Customer Orientation and Innovation Capability: Driving Financial Performance, Exams of Innovation

Download Customer Orientation and Innovation Capability: Driving Financial Performance and more Exams Innovation in PDF only on Docsity! Received Mar. 15, 2018 - Accepted July 27, 2018 Financial support: None. This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Gestão & Produção, 27(4), e4706, 2020 | https://doi.org/10.1590/0104-530X4706-20 1/20 ORIGINAL ARTICLE Customer orientation and financial performance relationship: the mediating role of innovative capability A relação entre a orientação ao cliente e o desempenho financeiro: o papel mediador da capacidade de inovação Mirela Jeffman dos Santos1, Marcelo Gattermann Perin2 , Cláudia Simões3, Cláudio Hoffmann Sampaio4 1Universidade de Santa Cruz do Sul – UNISC, Programa de Pós-graduação em Administração, Santa Cruz do Sul, RS, Brasil. E-mail: mirelajs@unisc.br 2Fundação Getulio Vargas – FGV, Escola de Administração de Empresas de São Paulo – EAESP, São Paulo, SP, Brasil. E-mail: mperin25@gmail.com 3Universidade do Minho – UMINHO, Escola de Economia e Gestão, Campus de Gualtar, Braga, Portugal. E-mail: csimoes@eeg.uminho.pt 4Pontifícia Universidade Católica do Rio Grande do Sul – PUCRS, Programa de Pós-graduação em Administração, Porto Alegre, RS, Brasil. E-mail: csampaio@pucrs.br How to cite: Santos, M. J., Perin, M. G., Simões, C., & Sampaio, C. H. (2020). Customer orientation and financial performance relationship: the mediating role of innovative capability. Gestão & Produção, 27(4), e4706. https://doi.org/10.1590/0104-530X4706-20 Abstract: Existing research establishes customer orientation (CO) per se as insufficient to achieve higher levels of financial performance (FP). Such reasoning suggests the need for additional skills and capabilities, such as, innovative capability (IC). In addition, environmental variables (e.g., Technological Turbulence – TT) affect these relationships. This paper explores the relationships and effects of CO and IC on FP under different TT conditions. A research framework and hypotheses were developed. The framework captures the following relationships: (i) the direct influence of CO on FP; (ii) the mediating role of IC on the CO/FP relationship; (iii) the moderating role of TT over the mediation of IC on the CO/FP relationship. The fieldwork included an exploratory stage, followed by a cross-sectional survey applied to managers in medium-sized companies in Brazil. Findings revealed that IC partially mediates the relationship between CO and FP, in particular in high TT environments. Managerial implications and avenues for future research are presented. Keywords: Customer orientation; Financial performance; Innovative capability; Technological turbulence; Emerging market. Resumo: A pesquisa existente estabelece que a orientação ao cliente (CO), por si só, é insuficiente para atingir níveis mais elevados de desempenho financeiro (FP). Tal raciocínio sugere a necessidade de habilidades e capacidades adicionais, como a capacidade de inovação (IC). Além disso, as variáveis ambientais (por exemplo, turbulência tecnológica – TT) podem afetar essas relações. Este artigo explora as relações e os efeitos da CO e da CI no FP em diferentes condições de TT, tendo sido desenvolvido um modelo teórico correspondente. Tal modelo envolve as seguintes relações: (i) a influência direta da CO no FP; (II) o papel mediador da IC na relação CO/FP; (III) o papel moderado do TT sobre a mediação da IC na Customer orientation and financial performance relationship... 2/20 Gestão & Produção, 27(4), e4706, 2020 relação CO/FP. O trabalho de campo incluiu uma etapa exploratória, seguida de um levantamento transversal aplicado aos gestores de empresas de médio porte no Brasil. Os achados revelaram que a CI tem mediação parcial na relação entre CO e FP, em particular em ambientes de alta TT. Implicações gerenciais e sugestões para futuras pesquisas são apresentadas. Palavras-chave: Orientação ao cliente; Desempenho financeiro; Capacidade de inovação; Turbulência tecnológica; Mercado emergente. 1 Introduction Transformations in the business environment, such as, the emergence of new technologies and changes in customer preferences, call for organizations to develop new market approaches and capabilities (Paladino, 2008; Wei & Morgan, 2004). The different capabilities and their combination are expected to generate competitive advantage and, ultimately, impact on business survival (Watson et al., 2018). The theory of the Resource Based View (RBV) of the firm posits that the right combination of internal resources fosters the development and implementation of strategies that generate a leading position in the market (Hooley et al., 2001), competitor differentiation and competitive advantage (Barney, 1991). Resource effectiveness emerges from the arrangement of the organization’s capabilities that support the application and the use of knowledge created internally (Hooley et al., 2001). Yet, the inertia of stable and common resources may not generate the full potential for competitive advantage, implying new resource arrangements (Eisenhardt & Martin, 2000). In fact, resources are in permanent transformation (Teece, 2007) and are integrated in the organizations’ strategic orientation, consumer/stakeholder relationships and in marketing capabilities that coordinate the resource articulation to the market (Hooley et al., 2001). As a consequence, organizations ought to develop suitable and relevant capabilities that leverage their competence in addressing the market and business environment. A relevant capability, emerges from the ability that organizations have to assess and collect stakeholder information in order to develop internal capabilities (Watson et al., 2018). For example, Customer Orientation (CO) is a strategic orientation directed at searching, collecting and using information about customers (Atuahene-Gima, 2005). CO is related to the development of a market orientation (Tajeddini, 2010; Frambach et al., 2016) and to the generation of innovation and Financial Performance (FP) (Woodside, 2005). Ultimately, CO may be considered a critical strategic capability (Nakata & Zhu, 2006) in reaching market success (Booner, 2009). Organizations further need the ability to develop innovations (Saunila et al., 2014) to address market dynamics. In particular, organizations endeavor to transform customer knowledge into new products or processes so that market needs are met (Hult et al., 2005; Vorhies et al., 2009). The Innovative Capability (IC) encompasses the organization's ability to generate, create, and develop innovations (Akman & Yilmaz, 2008). The underlying idea is to use resources and skills to explore market opportunities in a proficient way (Neely et al., 2001). Such capability may be a source of competitive advantage (Akman & Yilmaz, 2008; Stock & Zacharias, 2011) and financial development (Saunila et al., 2014), especially in turbulent business environments (Song et al., 2005). The way organizations combine different capabilities is expected to impact business performance (Watson et al., 2018). The marketing literature addressed CO as a Customer orientation and financial performance relationship... Gestão & Produção, 27(4), e4706, 2020 5/20 offers to the market (Booner, 2009). The transformation of resources happens through the development of special capabilities like CO and IC (Eisenhardt & Martin, 2000; Akman & Yilmaz, 2008). The study’s general argument portrays that companies with greater CO are expected to present support for innovation (IC), market success, and ultimately, higher levels of FP (Woodside, 2005). Environmental variables, such as TT, intervene in these relationships. Figure 1 depicts the theoretical framework and the research hypotheses capturing this argument. Figure 1. Theoretical framework. CO reflects an organization’s approach to collect information about current and future customer habits, and to disseminate and use the information within the organization (Atuahene-Gima, 2005; Deluca et al., 2010). A customer-oriented approach involves the proximity of the organization with its customers (Macintosh, 2007). CO covers customer behavior identification, analysis, understanding and responses (Yang et al., 2012; Augusto & Coelho, 2009). In sum, CO entails the collection of market feedback to comprehensively understand customer behavior (Auh & Menguc, 2005). CO is manifested through the degree to which an organization and its professionals have contact with customers (Macintosh, 2007) and focuses on obtaining market feedback (Akgün et al., 2010), understanding, and satisfaction (Augusto & Coelho, 2009; Yilmaz et al., 2005). Customer information reduces uncertainty about the external environment, in particular regarding issues related to customer needs. Updated information about the customer improves decision making efficiency (Van Riel et al., 2004). CO is a central component of market orientation and an important driver for firm performance (Kirca et al., 2005). Since CO prioritizes customers’ needs, allows for the identification and analysis of customer preferences and, thus, to serve them better (Augusto & Coelho, 2009; Gao et al., 2007). CO supports organizations in developing innovative projects (e.g., products and services) that better meet customers’ needs (Deluca et al., 2010; Grinstein, 2008) generating higher value offers and products in the market. The aim is to assist customers in their buying decisions and to develop offers that best satisfy their needs (Macintosh, 2007). A company can gain an advantage over competitors by focusing its efforts on customer satisfaction (Jeong et al., 2006). CO is reflected in the organizational culture (Menguc & Auh, 2006) and impacts FP (Nakata & Zhu, 2006). Frambach et al. (2016, p. 1433) found evidence for the effect of CO on firm’s performance where “[…] customer orientation is Customer orientation and financial performance relationship... 6/20 Gestão & Produção, 27(4), e4706, 2020 consistently part of high-performance configurations”. Hence, the following hypothesis is proposed: H1: Customer orientation positively influences financial performance. Claims that CO per se leads directly to higher FP have been challenged due to inconsistent findings regarding the effect of CO in FP. Such reasoning suggests that CO alone is not sufficient for the organization to reach higher levels of performance (Booner, 2009). Indeed, a customer oriented approach, although crucial to create an innovative environment (Akman & Yilmaz, 2008) and compete in the market, seems insufficient to reach an outstanding performance (Booner, 2009). These arguments are supported with findings reporting the absence of and/or an insignificant direct relationship between CO and performance (e.g., Langerak et al., 2004; Jeong et al., 2006). The information obtained from customers, needs to be converted into market offers endowed with attributes and features that meet expectations and satisfy the market. Customer knowledge must be harnessed and transformed so that the organization attains higher levels of FP (Piening & Salge, 2015; Saunila et al., 2014). The transformation of customer based knowledge into tangible results occurs through the development of specific skills (Rijsdijk et al., 2010). Organizations develop distinct capabilities consistently with their environment and innovation activity. It is important to cultivate the capability of learning through stakeholder engagement and embrace different viewpoints. The underlying idea is to create value together with the customer, reformulating problems and proposing innovative solutions (Watson et al., 2018). The endeavor entails an interactive process that starts with identifying an opportunity (a new market and/or new product) and evolves into the development, production and marketing of the new product to the target market (Garcia & Calantone, 2002). IC translates such organizational capability (Akman & Yilmaz, 2008). IC involves a set of abilities embracing the organization’s culture orientation, the structure, the individual activities and market knowledge (Saunila et al., 2014). That is, IC can be understood as the ability that an organization has to generate results from innovations, using resources and skills in the best possible way, with a view to explore market opportunities (Neely et al., 2001). The continuous gathering of external (market) knowledge is core for innovation generation, supporting planning and development activities (Piening & Salge, 2015). Consequently, IC is more likely to occur in firms with greater CO (Joshi, 2016; Han et al., 1998). The focus on customers encourages decisions and management actions driving the development of skills that facilitate the alignment between what is offered in the market, and what customers expect out of these offers (Ngo & O’Cass, 2012). Consequently, CO instills the continuous update of internal capabilities to better serve customers. Stock & Zacharias (2011) defend that customer-related information is a strong stimulus for innovation, because it generates new ideas for new product development, supports the delivery of superior value in the market and, ultimately leads to higher FP. Hence, knowledge about the external environment (in particular about customers) is integrated in the capability of the organization to develop innovations (Saunila et al., 2014). Thus, customer-oriented companies are more likely to develop new ideas because they are engaged in an active dialogue with their customers and use their knowledge to identify and respond to market opportunities (Spanjol et al., 2011). Based on this discussion the following hypothesis is derived: H2: IC mediates the impact of customer orientation on financial performance. Customer orientation and financial performance relationship... Gestão & Produção, 27(4), e4706, 2020 7/20 Environmental conditions affect the way companies operate in their markets (Piening & Salge, 2015). Variables, such as, the industry’s structure, complexity, heterogeneity, and turbulence have an impact on the way companies function, directly influencing strategies and decision making (Kuivalainen et al., 2004). When environmental conditions are turbulent and less predictable, organizations tend to adjust their way of working in order to overcome the challenges of such context (Piening & Salge, 2015). Organizations operating in turbulent environments ensure business survival by seeking an alignment between their internal resources and the external demand (Akgün et al., 2012). Turbulent conditions require internal teams to be committed and dedicated to carry out their roles during innovation development (Dayan & Elbanna, 2011). Therefore, professionals ought to adjust their actions, practices, and beliefs, adapting to changes more rapidly (Akgün et al., 2012). Among the environmental turbulence factors, TT stands out as having a strong effect on the internal development of innovation (Buganza et al., 2009). Technological innovations can cause turbulence in the environment, accelerate market changes (Calantone el al., 2003), or lead to new technical discoveries (often causing the implementation of new legal systems) (Akgün et al., 2006). Organizations operating in environments with high TT are exposed to constant advances in technology. Changes may suddenly occur and unexpectedly, rapidly turning existing products obsolete (Lee, 2010). Technologically unstable environments cause risk and uncertainty in innovation development processes because demand forecast is more difficult, and existing products become outdated in shorter periods of time (Rijsdijk et al., 2010). Such context requires the organization to identify technological opportunities created by rapid environmental changes and to timely introduce innovations in the market (Li et al., 2008). In this way, uncertainty favors the use of resources and the development of new capabilities (Piening & Salge, 2015). Ultimately, turbulent environments may lead the organizations to develop a competitive advantage through the creation of capabilities and strategies that are more difficult for competitors to imitate in a timely manner, enhancing market competitive advantage (Barney, 1991). When the business environment is relatively stable and predictable, competitors can more easily capture and imitate the resources that are being used. Conversely, in turbulent environments, organizations tend to use a set of dynamic capabilities, making competitor imitation more difficult, thus positively impacting FP (Song et al., 2005). Hence, in high TT environments, IC is fundamental to the reach higher FP. Hence, the following hypothesis is proposed: H3: TT positively moderates the indirect effect of CO and FP - the stronger the TT, the greater the impact of CO on FP through IC. 3 Method The empirical study entailed a cross-sectional survey applied to business managers in Brazil. The sample framework included 2,500 medium-sized Brazilian companies withdrawn from the Dun & Bradstreet database (recent studies have validated the accuracy of Dun & Bradstreet data; e.g., Baum & Locke, 2004). The companies had a number of employees within the interval 100 to 499 (IBGE, 2017). The database included firms operating in a wide range of industrial markets (Akgün et al., 2010; Smirnova et al., 2011). As an initial step, general managers of 1.000 firms were contacted by phone and asked to participate in the survey. Among those, 659 agreed to be contacted by email and receive the link to the questionnaire. The sample Customer orientation and financial performance relationship... 10/20 Gestão & Produção, 27(4), e4706, 2020 and kurtosis less than 7.0; Hair et al., 2013). Overall the results indicate good measurement properties. All item loadings are significant (p<0.001). Inter-construct correlations are low to moderate (0.25-0.66) (Rowntree, 1981). The high coefficient Alpha, AVE scores and CR levels for each construct support the evidence of convergent validity (Hair et al., 2013). To assess discriminant validity, the squared correlation of each factor pair was contrasted with the variance extracted from each factor (Fornell & Larcker, 1981). In each case, the AVE exceeds the squared correlation between the constructs, providing evidence for discriminant validity. Table 3. Summary of the scale validation measures. Item description Standardized Loadings t-values Customer Orientation (Narver & Slater, 1990) • We constantly monitor our level of commitment and orientation to serving customer needs. 0.808 26.327 • Our business strategies are driven by our beliefs about how we can create greater value for customers 0.661 9.014 • Our strategy for competitive advantage is based on our understanding of customer needs 0.720 12.603 • Our strategy for competitive advantage is based on our understanding of customer needs 0.694 15.143 • We measure customer satisfaction systematically and frequently. 0.780 20.136 • We give close attention to after-sales service. 0.683 10.230 (scale: 1= strongly disagree; 7= strongly agree) Innovative Capability (Akman & Yilmaz, 2008) • Our firm has an organizational culture and a management comprehension that support and encourage innovation. 0.809 27.873 • At our firm, knowledge from different resources is used for product development activities efficiently and rapidly. 0.788 19.828 • Our firm is able to reflect changes at market conditions (such as changes from customer wants, competitors’ products, etc.) to own products and processes as soon as possible. 0.749 16.770 • Workers of our firm are supported and encouraged to participate in activities such as product development, innovation process improvement and to produce new ideas such topics. 0.676 12.406 • New ideas that come from customers, suppliers, etc. are evaluated continuously and try to include into product development activities. 0.686 15.329 • Our firms could be adapted to environmental changes easily and in the short time by making suitable improvements and innovations at its products and processes. 0.641 11.777 (scale: 1= strongly disagree; 5= strongly agree) Technological Turbulence (Jaworski & Kohli, 1993) • The technology in our industry is changing rapidly. 0.833 10,871 • Technological changes provide big opportunities in our industry. 0.875 13.871 • A large number of new product ideas have been made possible through technological breakthroughs in our industry. 0.855 15.052 • Technological developments in our industry are rather minor* 0.589 4.560 Customer orientation and financial performance relationship... Gestão & Produção, 27(4), e4706, 2020 11/20 Item description Standardized Loadings t-values (scale: 1= strongly disagree; 5= strongly agree) Financial Performance (Sampaio et al., 2011) • Profit levels 0.872 21.747 • Sales volume 0.795 16.077 • Profitability 0.826 14.241 (scale: 1= much lower; 7= much higher) Construct Mean SD α CR AVE Correlation Matrix 1 2 3 4 1. Customer Orientation 5.53 1.02 .82 .87 .53 .73 2. Innovative Capability 3.72 .77 .82 .87 .53 .663** .73 3. Technological Turbulence 3.42 .98 .81 .87 .63 .251** .309** .80 4. Financial Performance 3.39 .81 .78 .87 .69 .421** .415** .280** .83 *Reverse item. SD = Standard deviation; α = Cronbach alpha; CR = composite reliability; AVE = Average variance extracted. Diagonal elements in bold are the square root of AVE. **p < 0.01. 4 Findings Path analysis was conducted to test the theoretical framework (Table 4). The bootstrapping procedure (5,000 subsamples) provided the t-values and the significance of each path in the model (Hair et al., 2013). Two models were evaluated. First, a simple model (Model 1), with the main relationship between CO and FP, was verified. In the second model (Model 2), the IC was included as a mediating variable in the relationship between CO and FP. Control variables were incorporated in both models. The explained variances (R2) of the endogenous variables for each model suggest moderated R2 estimates – ranging from 0.231 to 0.439 (Hair et al., 2013). The cross-validated redundancy (Stone-Geisser’s Q2) estimates are greater than 0 for all endogenous constructs in both models, ranging from 0.141 to 0.225. Due to the possible existence of outward factors or alternatives, the models’ predictive relevance is satisfactory (Hair et al., 2013). Table 4. Structural model results. Linkages in the model Standardized parameter estimates Model 1 Model 2 Main effects H1: CO → FP 0.431*** (6.071) 0.262** (2.721) CO → IC 0.663*** (13.785) IC → FP 0.257** (2.710) Control variables Size → FP 0.147* (2.108) 0.154* (2.105) Age → FP -0.032 (0.753) -0.004 (0.094) Sector → FP -0.172* (2.4) -0.177** (2.674) Indirect effects Table 3. Continued… Customer orientation and financial performance relationship... 12/20 Gestão & Produção, 27(4), e4706, 2020 Linkages in the model Standardized parameter estimates Model 1 Model 2 H2: CO → IC → FP 0.171** (2.266) R2 IC 0.439 FP 0.231 0.268 t-values and significance of path coefficients were generated by a bootstrapping procedure (5,000 subsamples). *p < 0.05. **p < 0.01. ***p < 0.001. Findings suggest that CO has a direct and positive impact on FP. In both models, CO’s direct effect on FP is positive and statistically significant (β=0.431, p<0.001; β=0.262, p<0.01). Consequently, H1 is supported. In what concerns the mediating effects, Iacobucci et al. (2007, p. 153) suggest that a model with direct and indirect paths should fit simultaneously by structural equation modeling to “estimate either effect while partialling out, or statistically controlling for, the other,” even for small samples and models with multiple mediators. The Sobel ɀ-test should also be computed to assess “the relative sizes of the indirect (mediated) vs. direct paths”. The mediation effects of a variable M (IC) on the relationship of an independent variable X (CO) and a dependent variable Y (FP) is verified when: a) both X → M and M → Y paths are significant; and b) the Sobel ɀ-test for M is also significant. Then, if the direct path X → Y is significant, the mediation is reported as “partial”; if not, it is reported as “full”. If one (or both) of X → M and M → Y paths is (are) non-significant, no mediation can be reported (Iacobucci et al., 2007). Findings report that the condition “a” is satisfied as the relationships CO → IC (β=0.663, p<0.001) and IC → FP (β=0.257, p<0.01) are significant. Condition “b” is also satisfied as the Sobel ɀ-test for the mediating effect of IC in the relationship between CO and FP is significant (ɀ=2.7496; p<0.01). Furthermore, the indirect effects of CO on FP via IC is positive and significant (β=0.171, p<0.01). Hence, as the relationship between CO and FP is significant, there is evidence of the partial mediation effect of IC (Model 2). Hence, H2 is supported. H3 postulates the moderating effect of TT on the indirect effects of CO on FP. The hypothesis was tested using the PROCESS macro (Hayes, 2015) for moderated mediation modeling. The conditional indirect effect of the independent variable (CO) on the dependent variable (FP) was estimated across a range of low to high values of the moderator (TT) with 95% confidence bands. Bootstrapping (5,000 samples) with bias correction was used for calculation of standard errors and confidence intervals (Hayes, 2013). This procedure has been frequently applied to check the moderated mediating effects (e.g. Leal-Rodríguez et al., 2014; Wood et al., 2015). Table 5 shows the conditional indirect effects of CO on FP within different levels of TT. Table 5. Conditional indirect effects of CO on FP within different levels of TT. TT B Bootstrap SE Bootstrap 95% CI Lower Upper -1 SD (2.435) 0.018 0.043 -0.066 0.111 Mean (3.420) 0.092 0.040 0.012 0.174 1 SD (4.400) 0.200 0.065 0.081 0.337 B = Unstandardized Regression Coefficient; SE = Standard Error; CI = Coefficient Interval; SD = Standard Deviation. Table 4. Continued… Customer orientation and financial performance relationship... Gestão & Produção, 27(4), e4706, 2020 15/20 in the external environment (which is related to CO). IC allows the company to develop innovations that, if based on market knowledge, will have a higher effect on FP. By combining a strong CO with IC, managers can magnify the company’s performance. This combination results in a sustainable source of competitive advantage. These capabilities are gradually built and ought to fit the company’s business and context. Nonetheless, independently of the company’s size or industry, unstable markets are a reality. Managers should also consider that in order to successfully operate in a certain market, there is the need to account for environmental conditions, such as TT. In particular, when operating in high TT environments subject to dynamic markets and technological changes, managers should use IC as a way to bridge and enhance the CO’s effect on FP. Companies having a strong IC will be able to better and rapidly adjust to market changes. Hence, developing a strong CO and IC is core to build competitive advantage. 5.2 Research limitations and future research The study’s findings endure limitations and open avenues for future research. The adopted sampling procedure is non-probabilistic limiting the extrapolation of the finding to the population. Nonetheless the selection of the companies in the sample was drawn from a reliable list and the sample had a similar demographical profile to the population. Future research ought to widen the analysis trying to capture nuances amongst the types of industries and other organizational characteristics (e.g., different companies’ sizes – micro and large). It would also be relevant to consider multiple respondents in the company to capture the various perspectives into the combination and use of capabilities. This research was conducted in the context of an emerging economy. A replication in other market contexts (e.g., western economies, other emerging economies) is warranted to capture how strategic capabilities interact and behave in distinct business environments and circumstances. The research model should be further expanded to include other variables and their impact on business performance. For example, it is recommended to explore additional capabilities in order to thoroughly understand alternative paths to the proposed model. Moreover, strategic orientations, such as, entrepreneurial orientation ought to be considered to assess the effect of IC in performance. The metrics for performance may also be expanded to include other measures, such as, non-financial performance and objective measurements. Finally, to better understand the role of environmental conditions in the relationship between capabilities and performance, other moderating environmental variables ought to be considered (e.g., market turbulence). References Akgün, A. 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