Does Innovativeness Play a Role in Hotel Profitabilty?

[We’re pleased to welcome Izabela Sandvik who collaborated with Dale F. Duhan and Kare Sandvik on their article “Innovativeness and Profitability: An Empirical Investigation in the Norwegian Hotel Industry” from Cornell Hospitality Quarterly.]

What inspired you to be interested in this topic?

The paper was inspired by the contradiction between the assumption that innovativeness is important to performance and profitability while the results reported in the marketing literature indicate that such relationships are often weak or do not exist at all. The hospitality industry also views innovation as important to performance. For instance, investors bring entirely new hotels into the market regularly, and many existing hotels compete by introducing new service concepts, such as new entertainment, technology, restaurant concepts or spas. Clearly, behavior in the hospitality industry reflects a belief that success is positively related to innovativeness in service offerings. However, research studies of the hospitality industry also report weak or non-existent relationships between innovativeness and profitability. We believe that there are theoretical and methodological issues that contribute to the weak results, and so we decided to address some of those issues in this study.

Were there findings that were surprising to you?

We found that the direct relationship between hotel innovativeness and profitability is essentially zero (.01). Given the existing literature, that part of our results was not surprising. But we felt that perhaps the key to this conundrum was the focus on the direct relationship and that perhaps this relationship is really mediated. So we began to think about what mediator(s) might be appropriate. Since we are professors of marketing, it is not surprising that we looked to the market reaction to innovativeness as the key missing mediator. However, since we were confident that market advantage is the only form of mediation, we also included sales growth and capacity utilization as additional (second order) mediators. We proposed a model with both a simple mediated relationship (from innovativeness to profitability through market advantage) and also more complex forms of mediation that included both growth and capacity utilization (capacity utilization is an important measure of performance in businesses with large investments in fixed capacity such as hotels). This model was designed to allow comparisons of these alternative forms of mediation (paths).
What did surprise us about our results was that the simple mediated relationship (innovativeness => market advantage => profitability) was not significant. We found that the innovativeness => profitability relationship is moderated at two levels, through the market (market advantage) and through the impacts that the market responses have on sales growth and capacity utilization.

How do you see this study influencing future research and/or practice?

The advantages of most innovations for hotels and other service oriented businesses tend to be comparatively short-lived. This means that such businesses are more dependent on continuous innovation to maintain the superiority of their offerings. A customer’s overall assessment of a service business is of the package of benefits (for instance, for hotels: dining, room interior, room view, front desk service, as well as the presence or absence of other features such as spas, fitness centers, free car parking, airport shuttles, in-room wireless, local area network, etc.). As a result, innovativeness must be developed for a variety of activities, and that may take time to establish and improve. When a hotel launches a new market offering, a number of marketplace changes may occur. For example, (1) competitors may decide to launch new offerings of their own, which increases consumer choice in the market; (2) new information technologies may become available that enable competitors to introduce technologically innovative offerings with enhanced features (e.g. using mobile phones to enter hotel room, or the Radisson iConcierge app, which provides guests with access to a wide variety of hotel services and local information – before, during and after their stay); and (3) economic conditions may change that influence consumers’ buying behaviors. As a result, market offerings often face environments that differ considerably from those that existed during their development and launch stage. Therefore, continuous innovations (i.e., the ability to quickly adapt and redesign market offerings in response to marketplace changes) are an important capability for organizations.

Since many innovations are not visible and may not provide obvious responses directly from customers, it may be tempting for management to emphasize front-stage (more visible) innovativeness at the expense of backstage conceptual and process-type innovativeness. This could be a mistake. It is recommended, that management practices should more explicitly address and facilitate these two types of innovations. Digital marketing opens up a great variety of options to literally visualize new innovations. First, hotels increasingly use videos and pictures online to effectively capture customer experiences of new market offerings. Second, digital CRM systems enable numerous possibilities to design “programs” for the preferences and purchase likelihood of different segments. Third, affiliate marketing and co-marketing are also means to reach particular segments and to more easily facilitate consumer learning about the innovation (e.g., hotels’ use of brands, such as Gordon Ramsay at Paris Las Vegas and entire hotel concepts, such as Armani hotels) as well as joint events that use hotel’s innovative facilities and concepts (e.g., film set, music events promoting of young and unknown artists at The Thief hotel in Oslo). Fourth, customers’ increasing use of online word of mouth contributes to the communication of new hotel offers and features through social media channels such as Trip Advisor, Facebook, Twitter, and others. Hotels’ management of word-of-mouth is important to creating buzz about and credibility for innovations. Hotels display great variety of channels in how they communicate their innovations. We believe that significant and continuous efforts to visualize and present new market offerings will pay-off in the market place. Thus, a commercialization plan for each launched innovation is crucial to generate sufficient revenue for success.

Read “Innovativeness and Profitability: An Empirical Investigation in the Norwegian Hotel Industry” from Cornell Hospitality Quarterly for free by clicking here. Keep up on all the latest from Cornell Hospitality Quarterly! Click here to sign up for e-alerts.

Izabela L Sandvik, Ph.D., is an associate professor at the Business School of Buskerud and Vestfold University College, Hønefoss, Norway.

Dale F. Duhan, Ph.D., is a professor of marketing at the Rawls College of Business at Texas Tech University, Lubbock, USA, and at the Business School of Buskerud and Vestfold University College, Hønefoss, Norway.

Kåre Sandvik, Ph.D., is a professor of marketing at the Business School of Buskerud and Vestfold University College, Hønefoss, Norway.