodgson, 2018; Visnjic et al., 2016).
In addition, product innovation increases customer satisfaction and helps firms to
achieve competitive advantages (Jie et al., 2015; Slater et al., 2014). Also, the values
displayed by firms determined their profitability (Dodgson, 2018). Thus, product
innovation, accompanied by a customer and organiser interaction, helps in delivering a
better service (Yang et al., 2017). In the case of the higher education sector, product
innovation involves introducing well-designed services with better functionality and
value aimed at enhancing student’s learning experience; and subsequently their level of
satisfaction (Qazi et al., 2018; Maritz et al., 2014). Hence, to obtain a more constructive
evidence on the impact of product innovation on student satisfaction in the Malaysian
higher education industry; this study hypothesised that:
H1 Product innovation has a significant positive direct effect on the student satisfaction
in the Malaysian higher education sector.

2.4 Process innovation

Process innovation is defined as an improvement of processes and procedures which are
involved in the production and distribution of the various services and goods (Huang and
Rice, 2012). Organisations engaging in process innovation must exponentially transform
their supply chain to improve the productivity of their existing products (Reinganum,
1981). Here, the improvement in services depends on the service delivery workforce and
294 B.L. Cheng et al.

whether they genuinely wish for organisational growth (Yang et al., 2016). Students’
perceptions regarding their educational destination are based on their underlying
experiences, organisational capabilities and general buzz; and hence, process innovation
helps in developing innovators in the manufacturing sector (Chuchu et al., 2018). In their
study, Chen et al. (2015) showed the significance of identifying the customer-company
relationships and stated that customer behaviour was influenced by the favourable
climate established by the organisation.
Service conditions also significantly affected customer satisfaction (Abdallah et al.,
2016; Dean, 2004; Dietz et al., 2004). Development of existing services and presenting
novel and innovative idea was necessary for maintaining an organisation’s sustainability
(Chai et al., 2005). Some studies (e.g., Rostami et al., 2019; Lusch and Nambisan, 2015)
suggested that frontline employees must engage, understand and satisfy their customers,
and this leads to service improvement, idea generation and provides a competitive
advantage. Besides, an effective and efficient service process could also reduce the cost
incurred in after-sales service, and subsequently lead to an increase in customer
satisfaction (Gurnani et al., 2018). In the service sector, improvement and idea generation
leads to customer satisfaction; whilst higher educational institutes must employ process
innovation. Today’s students, especially those in higher education institutions are more
sophisticated and experienced in comparison to earlier generations. Will process
innovation still prove an important factor to influence their level of satisfaction? To
answer this, this study postulated that:
H2 Process innovation shows a significant positive effect on student satisfaction in the
Malaysian higher education sector.

2.5 Organisational innovation

Organisational innovation is defined as the organisational or management techniques
used by several institutes (Vargo et al., 2015). Though changes made in organisational
innovation are not immediately obvious, improvements lead to exclusive quality,
cost-effectiveness (Cheng, 2014), momentum and vulnerability (Gallego et al., 2013).
Smith et al. (2005) classified organisational innovation into different aspects, like:

1 earlier innovations

2 product improvement

3 production and process technologies

4 development of programmes in legislation, management and workforce.

Tang et al. (2013) stated that a process orientation directly affected the organisation’s
internal management and organisational innovation and led to higher employee
innovativeness and customer integration. Changes made via organisational innovation
promote value-addition, thus improving organisational performance.
In addition, it is reported that performance and increased sales are based
on the innovation initiatives introduced by the organisation (Gallego et al., 2013).
Organisational innovation leads to customer satisfaction and improved financial
performance (Valenzuela et al., 2010; Luo and Bhattacharya, 2006). Organisational
 Service innovation 295

innovation was also found to be affected by leadership (Elkins and Keller, 2003) and
creativity (Shalley and Gilson, 2004). Moon and Choi (2014) described the relationship
between organisational innovation and customer satisfaction. Tierney and Lanford (2016)
discussed how change and innovation is imperative for tertiary education institutions to
stay relevant in the industry. Brennan et al. (2014) suggested that adopting a ‘system’
view helps higher education institutions and their stakeholders fine-tune their strategies to
stay competitive in the industry. Organisational innovation is under explored in the
tertiary education industry, as previous research has focused mainly on organisational
culture (Englund et al., 2018; Kruse et al., 2018). Thus, this study hypothesised that:
H3 Organisational innovation shows a significant positive effect on student satisfaction
in the Malaysian higher education sector.

2.6 Marketing innovation

Marketing innovation is described as incremental changes which lead to contemporary
behaviour, strategy development and new markets (Vargo et al., 2015). Innovations are
implemented in the marketing field for improving marketing efficiency, despite the
competition (Arjunan, 2012). Previous studies reported that organisational performance
was related to marketing strategy (Harris, 2001; Diamantopoulos and Hart, 1993). Naidoo
(2010) observed that a marketing orientation positively affected marketing innovation,
leading to competitive advantage and improved organisational performance. Innovations
are needed for exploring the full potential and obtaining competitive success using
strategic assets (Hamel, 2000; Dierickx and Cool, 1989). Organisational success is based
on innovative marketing strategies (Peters, 2009). Arjunan (2012) stated that incremental
innovation was important for implementing persistent and sustainable marketing
strategies. However, all marketing activities are geared toward improving the
customer-company relationship (Mariadoss et al., 2011). Thus, effective marketing and
customer engagement improve customer satisfaction (Pansari and Kumar, 2017;
Voorhees et al., 2017).
Students in higher education institutions are more demanding, and it is clear
that operators in higher institutions worldwide are presently dealing with this in many
creative and innovative ways. Moreover, Cambra-Fierro et al. (2017) observed that
innovative non-technical marketing activities improve customer satisfaction and firm
competitiveness. For the higher education sector, studies have discussed the effectiveness
of marketing innovation in enhancing satisfaction of students who have benefited
(Veer Ramjeawon and Rowley, 2018; Maritz et al., 2014). Thus, in order to test the
influence of marketing innovation on student satisfaction in the higher education industry
in Malaysia, this study hypothesised that:
H4 Marketing innovation shows a significant positive effect on student satisfaction in
the Malaysian higher education sector.

2.7 Institution image

Corporate image is the personality of an institution that differentiates it from other
competitors (Chen, 2016). According to Eldegwy et al. (2018) higher education institutes
operate in an industry which relies on their corporate image to survive and thrive.
296 B.L. Cheng et al.

Corporate image is related to the perceptions regarding quality. In this case, the
institution’s image affects the customer behaviour, influences their decision-making
during payment for the service and their loyalty towards the institute (Eldegwy et al.,
2018; Keller, 1993). Hence, higher educational institutes must develop their brand image
to become more distinctive and unique than their competitors. This would also help in
their growth, profitability and survival. Studies believe that the corporate image affects
the rational perceptions and the association of an individual with the institution based on
their attitude, experiences, feelings and knowledge (Tran et al., 2015; Foroudi et al.,
2014).
In addition, Kennedy (1977) identified two components of corporate image, i.e.,
functional and emotional components. The functional components are described as the
measurable and tangible stimuli like the range of services or goods provided, price and
layout, whereas the emotional components include the psychological state which is
apparent through the attitude, feelings, the consumer’s sense of belonging and his
experiences after consuming the goods or service. Dobni and Zinkhan (1990) established
that the image itself was a perpetual phenomenon constructed by the emotional and
rational interpretations by an individual based on the cognitive and affective process
components. The cognitive components were the antecedents of the effective components
(Anand et al., 1988). Chin (2010) found that student perception towards the institution
image can be relatively explained through student satisfaction. In this regards, satisfied
students are more likely to have a favourable perception of the institution image. Hence,
this study hypothesised that:
H5 Student satisfaction has a significant positive effect on institution image in the
Malaysian higher education sector.

2.8 Student loyalty

In the higher education sector, the social behavioural intent is based on the students’
desire to recommend their institute to other students, family or friends. Customer loyalty
is reflected by the behavioural and attitudinal dimensions. The behavioural dimension
includes the individual’s preference for a specific brand, which leads to recurring
purchases (Cham et al., 2016; Chao, 2008; Bowen and Shoemaker, 1998). However, the
attitudinal dimension is based on the customer’s goodwill towards the brand and his
recommendations and desire to spread a positive word of mouth (WoM) about the brand
to friends or family (Chen, 2016; Getty and Thompson, 1994). Customer loyalty has been
a popular research topic for a long time; for instance, in 1990’s Dick and Basu (1994)
stated that these two conditions affect customer loyalty, wherein:
1 behaviourally loyal customers repeatedly seek the services or goods, whenever
possible
2 thereafter, they recommend this brand to others and encourage them to purchase the
services or products.
In the higher education industry, the students who display these characteristics are said to
be loyal since they form a long-term relationship with the institutions based on their level
of satisfaction and favourable perception on the institution image (Saad et al., 2017;
Chen, 2016).
 Service innovation 297

In the higher education sector, satisfied students are more likely to have favourable
perception on the institution’s image, and they are willing to complete their existing
programme and join the institute again for furthering their education in future, if possible
(Fernandes et al., 2013). Furthermore, they display an attitudinal loyalty and spread a
positive WoM and recommend this institute to their family, friends and acquaintances, at
any opportunity (Ramaseshan et al., 2017). To further examine the interrelationships
among student satisfaction, institution image and student loyalty, this study hypothesised
that:
H6 Student satisfaction has a significant positive effect on student loyalty in the
Malaysian higher education sector.
H7 Institution image has a significant positive effect on student loyalty in the
Malaysian higher education sector.
H8 Institution image mediates the relationship between student satisfaction with their
loyalty in the Malaysian higher education sector.
The conceptual framework of the study is presented in Figure 1.

Figure 1 Conceptual framework

Service innovation
H8
Product
innovation H1 Institution
image
H5
Process H2
innovation
Student H7
H3 satisfaction
Organisational
innovation H4 H6
Student
Marketing loyalty
innovation

3 Research methodology

For this study, the target population was students currently pursuing their study in two
public and two private universities in the Greater Kuala Lumpur area of Malaysia.
Greater Kuala Lumpur has been chosen for this study as this region has the highest
number of universities in Malaysia (Ministry of Education Malaysia, 2017). The selected
universities for this study were determined based on the similarities in terms of the
numbers of students and programmes offered. Quota sampling with screening criteria was
adopted to collect data from a total of 400 students. Questionnaires were equally
distributed among the two public and two private universities with 100 respondents each.
The survey questionnaires were distributed at the cafeteria of these universities where
298 B.L. Cheng et al.

students were easily accessible. The sample sizes of 400 respondents in this study are
considered sufficient for the statistical testing and to represent the population of students
(Saunders et al., 2012). Moreover, Kline (2005) reported that a ‘critical sample size’ of
200 is needed for structural equation modelling (SEM) testing. Of the four hundred
questionnaires only 397 were usable with three others being rejected due incompletion.
The use of G*Power programme shows that final dataset of 397 observations met the
minimum sample size of 129 with an effect size of 0.15 at 95% power level (Faul et al.,
2007). Hence, the final sample size of 397 for the present study has fulfilled the
requirement of sample size as suggested by the literature.
As for the context of survey measurement, the measurement scales for the present
study were adapted from the existing literature. Service innovation includes product
innovation (four items), process innovation (five items), organisational innovation
(four items) and marketing innovation (four items) these were adapted from Cheng
(2014). As for student satisfaction, the construct was measured using Olorunniwo et al.’s
(2006) four-item scale in terms of students’ overall satisfaction, positive experience and
attitude towards the university that they attached to. Institutional image was measured
based on the eight-item scale developed by Østergaard and Kristensen (2005) which was
based on the reputation, industry relations, standards, and contacts of the university.
The measurement of student loyalty in the present study was adapted from Østergaard
and Kristensen (2005) based on the propensity of students to recommend their university
to others and the students’ intention to study further in the same university.
All measurement items were measured based on a seven-point Likert scale, from
1 = strongly disagree to 7 = strongly agree. The analyses were conducted with the used of
the Statistical Package for the Social Sciences (SPSS) version 24 and Analysis of
Moment Structures (AMOS) version 24.

4 Research results

4.1 Respondents’ demographic characteristics

The profile of the respondents was analysed with the use of descriptive analysis based on
SPSS. The result for the respondents’ demographic profile is presented in the form of
percentages. As for the demographic profile, this displayed a balanced gender ratio of
male (53.8%) to female (46.2%) respondents. As regards ethnicity, the majority of the
respondents were Malay (45.2%) followed by Chinese (34.2%), Indian (15.1%) and the
remaining are fall in the category of ‘others’. As for the stream pursuing at universities,
majority of the respondents were studying arts courses (55%) while the rest were in
science (45%). The majority of the respondents were students who are pursuing their
degree in the second (43.2%) and third year (35.5%) while 9% of them were in their first
year and the remaining were in their fourth year.

4.2 Confirmatory factor analysis

Confirmatory factor analysis was utilised to examine the convergent and discriminant
validity of the studied constructs. According to Hair et al. (2010), a model is considered a
good fit if the value of normed chi-square (χ2/df) is less than 3, root mean square error of
approximation (RMSEA) is less than 0.08, goodness of fit (GFI) exceeds 0.90, the
 Service innovation 299

Tucker-Lewis index (TLI) exceeds 0.90 and the parsimony normed fit index (PNFI) is
more than 0.50. The results of the confirmatory factor analysis indicated that the
measurement model for the present study is a good fit with the value of χ2/df = 1.333,
RMSEA = 0.029, GFI = 0.918, TLI = 0.977, and PNFI = 0.819.
The convergent validity of the data in this study was assessed based on the suggestion
by Hair et al. (2010). According to Hair et al. three criteria are required to be fulfilled in
order to establish convergent validity, which are:
1 the standardised factor loadings for all the items should have at least a loading
estimate of 0.60
2 the average variance extracted (AVE) for all the constructs should be greater
than 0.50
3 the composite reliability for all the constructs should be greater than 0.70.
The result from the CFA shows that an item has been dropped from the constructs of
‘student satisfaction’ and ‘student loyalty’ due to the issue of low loading (less than the
0.60). After the removal of both items, Table 1 revealed that the standardised factor
loadings for all the measurement items were above 0.60, the AVEs for all the constructs
were above 0.50 and the composite reliability were above 0.70, hence suggested that the
convergent validity for this study is established.
Table 1 The result of convergent validity

Factor Average variance Composite

Items
loading extracted (AVE) reliability
Product innovation 4 0.739–0.791 0.571 0.842
Process innovation 5 0.680–0.818 0.562 0.865
Organisational innovation 4 0.787–0.854 0.686 0.897
Marketing innovation 4 0.713–0.846 0.587 0.850
Student satisfaction 3 0.703–0.715 0.503 0.752
Institution image 8 0.619–0.880 0.647 0.935
Student loyalty 4 0.660–0.796 0.544 0.826

Table 2 The result of discriminant validity

1 2 3 4 5 6 7
Institution image 0.804
Product innovation 0.089 0.756
Process innovation 0.006 0.022 0.750
Organisational innovation 0.057 –0.113 0.070 0.828
Marketing innovation 0.032 –0.107 0.338 0.188 0.766
Student satisfaction 0.168 0.178 0.316 0.276 0.288 0.709
Student loyalty 0.393 0.202 –0.033 0.125 0.031 0.387 0.737
Notes: 1 The off-diagonal entries (in italics) represent the variance shared between
constructs.
2 The diagonal entries (in bold) represent the squared root AVE by the
construct.
300 B.L. Cheng et al.

Discriminant validity based on the suggestion by Fornell and Larcker (1981) can be
achieved if the squared AVE for each constructs are greater than the shared variance
between the constructs. The results from Table 2 showed that the constructs tested in the
study have achieved discriminant validity as the values of correlation between constructs
are below than the values of squared root of AVEs.
This study assessed the common method variance (CMV) based on the suggestion by
Malhotra et al. (2006). CMV is reported as a significant issue in data analysis as it has an
impact on the consistency and it can produce a false correlation amongst the variables
(Cham et al., 2018; Podsakoff et al., 2003). Malhotra et al. (2006) asserted that CMV is
assumed not to be an issue for a research study if a hypothesised model (with the entire
item indicators of the constructs modelled as a single factor) is not fit. As for the present
study, common method bias is assumed not to be a problem as the result of the
hypothesised model with the entire item indicators of the constructs modelled as a single
factor was not fit. Having satisfied the reliability, validity, and CMV requirements, the
next section presents the results of structural model and hypothesis testing.

4.3 Structural model and hypothesis testing

The findings from the analysis showed that the structural model has a good model fit with
the value of χ2/df = 1.337, RMSEA = 0.029, GFI = 0.917, TLI = 0.976 and PNFI = 0.832.
The path analysis in Table 3 revealed that all factors in service innovation were found to
have a positive impact on student satisfaction. Specifically, product innovation
(β = 0.191), process innovation (β = 0.118) and organisation innovation (β = 0.180)
have a significant positive influence on student satisfaction at 99% confidence level
while marketing innovation (β = 0.150) was found positively associated with student
satisfaction at 95% confidence level. In a similar vein, student satisfaction was found to
have a significant positive influence on both institution image (β = 0.253, p < 0.05) and
student loyalty (β = 0.451, p < 0.001). Institution image (β = 0.312, p < 0.001) was also
found to be positively related to student loyalty.
Table 3 Result of path analysis

Standardised Critical
Hypothesised path Hypothesis
beta (β) ratio
H1: Product innovation → student satisfaction 0.191 3.442** Yes
H2: Process innovation → student satisfaction 0.118 3.356** Yes
H3: Organisational innovation → student satisfaction 0.180 4.270** Yes
H4: Marketing innovation → student satisfaction 0.150 2.804* Yes
H5: Student satisfaction → institution image 0.253 2.762* Yes
H6: Student satisfaction → student loyalty 0.451 5.126** Yes
H7: Institution image → student loyalty 0.312 5.781** Yes
Notes: ** and *denote significant at 99% and 95% confidence level respectively.
As for Hypothesis 8, the mediation effect of institution image on the relationship between
student satisfaction and student loyalty in the present study was addressed using the
PROCESS macro developed by Hayes (2013). According to past studies, it was reported
that PROCESS can be an alternative to maximum likelihood-based SEM because
PROCESS can generate the results that are almost identical to the result generated by
 Service innovation 301

SEM and it is less complicated compared to SEM (Hayes et al., 2017; Hayes, 2013).
Hence, the decision whether to use PROCESS macro or SEM for mediation analysis
depends entirely on the preference of the researchers (Hayes et al., 2017; Rijnhart et al.,
2017). Besides, the combination used of SEM-AMOS for path analysis and PROCESS
for the mediation analysis in quantitative studies reporting were also evidenced in the
recent literature (e.g., Hu and Jiang, 2018; Yang and Yen, 2018).
The results in Table 4 for the mediation analysis show that the total effect of student
satisfaction and student loyalty was found to be significant at 99% confidence level with
β = 0.479. With the addition of a controlling mediator (e.g., institution image) in the
model, the direct effect of student satisfaction and student loyalty was found to be
significant (p < 0.001) but the strength of the relationship was reduced from 0.479 to
0.415. Moreover, the indirect effect of student satisfaction on student loyalty was also
confirmed with the bias-corrected bootstrapping technique on 5,000 bootstrap samples.
It was found that the 95% bias-corrected confidence interval (lower level 0.018;
upper level 0.128) does not straddle a zero in between. Based on evidence above, it can
affirm that institution image partially mediates the relationship between student
satisfaction and student loyalty.
Table 4 Result of mediation analysis

Indirect C.I Direct T-value Total T-value P-value

S.S → S.L 0.479 6.502 <0.001
SS. → I.I → S.L 0.064 0.018/0.128 0.415 5.864 <0.001
Notes: S.S = student satisfaction; S.L = student loyalty; I.I = institution image and
C.I = confidence intervals at 95%.

5 Discussion

Earlier studies in the fields of retention, customer satisfaction, and competitiveness

showed a positive relationship between service innovation and student satisfaction
levels (Danjum and Rasli, 2012; Hu et al., 2012, 2009). This indicates that students’
perceptions regarding service innovations affected their satisfaction levels based on their
experiences. Service innovation governs the organisation’s performance, including its
growth, profitability, sustainability and customer satisfaction (McDermott and Prajogo,
2012; Agarwal et al., 2003). The relationship also suggests that the availability of unique
and contemporary higher education products (and/or services) will improve the level of
satisfaction among students. Past studies noted that customer-oriented innovation in the
service industry increases market demand (Bettencourt et al., 2013; Bettencourt, 2010).
The findings suggest that students’ experiences with higher institutions have a significant
influence on their level of satisfaction with service consumption. Service innovation
management involved matching customer expectations with products to increase
customer satisfaction. Also, competitive advantage was achieved by integrating radical
and incremental innovations (Droege et al., 2009). This study barely investigated radical
innovations, however, incremental innovations were described using factors like product
dimension, process, organisational and marketing innovations (Vargo et al., 2015).
Students are likely to be satisfied if they find marketing communications attractive,
well-planned, creative, and helpful. Thus, H1, H2, H3, and H4 hypotheses are supported.
302 B.L. Cheng et al.

In addition, the study found that students’ level of satisfaction has a significant impact
on their perceptions of institution image. This finding was in agreement with the
opinion expressed by Avenarius (1993), who stated that the stakeholders’ perceptions
significantly affected the organisation’s image. Here, the stakeholders include the
students. Thus, student satisfaction levels affect the institute’s image. The final result
where graduating students were satisfied or dissatisfied was the main factor that defined
the institute’s image. This indicates that the institutes must consider the student
satisfaction levels if they wish to improve their image.
Hypothesis 6, which stated that the student satisfaction levels affected their loyalty
towards their institute, was also supported. The finding is consistent with the study by
Hesket et al. (1997) who put forward that satisfied customers were more likely to be loyal
towards their service provider. Fernandes et al. (2013) observed that students displayed
their loyalty to their institutes in a behavioural or an attitudinal manner. Out of these two,
students preferred the attitudinal manner wherein they spread a positive WoM about their
institute since they found the switching costs to be very high if they wanted to move to
another institute (Fernandes et al., 2013). Hence, if the institutes wish to develop student
loyalty, they need to focus on student satisfaction.
This study also found that students’ perceptions of the image of their institution has a
significant influence on their loyalty. Since students’ perceptions are multidimensional,
these could affect their loyalty towards their institutes (Brown and Mazzarol, 2009).
Institutions must build a good brand image to help them survive, improve their standing
and provide quality education. The better the students’ perceptions, the more likely they
were to stay and complete their course. Hence, higher educational institutes must
maintain a strong brand image to ensure student loyalty.
As stated above, institutional image is found to mediate the relationship between
student satisfaction and loyalty; which is supported in this study. This finding implies that
the institutions should not only drive student satisfaction to promote loyalty, they also
need to consider the importance of their institution’s image. Institutional image plays an
important role. Students who say positive things about their institution increase the
probability that they will return to the same institution for further study. Hence, a special
committee or task force may be set up by institutions to monitor their branding and
marketing activities in order to create and maintain their positive image among their
students and relevant stakeholders.

6 Discussion: limitations and future research

Although this study has put forward various theoretical and practical ideas, there are
some limitations that need to be addressed. Firstly, we only focused on four major
institutions in Greater Kuala Lumpur. Therefore, future research should focus on
different states in Malaysia, different types of institutions, and further explore
respondents from various backgrounds, demographic factors, and geographical regions to
ensure higher contextual suitability, as well as obtain a better representation of the higher
education sector. Secondly, the absence of open-ended questions in the questionnaire has
possibly restricted the accuracy of representing actual thoughts and perceptions among
the students. Therefore, the findings may not fully represent the target population; being
less applicable in actual settings. Hence, future researchers should also consider
employing the use of open-ended questions with more precise feedback to increase the
 Service innovation 303

validity and accuracy of the findings. Some qualitative research would also add more
depth to our findings.
In conclusion, the study proposes appropriate dimensions of service innovation,
which can be used for future research and relevant model development. Higher education
practitioners must better understand customer needs and implement long-term strategies
to attract loyal students. Practitioners should place more emphasis and resource
investment on service innovation to boost student satisfaction; subsequently leading to a
favourable institution image and increased loyalty for long-term development. The results
are of interest to services marketing scholars and relevant to practitioners who are
motivated to benchmark against best practice in the higher education sector.
The outcomes yield valuable information relevant for higher education practitioners
in developing effective and enhanced services marketing strategies to tackle stiff
competition head-on; ensuring long-term profit margins and sustainable growth.

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