When does competitive intensity improve service quality? The moderating role of differentiation strategy

Abstract

Competitive intensity is widely assumed to push firms toward higher service quality, yet the strategic conditions under which this pressure actually translates into quality gains remain poorly understood. Drawing on contingency theory, this study examines whether a firm’s differentiation strategy moderates the relationship between competitive intensity and service quality, and specifically tests whether strong differentiation substitutes for, rather than amplifies, the quality-enhancing effect of competition. The study uses survey data from 204 non-manufacturing business units operating in the United Kingdom, drawn from a broader research project on costing systems (data collected September–December 2018). The present analysis addresses a distinct research question and an interaction-form contingency model that was not examined in the original study. Competitive intensity, differentiation strategy and service quality were measured with multi-item, previously validated survey scales. Hierarchical moderated ordinary least squares (OLS) regression was used, with continuous predictors mean-centered before the interaction term was formed; heteroscedasticity-consistent (HC3) standard errors were applied as a robustness check, and simple-slope and Johnson–Neyman analyses were used to probe the interaction. Competitive intensity and differentiation strategy were each positively associated with service quality. Contrary to a simple reinforcement account but consistent with a substitution logic, differentiation strategy significantly and negatively moderated the competitive intensity–service quality relationship (b = − 0.094, p = .013; HC3 p = .015). The positive effect of competitive intensity on service quality was strongest among low differentiators and weakened, without fully disappearing across the observed range, among firms with the strongest differentiation commitments. The study contributes to contingency-based strategy research by reframing competitive intensity and differentiation strategy as interacting rather than independent antecedents of service quality, and by providing empirical evidence, from a UK non-manufacturing sample, of a substitution pattern between external competitive pressure and internal strategic commitment as drivers of service quality. Because the design is cross-sectional and based on a single respondent per business unit, the findings should be interpreted as associational rather than causal. Practical implications for managers balancing strategic positioning and competitive response are discussed.