Professional Documents
Culture Documents
1. Introduction
Concern over the global competitiveness and productivity of American manufac-
turers has drawn attention to the importance of a company’s manufacturing inno-
vation activities to its financial performance (Thurow 1992). Manufacturing inno-
vation includes creating, refining, and extending products, processes,and technologies.
Such innovations can improve the global standing of US manufacturing companies
and help them regain their status as world-class producers. By using new technology,
creating and commercializing or marketing new products, and adopting innovative
manufacturing processes,American companies’ can effectively solve their competitive
problems ( Swamidass 1986 ) .
* Received August 1992; revision received June 1993; accepted September 1993.
15
1059-1478/93/0201/000$1.25
Copyright Q 1993, Production and Operations Management Society
16 SHAKER A. ZAHRA AND SIDHARTHA R. DAS
often results from synergy among innovation activities. Finally, the literature is unclear
on the appropriate approach to modeling the collective effect of innovation strategy
on company performance. Past researchers have employed multiple regression as
the primary analytical tool (e.g., Hambrick, MacMillan, and Barbosa 1983; Hambrick
and MacMillan 1985); in doing so they often ignore the potential logical order among
the dimensions of innovation strategy. Thus, rather than “assuming” a simultaneous
effect of innovation strategy on performance, researchers should explore other types
of relationships, such as sequential relationships that are typically embodied in path
analysis and similar techniques.
In this paper, we empirically examine the association between a company’s man-
ufacturing innovation strategy and its financial performance. We first present the
major dimensions of innovation strategy. Next, we introduce two models of the
potential association between innovation strategy variables and company financial
performance. The first model examines variations in company financial performance
as a function of the simultaneous effect of the dimensions of innovation strategy.
We test this model using multiple regression analysis. We test the second model,
which suggeststhat a “causal sequence” among the dimensions of innovation strategy
may lead to superior company performance, using path analysis. Finally, we compare
the results from the two models and discuss their implications for managerial decision
making.
Overall, we aim to contribute to the literature in three ways: ( 1) to present a
comprehensive definition of innovation strategy, thus setting the stage for improved
scholarly exchange on the topic; (2) to show that innovation strategy makes a sig-
nificant difference in company performance; and (3) to introduce two models that
explore the association between innovation strategy and company performance that
executives can use to establish an effective innovation strategy.
does not undertake leading-edge research but instead focuses on improving on its
rivals’ products. Compaq, Emerson Electronics, and Zenith Computers are well-
known firms that follow this orientation.
A late-entrant, imitator orientation signifies a firm’s commitment to copying its
competitors’ successful brands, products, or models and offering inexpensive sub-
stitutes to them. A late entrant usually adds functions to the product, emphasizes
ease of use, and competes based on low cost. Dell Computers and Leading Edge
follow this orientation. Hayes and Abernathy ( 1980) discuss the potential trade-offs
associated with imitating versus developing new products.
Types of Innovation
This dimension refers to the combination (portfolio) of manufacturing innovations
(product and process) a firm pursues or generates over time. In this study, we have
not considered innovations in other related business applications, such as information
technology and innovative organizational designs. Instead, we focus on product and
process innovation-a focus that is consistent with the results of a survey of man-
ufacturing managers that concluded that both process and product innovations are
important to a company’s business strategy (Schroeder, Anderson, and Cleveland
1986). Further, an extensive review of the literature by Anderson, Cleveland, and
Schroeder ( 1989) shows that within manufacturing managerial choices usually center
on product and process technologies.
Product innovation results in the creation and introduction of radically novel
products or modifications in existing ones (Krubasik 1988; Pale 1988). Research
shows that product innovation can be risky. For example, Gupta and Wilemon
( 1990) suggest that poor definition of product requirements, technological uncer-
tainty, lack of senior management support, lack of resources, and poor project man-
agement can handicap product development efforts. By overcoming these problems,
companies can reduce the risks associated with new products and, in fact, create a
sustainable competitive advantage in their marketplace. Indeed, a recent analysis of
1,48 1 new product announcements by 263 companies between 1975 and 1988 has
concluded that product innovations have increased the market value of innovating
companies by more than $10 billion (Chaney and Devinney 1992; Devinney 1992 ).
Skinner ( 1984, p. 116) proposes that “innovation in operations equipment and
process technologies can be used strategically as a powerful competitive weapon.”
Process innovations lead to new methods of operation by producing new manufac-
turing technologies or improving existing ones (Leonard-Barton 199 1) . They can
also help companies to achieve economies of scale or scope that can be used to lower
costs and prices. Indeed, the future global success of US manufacturers depends on
their proficiency in process innovation (Thurow 1992). Recently, process innovations
have become more important than product innovations in determining global success.
Although US companies have excelled in developing new products, successful Jap-
anese and German manufacturers have stressed process innovations in their bids for
world leadership. Thus, US companies’ continuing focus on product innovation may
be out of step with the growing global emphasis on process innovation. This gap has
been highlighted by the results of a recent study of US companies’ research and
development (R&D) spending between 1979 and 1985 (Caravatti 1992). It concluded
that although US companies devoted only 19 percent of their R&D expenditures to
process innovations, Japanese companies devoted nearly 62 percent to this purpose.
INNOVATION STRATEGY FOR COMPANY FINANCIAL PERFORMANCE 19
Investment
This dimension embodies the financial, technological, and human capital invest-
ments associated with manufacturing innovation activities (Thompson and Ewer
1989; Leong, Snyder, and Ward 1990). Financial investments include spending on
R&D projects and purchasing innovations developed elsewhere. Technological in-
vestments are expenditures on infrastructure equipment and basic facilities required
for innovation (Thurow 1992). Human capital investments include salaries, training,
and other costs associated with developing staff (Kamm 1987).
Theoretically, there are many different potential links between the four innovation
strategy dimensions, and it is important to focus on the fit between the dimensions.
One must effectively match (seek consistency) one’s choices among the innovation
strategy dimensions. Choices in these dimensions should be compatible, thus rein-
forcing and supporting one another (Venkatraman 1989). Fit reduces the misuse of
resources and enables a firm to attain high performance levels.
20 SHAKER A. ZAHRA AND SIDHARTHA R. DAS
Simultaneous Model
This model posits that careful planning of the four dimensions of innovation
strategy will lead to superior company financial performance. It suggeststhat different
dimensions of innovation strategy will influence company performance simulta-
neously (Kamm 1987; Teece 1988), as depicted in Figure 1. These dimensions will
vary in their associations with company performance.
The simultaneous model builds on the potential synergy among the dimensions
of innovation strategy, suggesting that the total effect of innovation strategy on com-
pany performance will exceed the sum of the contributions of its individual dimen-
sions. This synergy has two major sources: savings, because of the clear priorities
embodied in developing an innovation strategy, and the mutual support among the
dimensions. We tested the model using multiple regression to consider the combined
effects of the four dimensions (the “independent” variables) on company financial
performance (the “dependent” variable).
Researchers have employed the simultaneous model in several studies examining
the association between a firm’s innovation strategy and its financial performance
(e.g., Hambrick, MacMillan, and Barbosa 1983; Hambrick and MacMillan 1985 ) .
Leadership
Comwy
I Financial
Petfomwwe
They recognized the strengths of the simultaneous model, which include ( 1) a clear
delineation of the direct association between an innovation strategy variable and
financial performance; (2) the ability to examine the unique contribution of particular
variables (e.g., R&D investment) to company performance, once other variables have
been considered; and ( 3 ) the opportunity to integrate diverse sets of variables (e.g.,
environment and strategy) as they determine the components of innovation strategy
and their effects on company performance.
Although the studies employing the simultaneous model have enriched our un-
derstanding of the interplay between innovation strategy and company performance,
they have two shortcomings. First, they ignore the potential indirect effect of a variable
(e.g., innovation leadership posture) on performance through its impact on another
variable (e.g., type of innovation used). By considering indirect effects, one can
develop an accurate estimate of returns for innovations. Second, past studies have
overlooked the logical sequence of relationships among variables. For example, in-
vestment in R&D per se may not have a profound effect on company performance
(Thurow 1992). Only when this investment is deployed strategically among new
products or processes is the effect on company performance positive. These two
shortcomings can be overcome by using a sequential model.
Sequential Model
This approach posits that a logical sequence may exist among the four innovation
strategy dimensions (Porter 1985), reflecting an ordered set of relationships among
them. Certain choices (e.g., leadership posture) must precede others (e.g., level of
investment ) .
The sequential model also acknowledges the potential indirect influence of some
innovation strategy dimensions on company performance (Asher 1983). Even though
a variable may not influence performance directly, as assumed in the simultaneous
model, it may still influence other important dimensions that, in turn, affect company
performance. This occurs because innovation strategy dimensions may depend on
one another, as depicted in Figure 2.
Figure 2 shows the sequential model and the hypothesized order of relationships
among the dimensions of innovation strategy. The rationale for sequencing the vari-
ables in the order shown is based on theory. Still, because other sequences may be
posited by other researchers, further empirical research is necessary to test alternative
models.
The logical starting point in Figure 2 is the company’s choice of its intended
innovation leadership position. The firm makes this choice based on its chosen ex-
ternal environment, its competitive strategy, its strengths and weaknesses, and the
availability of resources (Porter 1985 ) .
Once they choose an innovation leadership orientation, executives then address
two issues. The first is, what types of innovation will the firm emphasize? For the
manufacturing function, they should select a portfolio of product and process in-
novations. They will need to consider the firm’s competitive strategy, market defi-
nition, and customer profile. They can then clearly articulate the extent of the com-
pany’s emphasis on process and product innovations.
Next, executives must address a second question: Which sources should the com-
pany use in developing or securing manufacturing innovations? They will base their
selection of innovation sources on the company’s planned leadership position. If the
company pursues a first-to-the-market orientation, it will rely heavily on internal
sources in generating its process and product ideas (Porter 1980, 1985 ) . A company
that follows a second-to-the-market orientation will use both internal and external
sources ( Burgelman and Sayles 1986 ) . A late-entrant, imitator firm will use external
sources extensively in developing its product and processes and then rely on its
internal facilities to improve on these innovations.
The executives’ choices of the types (process and product) and sources (internal
and external) of innovation determine the levels of investments. Leadership orien-
tation will also influence the level of company investment in innovation. A first-to-
the-market orientation requires significant investments in both theoretical and applied
research, employment of highly skilled researchers and staff, development of infor-
mation systems that can scan the environment to identify important opportunities,
and maintenance of state-of-the-art research facilities.
Firm’s adopting a second-to-the-market or late-entrant orientation face quite dif-
ferent situations. Companies that adopt either of these orientations will require dif-
ferent skills and resources that may not call for such high levels of investment.
Corporate investment in manufacturing innovation is expected to have a positive
direct effect on company performance, and past empirical research that shows higher
corporate spending on R&D is associated with higher company performance (Dosi
1988; Thompson and Ewer 1989; Van den Kroonenberg 1989).
Leadership orientation also has a direct influence on corporate financial perfor-
mance. Growing evidence shows that pioneers (first movers) improve their financial
positions if they implement their innovation strategies effectively (Porter 1985;
Butler 1988).
Researchers have employed a path analytic framework in past studies examining
sequential associations between innovation strategy and company performance (Ettlie
1983; Ettlie, Bridges, and O’Keefe 1984). Path analysis enables researchersto examine
the effects of selected variables on other variables of interest. It helps them to identify
direct and indirect effects in a complex system of variables, and allows them to
include intervening variables in the analysis easily (Swamidass and Newell 1987).
INNOVATION STRATEGY FOR COMPANY FINANCIAL PERFORMANCE 23
4. Method
Sample
We mailed a questionnaire to the presidents (or highest ranking executives) of
manufacturing firms throughout the United States. These firms covered six four-
digit Standard Industrial Classification (SIC) consumer and industrial goods groups.
To qualify for inclusion, a company had to generate at least 70 percent of its revenue
from a given industry, thus corresponding to the single or dominant business definition
(Dess 1987 ). A total of 5 13 manufacturing companies met this criterion.
We used two mailings, 1 month apart, and received 149 complete responses (36
additional surveys are undeliverable), for a response rate of 3 1.9 percent. Each re-
sponse represented a single company; no two responses were from the same firm.
Responding firms averaged $689.6 million annual sales, with a range from $200 to
$2,286 million. Industries included canned fruits and vegetables, dehydrated fruits
and vegetables, biological products, fabricated metal products, food product ma-
chinery, and apparel. These industries, which differed in their stage of evolution and
competitive intensity, provided an interesting setting in which to examine the as-
sociation between innovation strategy and company performance.
We compared responding and nonresponding firms in sales, size, number of em-
ployees, and SIC, using multivariate analysis of variances. We found no significant
differences between these two groups, indicating that the sample did not differ sig-
nificantly from its population.
Measures
We measured the dimensions of innovation strategy using indices developed from
executives’ responses to multiple items. We selected items corresponding to each
index based on theory. In addition, we ran a principal component analysis to deter-
mine if the 28 innovation items fell into their respective theoretic dimensions. The
results supported the separation of the 28 items into the six dimensions shown in
the Appendix. We formed innovation strategy indices by summing raw innovation
item scores; we then divided the total by the relevant number of items to produce
an average score. (The results reported in the paper did not change significantly using
this procedure from those found when we used factor scores derived from principal
component analysis.) The Appendix shows the measures and items.
Measuring innovation is problematic (Bigoness and Perreault 198 1) . Therefore,
in developing the measures, we followed three criteria to enhance the reliability of
the scales. ( 1) Throughout the survey we used the term company to avoid the con-
fusion that arises from using related concepts such as unit or division. We asked the
respondents to consider only their immediate company in completing the survey.
(2) Each measure consisted of multiple items, thereby capturing as much of the
theoretic domain of the constructs as possible. We developed the items based on the
definitions outlined earlier in the paper and derived from the literature. (3) To further
ensure accuracy, we asked the executives to compare their companies to the industry
24 SHAKER A.ZAHRA AND SIDHARTHA R.DAS
assets.We defined each as the average of the most recent 3-year period. In addition
to their wide use and acceptance in strategic management research (Hofer 1983),
these criteria had specific advantages within the context of this study. Growth in
sales reflected how well a company related to its external environment through in-
novation-a major source of profits and sales ( Schendel and Hofer 1979). Net profit
margin provided an indication of a firm’s ability to improve its margin as a result
of differentiated products, new production processes, or novel innovation. Finally,
return on assets showed a company’s ability to use innovations to make its assets
productive.
The appendix contains exact definitions and response format used in the ques-
tionnaire. Briefly, we calculated the measures as follows: net profit margin = net
income after interest and taxes/net sales; growth in sales = percent change in a
company’s net sales over the past 3 years; return on assets( ROA) = net income after
interest and taxes/total assets.
Executives provided data on company performance. Researchers into strategic
management have commonly relied on executives for data on company performance
(e.g., Daft, Sormunen, and Parks 1988; Ramanujam and Venkatraman 1987). Data
on some companies, especially strategic business units (SBUS) of corporations, were
not easily accessible in secondary sources. For instance, COMPUSTAT had data on
only 45 of the 149 SBUS in the current sample. In addition, some companies were
privately held, which made it difficult to collect data on their performance.
To ensure the reliability of data on financial performance, we defined each criterion
in the survey instrument to minimize misinterpretations; we took the definitions
from Gibson and Boyer ( 1979). In addition, we used data from COMPUSTAT and
corporate documents (such as 10-K reports) to validate the accuracy of survey re-
sponses. Data on a subset of 45 firms were available from secondary sources. We
then correlated the survey-based performance figures with data from COMPUSTAT.
The average correlation between data from the two sources on the three performance
criteria was 0.72 ( p < 0.0 1)) supporting the reliability of the survey performance
measures. Thereafter, we used performance data for the 149 companies in subsequent
analyses.
Our comparison showed that we had collected reliable, objective data from ex-
ecutives on their companies’ performance. Having established the reliability of the
performance data, we next focused on examining the simple correlations among
these measures. Correlations averaged 0.83 (p < 0.00 1) . Therefore, we subjected the
measures to a factor analysis with varimax rotation, yielding one significant factor
(eigenvalue = 1.3 1) . To reduce redundancy in the measures and alleviate problems
resulting from multicolinearity, we developed a “company financial performance
factor” (CFPF) and used it in subsequent analyses. We developed the CFPF by mul-
tiplying the raw item scores on the survey by their corresponding factor loadings.
The sum of this process represented the value of a company’s CFPF.
TABLE 1
Means, Standard Deviations, and Intercorrelations Among Dimensions of Innovation Strategy
Dimensions Xl x2 x3 x4 x5 X6 d SD
Cronbach coefficient (Yat the diagonal. All correlations are significant at p < 0.05.
Intercorrelations
Most of the correlations among the innovation strategy variables (X1-X6) were
positive, suggesting that innovation strategy dimensions reinforced one another. We
observed two exceptions (Table 1) . The association between leadership position and
the use of external sources was negative. Also, the association between external sources
and process innovation was negative, implying that companies deemphasized this
source in pursuing process innovation.
TABLE 2
Results of Multiple Regression: Simultaneous Eflect of
Innovation Strategy Dimensions on Company Performance
has yielded similar correlations (Buzzell and Gale 1987). These moderate coefficients
may reflect short-term relationships between the variables. Conversely, long-term
relationships may be stronger (Frank0 1989) because it takes time for innovation
strategy variables to influence company performance. The current database does not
permit an examination of such lagged relationships. It should also be acknowledged
that the CFPF is a complex construct that is subject to many influences from variables
that are not included in this study.
Table 2 also shows that five of the six measures of innovation strategy variables
were significantly associated with the CFPF (p < 0.05 or better). The exception was
the external source of innovation, which had an insignificant /3. Clearly, the results
supported the basic premise of the simultaneous model by showing that the dimen-
sions of innovation strategy significantly and positively influenced company perfor-
mance.
Path Analysis Results
In testing the sequential model, we believed that path analysis was more appropriate
than other causal modeling techniques (for example, LISREL). LISREL is preferable
to path analysis if the purpose of the study is to test well-established theory. Mason-
Hawkes and Holm ( 1989, p. 3 13) state that: “LISREL iS IIIOSt Useful in refining a
model after it has reached the stage of development at which all of the variables are
specified and most of their relationships are known.” Path analysis is useful when
the theory is not highly refined; insights from path analysis can be useful in trimming
and refining theoretical models. Because the theoretical relationships among the cur-
rent variables were not very well understood, we considered path analysis as appro-
priate. In addition, in this study, measurement errors were low-as judged by the
reliability coefficients, which exceed 0.80-favoring the use of path analysis. In con-
trast, LISREL assumes a large measurement error in the variables. Thus, this study is
consistent with established research tradition in this area, which emphasizes path
analysis as the primary tool.
We ran seven regressions to examine path relationships in the data. Next, we
examined direct and indirect relationships in the path model. We tested the hypoth-
esized paths using the following equations, which we derived based on the earlier
discussion and which are embodied in Figure 2.
X2 = a +p2,X1, (1)
X3 = a +p3rX1, (2)
X4 = a +p4,Xl, (3)
x5 = a +&*x1, (4)
X6 = a + palX 1 + pe2X2 + pb3X3 + pb4X4 + psSX5, (5)
X7 = a + p7, X 1 + pT6X6. (6)
In the analysis, a was the regression constant. The path coefficient p was defined
for the path between two variables (for example, pxI was the path coefficient for the
path from X 3 to X 1), defined as p; X l-X6 were the innovation strategy dimensions;
and X7 was the CFPF.
Figure 3 presents the results of path analysis from the regression runs. The path
model was significant at p < 0.001, with an R* of 0.32, indicating that the model
28 SHAKER A. ZAHRA AND SIDHARTHA R. DAS
R-32
I
(xs)
Investment
Level
FIGURE 3. Results of the Path Analysis Model Showing the Association Between Innovation Strategy
and Company Financial Performance.
captured a significant portion of variance in the CFPF. These results were reassuring
because they were consistent with our expectations.
Judging by the @values in Figure 3, the hypothesized associations relating to seven
of the nine links among innovation strategy measures were significant. Leadership
orientation (Xl ) was significantly associated with process innovation (p < 0.001 ),
product innovation ( p < 0.00 1)) internal sources (p < 0.00 1), investment level ( p
< 0.00 1)) and CFPF ( p < 0.00 1) . Moreover, investment level (X6 ) was associated
with product innovation (p < 0.0 1) and internal sources (p < 0.05). Further, in-
vestment level (X6 ) was associated with the CFPF ( p < 0.00 1). However, the external
source (X4) was not significantly associated with either innovation leadership (Xl )
or investment (X6). The results were not unexpected becausean innovation leadership
posture typically requires extensive internal developments, whereas gaining the ben-
efits of innovation from external sources is a difficult and time consuming process
(Davidson 199 1; Hitt, Hoskisson, and Ireland 1990; Hitt, Hoskisson, Ireland, and
Harrison 199 1) .
Decomposition of Path Variance
We examined the results of the path analysis further to determine the direct and
indirect effect of innovation strategy on CFPF (Li 1976; Asher 1983). A direct effect
existed when a dimension of innovation strategy (e.g., Xl ) influenced company
performance (X7) without the mediation of a third dimension. Table 3 displays the
seven regression equations and their results.
We then used the coefficients reported in Table 3 to produce Figure 3; these coef-
ficients represented the direct paths in the model. However, to fully capture the effect
of the variables on the CFPF, one must also consider their indirect effect. Indirect
coefficients showed the impact of one dimension (e.g., process innovation, X2) on
financial performance through its influence on a third dimension (e.g., investment
level, X6). Table 4 reports the results for the direct and indirect paths.
Consistent with the proposed model (displayed in Figure 2)) only two dimensions
have a significant, direct effect on CFPF: Xl (leadership orientation) and X6 (invest-
INNOVATION STRATEGY FOR COMPANY FINANCIAL PERFORMANCE 29
TABLE 3
Results of Path Analysis of the Innovation Strategy Dimensions-
Company Performance Links
aXl, leadership orientation; X2, process innovation; X3, product innovation; X4, external source;
X5, internal source; X6, investment level. Numbers show the standardized regression coefficient
(8).
* p < 0.05; **p < 0.01; ***p < 0.001.
ment), both at p < 0.00 1. Further, process (X2), product (X3), and the intern&
source of innovation (X5) each indirectly explained 8 percent or more of the variance
in CFPF. The indirect effects of leadership orientation (Xl ) and the external source
(X4) were negligible.
TABLE 4
Decomposition of Variance
Limitations
Our findings should be considered in light of the study’s limitations. First, the
results need further validation to support the superiority of either the simultaneous
or sequential approach and to ensure that the results reported here are not sample
specific. Second, the current cross-sectional data do not permit the testing of causal
relationships. This is a limitation because, for example, particular levels of company
financial performance may encourage (or discourage) firms from pursuing particular
innovation strategies as much as particular innovation strategies promote firm per-
formance. Third, other variables may moderate the effect of the four dimensions of
innovation strategy on company performance. For example, the manufacturing ex-
perience of CEOS and divisional managers have been shown to influence the imple-
mentation of innovation activities (Ettlie 1990). Also, the extent to which innovations
in technology are matched by corresponding changes in administrative practices may
affect the success of an innovation strategy (Ettlie 1988).
that their companies’ priorities are properly defined with respect to each dimension
and also to consider the effect of these dimensions on other manufacturing activities.
For example, a recent study of manufacturing industries shows that when companies
adopt new production technologies, they need to look beyond their direct impact
on the production work force and consider their impact on the support staff (Ward,
Berger, Miller, and Rosenthal 1992).
A second implication for executives is the need to manage sources of innovation.
The results suggestthat internal sources of innovation are significantly and positively
associated with company performance. This can be interpreted as suggesting a need
for managerial commitment to internal R&D and innovation efforts. This can take
many forms: allocating resources, hiring and retaining qualified personnel, and pro-
viding a supportive work environment that encourages innovation activities.
A third avenue for managerial action is the need to adopt an innovation “lead-
ership” orientation; companies should be committed to developing and introducing
new products and processes. This is especially true in today’s business environment.
Global competition requires commitment to introducing new products and processes
(Ettlie 1990). Indeed, the results show that companies should lead the development
of significant product and process innovation as a means of achieving successful
performance.
Research Implications
Our results support the importance of innovation strategy as a major predictor of
company performance. Researchers should examine and define the domain of in-
novation strategy. Future research is needed to extend our definition of this domain
and the operationalization of its dimensions. These future studies would benefit from
employing alternative analytic techniques to establish the validity of the current
findings. For instance, researchers may explore LISREL as an alternative analytic
framework for testing the sequential model (Bollen 1989).
Another avenue for future research is to employ objective measures to gauge in-
novation strategy. For instance, one might collect objective data to measure com-
mitment to product and process innovations and a firm’s relative emphasis on internal
versus external innovation orientations. Objective data may help in validating em-
pirical indicators of innovation strategy.
Future researchers would benefit from examining the possibility of a lag effect
between innovation strategy and company financial performance (Teece 1988).
Clearly, innovation activities take time to influence company financial performance.
The lag effect will most likely be industry specific because of the nature of the industry
or the influence of environmental conditions on an industry. Therefore, by deter-
mining the length of time innovation strategy takes to influence company perfor-
mance, future researchers will help in guiding R&D investments and other manufac-
turing innovation activities. Understanding these lags would be helpful to decision
makers as they plan their innovation activities. To increase the relevance of these
findings, researchers should use different measures of company performance. For
instance, it would be desirable to determine if innovation strategy influences growth
and profitability measuresdifferently, at different times. Moreover, as suggestedearlier,
researchers should explore the associations between the dimensions of innovation
strategy and subjective company performance measures, which typically reflect ex-
ecutives’ perceptions of their companies’ standing relative to their competition. Fi-
32 SHAKER A. ZAHRA AND SIDHARTHA R. DAS
’ We acknowledge with appreciation the comments of an associate editor and two anonymous reviewers
of this paper.
We collected data for innovation strategy using multiple items. We then summed the responses to
these items to produce overall indices whose reliabilities we tested using Cronbach coefficient CX,as
presented at the diagonal of Table 1. The items follow.
1 2 3 4 5
Little Neutral Major
Emphasis Emphasis
Your company’s
a. emphasis on being first to introduce new products to the market 1 2 3 4 5
b. emphasis on commercializing new products or technological models 1 2 3 4 5
c. commitment to conducting cutting edge research and development
(R&D) 1 2 3 4 5
d. reputation for being the industry’s leader in pioneering product
changes 1 2 3 4 5
e. ability to introduce new products ahead of the competition 1 2 3 4 5
f. emphasis on adopting a strategy of being the industry leader in offering
new products (technologies) 1 2 3 4 5
INNOVATION STRATEGY FOR COMPANY FINANCIAL PERFORMANCE 33
2. Process Innovation. Executives rated their companies’ emphasis on the following items over the
past 3 years. We asked them to circle the one number that best described their companies’ situation,
using the scale below.
1 2 3 4 5
Minor Major
Emphasis Emphasis
3. Product Innovation. Executives rated their companies’ emphasis on and commitment to product
innovation activities over the past 3 years, using a five-point scale.
1 2 3 4 5
Very Low Average High Very
Low High
Your company’s
a. level of product innovation 1 2 3 4 5
b. emphasis on modifying existing products 1 2 3 4 5
c. commitment to introducing more products than its major competitors 1 2 3 4 5
d. commitment to introducing more products than your industry average 1 2 3 4 5
e. commitment to introducing more products than 3 years ago 1 2 3 4 5
4. External Innovation Source. Executives rated their companies’ emphasis on the following items
over the past 3 years. We asked them to circle the one number that best described their companies’
situation.
1 2 3 4 5
Minor Major
Emphasis Emphasis
5. Internal Innovation Source. Executives rated their companies’ emphasis on four items, covering
the past 3-year period. We asked them to circle the one number that best described their companies’
situation.
1 2 3 4 5
Minor Major
Emphasis Emphasis
Company Financial Performance. The study focused on profitability (net profit margin and return
on assets)and growth (growth in sales) measures of company performance. Executives provided data on
their companies’ performance over the past 3-year period, as follows:
1. Your company’s average net profit margin (defined as income after taxes and interest divided by net
sales) over the past 3 years:
2. Average growth in your company’s sales (defined as the percent change in your company’s net sales)
over the past 3 years:
3. Your company’s average return on assets (defined as income after taxes and interest divided by total
sales) over the past 3 years:
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