Innovation and Knowledge-Based Strategy: A Model and Empirical Test

1. Innovation and Knowledge-Based Strategy: A Model and Empirical Test Bob McDonald Texas Tech University Area of Marketing Texas Marketing Faculty Colloquium April 2, 2004

2. 2 Innovation I Focal point for knowledge-based business and marketing strategies. Crucial for long-term success (survival). Creative Destruction (Schumpeter 1934, 1942)

3. 3 Innovation II Innovation mediates the relationship between organizational learning and superior performance (Fiol & Lyles 1985; Han et al. 1998) Dynamic Theories of Competition: Central Role of Innovation in Striving for Competitive Advantage (Dickson 1992, 1996; Hunt 2000; Hunt & Morgan 1995, 1996, 1997) Requires higher-order learning (Argyris & Schön 1978; Dickson 1996; Senge 1990) Performance results from positions of competitive advantage (Hunt 2000; Porter 1980, 1985)

4. 4 Innovativeness Aspect of organizational culture (Hurley & Hult 1998) At the vanguard of new technology (Deshpande et al. 1993; Webster 1993) Associated with greater capacity for adaptation to environmental change and innovation (Hurley & Hult 1998) Regularly offer new products/services.

5. 5 Innovation “Any idea, practice or material artifact perceived as new by the relevant unit of adoption” (Zaltman et al. 1973) Development or adoption of innovation. New technology, product design, production process, marketing approach, distribution, supplier networks, order processing, promotion, pricing, market entry/exit, new products/current market, current products/new markets.

6. 6 Types of Innovations Radical/Incremental (Chandy & Tellis 1998; Ettlie et al. 1984) Architectural/Component (Henderson and Clark 1983) Product/Process (Ettlie 1983) Technical/Administrative (Han et al. 1998) Proactive/Reactive (Hunt 2000; Hunt & Morgan 1995, 1996, 1997)

7. 7 Types of Innovations Efficiency Enhancing/Value Adding (McDonald & Srinivasan 2003 Forthcoming?)

8. 8 Knowledge-Based Strategies I Knowledge is a resource that can lead to innovation and positions of competitive advantage Rare Valuable Inimitable Non-Substitutable Barney 1991; Non-Surpassable Hunt 1999, 2002

9. 9 Knowledge-Based Strategies II Market Orientation (Kohli & Jaworski 1990; Narver & Slater 1990) Learning Orientation (Baker and Sinkula 1999; Sinkula et al. 1997) Organizational Learning (Huber 1991; Sinkula 1994) Absorptive Capacity (Cohen & Levinthal 1990)

10. 10 Market Orientation Acquiring Disseminating Responding to: market intelligence from environment to meet customers’ needs better than competitors

11. 11 Learning Orientation Organization must be vigilant in constantly questioning its guiding organizational norms in order to achieve the higher order learning that may lead to competitive advantage.

12. 12 Organizational Learning The process by which organizations interact with their external environment to confirm or disconfirm these organizational norms. Leads to a change in the range of potential behaviors available to the firm.

13. 13 Absorptive Capacity Organizational ability to evaluate new information (technical), assimilate it, and apply it to commercial ends.

14. 14 Common Link An organization can improve its competitive position by learning from the external environment and reacting to what it learns in a timely manner.

15. 15 Prior Research Knowledge-based strategy literature has focused on understanding the acquisition of knowledge. (Nevis et al. 1995) “The conversion of sources of advantage into payoffs has been addressed only in a piecemeal way.” (Day & Wensley 1988, p. 5)

16. 16 Why Conversion is Important Even if all competitors possessed the same knowledge, “it is not at all clear ex ante what is the right thing to do.” (Nelson & Winter 1980, p. 250) Differences in perception of the environment due to different positions in the competitive topography. Differences in perception and judgment.

17. 17 Research Question Why do some organizations respond well to what they have learned, and others do not? Identify and investigate factors that explain this difference.

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20. 20 Method Tested model using structural equation modeling. Data collected with a mail survey of key informants in a large number of organizations located throughout the US. Single industry to control for different environmental effects.

21. 21 US Health Care Industry $1 trillion annually Traditionally innovative in patient care, but “staid” on the business side. Health insurance changes ? fundamental price shift Managed Care, DRG, HMO Hospitals forced to innovate to compete, and even to survive

22. 22 Sample Hospital administrators most knowledgeable about constructs being studied (Huber & Power 1985) Sample frame: 2000-2001 edition of the American Hospital Association’s Guide to the Health Care Field < 50% of beds in nursing facilities After pretest, excluded small hospitals (< 60 beds), federal hospitals, and certain specialty hospitals (psychiatric, behavioral, rehabilitation)

23. 23 Measures Extant literature 21 in-depth interviews with hospital managers (34 innovations) Purification achieved via a pretest of 112 hospital administrators Internal consistency, low item-total correlations EFA, weak loading items Unclear & un/universally adopted innovations

24. 24 Results Mail survey (Dillman 1972) 2474 surveys mailed 14 undeliverable 370 returned, 15% response rate 21 incomplete 92% CEO, COO, VP; Balance designated by administrator as appropriate person

25. 25 Measurement Model Measurement model Strong loadings Convergent validity Cross loadings indicate discriminate validity ?2 = 1383, df = 840 RMSEA = 0.040 Comparative Fit Index = 0.95 All constructs demonstrate good internal consistency (a = .83 to .94)

26. 26 Structural Model ?2 = 1290, df = 748 RMSEA = 0.043 CFI = 0.95

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29. 29 Discussion

30. 30 Limitations & Future Research Single industry Need to test model in multiple industries Additional factors that lead to innovativeness Proposed model, 43% of variance in Innovativeness Key informant (Huber and Power 1985) Hierarchical analysis Single source, self-reported, subjective measures Objective measure, # Innovations Adopted

31. 31 Implication Diligence in learning, analyzing, and responding enables organizations to be innovative while managing risk. In essence, the organization is able to mitigate its risk through diligent learning and action.

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