Drawing on the service-dominant perspective, this study develops and tests a research model of examining performance improvement in hospital organizations. Our model posits that internal capabilities with external infusions affect service climates, which in turn, influence service innovation and improvement of service performance. Survey data collected from 500 managers in hospital organizations were used to test the model using partial least squares analysis. We found that the internal capabilities with the external infusions are significantly associated with the service climate that lead to both service innovation and improvement of service performance in hospital organizations. The implications of these findings for both research and practice are discussed.