Although the entrepreneurship strategy is demonstrated by evidence as a path to enhance the performance of service firms, the question of how it happens has yet to be adequately studied in the tourism and hospitality (T&H) realm. More specifically, how an entrepreneurial strategy enables a T&H firm to enhance its performance through service innovation exploration-exploitation ambidexterity has created a strategic dilemma in extant T&H literature. Constructed on the dynamic capabilities view and organizational ambidexterity theory, our paper addresses this dilemma using data from a drop-and-collect survey of 303 T&H firms in Japan. The findings reveal that entrepreneurial strategy fosters service innovation exploitation and service innovation exploration within T&H firms. In contrast, service innovation exploitation helps T&H firms design unique service offerings, yielding a sustained competitive advantage and superior corporate performance in the long run. Further, the availability of slack resources within T&H firms fosters service innovation exploration and service innovation exploitation. •The effect of service innovation exploration and exploitation and their effects on service design and sustained competitive advantage•The findings reveal that service innovation exploration and exploitation have differential effects on sustained competitive advantage.•This research shows that service innovation exploitation is significantly related to sustained competitive advantage, whereas service innovation exploration is not.•The link between entrepreneurial strategy and performance is mediated by service innovation exploitation, service design, and sustained competitive advantage.