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Are there cases or contexts where certain groups of customers who are expected to place a considerable emphasis and importance on the tangible qualities of services end up attributing a greater weight to the intangible qualities? This paper attempts to exemplify the existence of such cases, and explain why such cases are, at times, paradoxical in nature, and how such cases could arise.

The paper employs a structural‐equation‐modeling approach to theorize about, and empirically examine, the tangible and intangible determinants of service quality. The model and the path developed in the paper also capture the relationship between service quality and customer satisfaction. Using AMOS, the empirical estimation of the model is carried out.

The central finding is that all intangible factors associated with service quality turn out to be unequivocally more important than the tangible ones in the Turkish non‐profit health‐care sector under investigation. In other words, intangible factors appear to play a statistically more significant role compared with tangible factors in determining the overall customer satisfaction and the quality of non‐profit health‐care services. Considering that, in developing countries, tangible factors are expected to be among the most scarce, and hence, most valuable ones, the relative unimportance of tangible factors constitutes a paradox to be explained and resolved.

This paper contributes to the literature by bringing to light a striking phenomenon which is largely unnoticed in the literature, namely that, in certain cases, there might exist a fundamental asymmetry and difference between the influences of tangible and intangible factors on service quality, and that difference in certain contexts, as in the case of the Turkish health‐care sector, constitutes a paradox to be explained. The paper demonstrates the possibility of such paradoxical cases and provides cultural and sector‐specific explanations for this seemingly puzzling phenomenon in question.

The principal aim of this study is to determine the critical factors of market orientation (MO) and to measure its effect on new service development (NSD) and financial performance of hospital industry in Turkey.

Drawing on a self‐administered questionnaire, the data were collected from a sample of privately‐held general hospitals within the city of Istanbul in Turkey. Based on theoretical considerations, a model was proposed to examine the interrelationships among MO, NSD‐performance and financial performance.

Data analysis reveals that while MO has a strong and positive effect on NSD‐performance, it has no significant effect on financial performance. Also a strong and positive relationship was noted between NSD‐performance and financial performance. Finally, the findings also provided evidence for the mediating role of NSD‐performance in the relationship between MO and financial performance in the hospital industry.

First, due to relatively small sample size, a caution should be exercised when interpreting the results. Second, the data were collected from hospitals in Turkey, which may restrict to some extent generalizability of findings. Third, we relied on the subjective evaluations of senior executives. It would therefore be useful to replicate the results with objective measures of performance indicators.

Although there is compelling evidence that MO has a positive effect on business performance, it alone may not be able to produce superior performance. Many hospitals are committed to MO and new services development. The framework clearly indicates that a strong commitment to both the NSD‐performance and marketing areas is essential for improving the financial performance of hospitals. Also, to remain competitive in today's healthcare industry, hospital managers should all keep pace with the daily changes in the market place and stay attuned to NSD activities and quality management practices.

The main thrust of this study is to investigate whether the relationship between MO and financial performance is mediated by NSD‐performance in hospital industry. This constitutes the novelty of this research as most prior empirical research investigating a mediating mechanism through which MO affects firm performance largely focused on other factors with no or little emphasis being placed on NSD activities or NSD‐performance in healthcare context.