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To cite this document:
Dimitrios Kafetzopoulos Evangelos Psomas , (2015),"The impact of innovation capability on the
performance of manufacturing companies", Journal of Manufacturing Technology Management, Vol.
26 Iss 1 pp. 104 - 130
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JMTM
26,1
104
Journal of Manufacturing
Technology Management
Vol. 26 No. 1, 2015
pp. 104-130
Emerald Group Publishing Limited
1741-038X
DOI 10.1108/JMTM-12-2012-0117
1. Introduction
Innovation is a broad and multi-dimensional concept that refers to all scientific,
technological, organizational, financial and commercial activities which lead to, or are
intended to lead to, the implementation of technologically new or improved products or
services (OECD, 1997). Innovation has become a key issue at various levels for firms,
institutions and governments and its importance has motivated researchers to identify
its various driving forces (Becheikh et al., 2006). The link between innovation and
firm performance is well established in the previous research. Indeed, there is a wealth
of evidence in the academic literature indicating a positive relationship between
innovation and firm performance in the manufacturing industry (Loof et al., 2002;
Cheng et al., 2010). However, some researches indicate a negative link or no link
at all (Capon et al., 1990; Chandler and Hanks, 1994; Subramanian and Nilakanta,
1996). There are limited analytical and empirical studies which examine the direct
Impact of
innovation
capability
105
JMTM
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activities (Garcia and Calantone, 2002; De Propris, 2002). It aims to introduce a new element
in production materials, machinery, equipment, processes, task specifications and
workflow mechanisms (Damanpour, 1991). The process innovation dimension is
measured through indicators that have been drawn from the studies of Nassimbeni (2001),
Wonglimpiyarat (2010), Tomlinson (2010) and Jimnez-Jimnez and Sanz-Valle (2011).
Marketing innovation. A marketing innovation is the implementation of a new
marketing method involving significant changes in product design or packaging,
product placement, product promotion or pricing (OECD, 2005). Marketing innovation
is the firms ability to publicize and sell the products on the basis of understanding
consumer needs, the state of the competition, costs and benefits and the acceptance of
the innovation (Yam et al., 2011). Marketing innovations are aimed at better addressing
customer needs, opening up new markets or newly positioning a firms product on the
market with the intention of increasing firm sales (Gunday et al., 2011). The marketing
innovation dimension is measured through indicators that have been drawn from the
studies of Yam et al. (2004) and Yam et al. (2011).
Organizational innovation. The OECD (2005) defines organizational innovation as
the implementation of a new organizational method in the firms business practices,
workplace organization or external relations. Organizational innovations have a
tendency to increase firm performance by reducing administrative and transaction
costs, improving workplace satisfaction (and thus labour productivity), gaining access
to non-tradable assets (such as non-codified external knowledge) or reducing the cost of
supplies. Organizational innovation involves changes to administrative processes and/
or organizational structures relating to the basic work activities of an organization and
its management. Changes in organizational structures and procedures can facilitate the
creation of new products and processes (Chang et al., 2012). The organizational
innovation dimension is measured through indicators that have been drawn from the
studies of Yam et al. (2004, 2011), Gunday et al. (2011) and Forsman (2011).
2.2 Firm performance
Firm performance is considered to be a multidimensional construct (Naser et al., 2004)
and is the measurement of a firms success and achievements (Yeung et al., 2003). A
restrictive set of financial performance measures may adversely impact on an
organizations long-term viability, so organizations should develop a broad range of
performance measures (OMara et al., 1998). Garvin (1987), Lee et al. (2001) and Sousa
and Voss (2002) deem product quality, coupled with operating and financial
performance of the companies, to be their performance dimensions. Furthermore,
Lakhal et al. (2006), following a literature review on strategic management, marketing
and operations management, have chosen three performance related dimensions:
financial performance, operational performance and product quality. Consistent with
prior research, the present study relies on multiple measures of performance to attain
robustness of results. So, three performance related dimensions have been chosen:
product quality, operational performance and financial performance.
Product quality. Product quality is a complex, multidimensional factor for which a
global and uni-dimensional definition does not exist (Sebastianelli and Tamimi, 2002).
Product quality refers to a products intrinsic and extrinsic quality attributes (Luning
et al., 2002). It has a vast number of meanings and encompasses parameters such as
functional characteristics, physical properties and consumer protection from fraud. It is
the degree to which it satisfies customer requirements (Gill, 2009). In this study, the five
Impact of
innovation
capability
107
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Impact of
innovation
capability
109
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However, in such a case, the companys production costs are decreased by developing
efficient internal processes. In other words, improving operational performance increases
financial performance (Ou et al., 2010). In addition, the findings from the study of Flynn
et al. (1995) show that improved operational performance results in fewer defective
products, decreased quality cost, increased productivity, on time product delivery and
finally in increased business performance. Jang and Lin (2008) also reach the conclusion
that operational performance influences market performance positively. Taking into
account the above studies, we reach the following hypothesis:
5. Improved operational performance is positively related to financial performance.
According to the findings of the empirical research study of Forza and Filippini (1998),
product quality is positively influenced by the improvement of process management
practices. The same conclusion was also reached by the study of Ahire and Dreyfus
(2000). Furthermore, Heskett et al. (1997) state that improving operational performance
results in more attractive products from a customer perspective. Similarly, Handfield
et al. (1998) note that a reduction in product wastage, coupled with improvement in
productivity result in increased product quality and company profits. Furthermore, the
studies of Psomas and Fotopoulos (2009) and Psomas et al. (2011) found that process
management practices have a strong and direct effect on quality improvement.
Consequently, this study hypothesizes the following:
6. Improved operational performance is positively related to product quality.
Figure 1 depicts the conceptual model and a graphical representation of the studys
hypotheses.
3. Research methodology
To test the above hypotheses, a questionnaire consisting of 40 questions was developed by
the authors through a multi step process. All measured variables of the questionnaire
were adopted following a comprehensive literature review. The questionnaire was judged
through structured interviews with eight professionals of manufacturing companies and
finally it was pilot tested on 43 manufacturing companies in Greece, proving its
appropriateness and achieving the content validity of the constructs. The results of the
pilot survey show the same trends as the results of the final sample. All questions
Product
Quality
H2
H4
H6
H3
Innovation
Capability
Figure 1.
Hypotheses and
conceptual model to
be tested
H1
Financial
Performance
H5
Operational
Performance
(37 items) of the seven factors/dimensions were measured on a seven point modified Likert
scale (1 very low to 7 very high). The measurement items used in the survey are listed
in the Appendix.
The population chosen for this study was manufacturing companies in all sectors
of economic activity in Greece so as not to bias the final results. The questionnaire
was sent by e-mail to 1,000 manufacturing companies that had been recorded on the
database of ICAP (the largest business information and consulting firm in Greece).
The companies were randomly selected after checking to ensure that large companies did
not have multiple plants included in the sample. The data base also provided names and
contact details of the companies. It was requested that the questionnaire be answered by
the general manager or another manager designated by him/her because of the latters
familiarity with the issues dealt with in the questionnaire. The respondents chosen have
the best knowledge of the innovation process in their organization. The manufacturing
companies are heterogeneous in terms of sub-sectors and product/process complexity, so
the sample was stratified by size, quality systems registration and sub-sector. Data on
these characteristics were available on the population database and were also collected in
the questionnaire. Finally, a total of 233 valid questionnaires satisfying the criterion for
SEM analysis (Wu and Liu, 2010) were collected, yielding a response rate of 23.3 per cent.
A profile of the responding firms is provided in Table I.
In our study, the respondents completed the survey instrument individually and
independently within an eight-week period. Consequently the independence of each
predictor variable was not violated. To measure the equality of variances for a single
variable or pair of variables, the Levene test is used showing that the p-value for the
test is W 0.05 significance level, indicating variation in homogeneity (Feng et al.,
2008). Each of the variables was examined individually for unique or extreme
observations, and no case was defined with a threshold value of a standard score up to
3 (Hair et al., 2006). By calculating the Mahalanobis d-squared distance, it was found
that no observations exceed the threshold value of 3 and so no data points are
Profile of the responding firms
Manufacturing companies sector
Food and beverages
Agricultural products
Machinery and equipment
Metal products
Plastic, chemical and associated products
Medicines/cosmetics
Various industrial products
Number of employees
0-10
11-50
51-100
101-250
251-500
500 over
Quality systems
ISO 9001
ISO 22000 or HACCP
ISO 14000
Number
84
54
28
19
11
14
23
36
23
12
8
5
6
10
61
82
35
21
19
15
26
36
15
9
8
6
119
126
25
51
54
11
Impact of
innovation
capability
111
Table I.
The sample
demographic
characteristics
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deleted from the analysis. As far as the normality of the data is concerned, all the
measured variables in this study exhibit univariate normality and do not suffer from
skew and kurtosis ( o 1), indicating, but not guaranteeing, multivariate normality
(Hair et al., 2006). In addition, the scatter plot shows constant variance of error terms
(Homoscedasticity), while the histogram and normal P-P plots of the standardized
residuals also indicate normality of the error term.
The analysis adopted in this study includes an initial EFA (principal component
extraction method with varimax orthogonal rotation), to uncover the underlying
structure of the variables. Then, CFA is used to refine the resulting scales in
EFA and to determine if the number of factors and the loadings of the measured
variables (i.e. indicators) on them conform to what is expected on the basis of
pre-established theory (Narayan et al., 2008). Multicollinearity, unidimensionality, scale
reliability and construct validity are undertaken for the study variables as suggested
by Lakhal et al. (2006) and Hair et al. (2006). The model and the hypotheses are
tested using SEM via path analysis, as it is a multivariate analytic methodology
that gives insights into the causal ordering of variables in a system of relationships
(Fynes and Voss, 2001). The statistical packages SPSS 16 and AMOS 6 were used for
data processing.
4. Data analysis and results
4.1 Construct validity of innovation dimensions
EFA and CFA are used to assess construct validity (Hair et al., 2006; Akroush et al., 2011).
The purpose of factor analysis in this study is to explore how various items within each of
the constructs interact with one another, and to develop scales (by combining several closely
correlated items) to be used in the following analysis on linkage. Factor analytic methods are
useful for observing the underlying patterns or relationships for a large number of variables
and they determine whether the information can be condensed or summarized in a smaller
set of factors or components (Gunday et al., 2011). As a result of the EFA, four latent factors
(constructs) are established explaining 72.259 per cent of the total variance. These four
factors are labelled based on the items included in each (product innovation, process
innovation, marketing innovation, organizational innovation). Table II shows the results of
EFA for the innovation dimensions scale components (Kaiser-Meyer-Olkin 0.916,
Bartletts test of Sphericity 2271.436, p 0.00, eigen-valueW1, MSAW0.80, factor
loadingsW0.694). The reliability of the factors of the innovation is confirmed through
Cronbachs coefficients. The Cronbachs values range from 0.831 to 0.885 suggesting
satisfactory level of construct reliability, since when Cronbachs values are W0.70, the
scale is accepted as reliable (Hair et al., 2006). The uni-dimensionality of the set of measured
statements for each factor is confirmed. Five items (V005, V006, V008, V013, V016)
that demonstrate cross-loading W0.4 on more than one latent factor are dropped because
they do not provide pure measures of a specific factor.
In order to determine whether the extracted latent factors show acceptable fit to the
empirical data, the CFA (maximum likelihood estimation technique) is also applied in
addition to EFA. Thus, a series of tests are also performed to further determine the
construct validity of the latent factors (Singh, 2008). The results show that the four
factors revealed using EFA are also confirmed through CFA. The extracted latent
factors show acceptable fit to the empirical data (Table III).
Construct validation also includes tests for face, convergent and discriminant
validity. The latent factors revealed and their associated items possess a sufficient level
Items
V017
V018
V019
V021
V020
V002
V001
V003
V004
V010
V011
V007
V009
V012
V015
V014
Eigenvalue
Cumulative variance per cent
Cronbach
Constructs
Factor loading
Organizational
Product
innovation
innovation
Process
innovation
Marketing
innovation
0.766
0.756
0.732
0.723
0.707
Impact of
innovation
capability
113
0.812
0.798
0.754
0.739
0.798
0.750
0.720
0.694
7.850
49.064
0.885
1.553
58.769
0.883
1.085
65.547
0.848
0.863
0.744
0.726
1.074
72.259
0.831
of face validity, as the survey instrument was mainly adopted from the existing
literature, reviewed by experts in the field and pilot tested (Hair et al., 2006).
Convergent validity refers to the extent to which varying approaches to the
measurement of the latent factors yield the same results. It is demonstrated if a group
of items measure one common factor (Su et al., 2008). The convergent validity of the
four innovation dimensions (latent factors) are confirmed by evaluating the factor
loadings ( W 0.645), the average variance extracted (AVE) ( W 0.578) and the construct
reliability (CR) (W 0.897) in all cases (Hair et al., 2006). The AVE estimate is similar to
the composite reliability, but differs in that standardized loadings are squared before
being added. It measures the amount of variance for the specified indicators accounted
for by the latent construct. Higher variance extracted values occur when the indicators
are truly representative of the latent construct. The variance extracted value is a
complimentary measure for the construct reliability value. A value above 0.50 for AVE
of any construct is accepted.
Discriminant validity checks whether the items estimate only the assigned latent
factor and no others (Singh, 2008). Discriminant validity is evaluated by comparing
the AVE with the shared variance (i.e. square of the correlation) between each pair
of latent factors (Singh et al., 2011). In each case, the AVE is greater than the
Corr2, confirming the discriminant validity (Hair et al., 2006) (Table IV). The nomological
validity (significant correlations among the extracted latent factors) and criterion-related
validity of the extracted latent factors are also tested. The results provide strong evidence
that the proposed latent factors of innovation dimensions pass rigorous testing of
these types of validities.
In the case of the present study, a higher order model is constructed using
innovation capability as a second-order factor that explains the four first-order
Table II.
Exploratory factor
analysis of
innovation
dimensions
Table III.
The fit indices of the
sub-models and the
overall measurement
and structural model
Second-order
innovation
capability
model
701.026
353
0.058
0.065
0.926
0.914
0.925
0.911
0.907
1.986
0.781
0.792
0.831
0.962
0.950
0.962
0.936
0.917
2.362
0.805
0.875
0.918
Structural
model
141.742
60
0.042
0.067
Firm
performance
model
1.636
0.794
0.827
0.859
0.926
0.919
0.925
0.913
0.915
579.303
354
0.063
0.052
Measurement
model
114
Fit indices
Innovation
dimensions
model
o3.0
W 0.50
W 0.50
W 0.50
W 0.90
W 0.90
W 0.90
W 0.90
W 0.90
o 0.08
o 0.08
022df
Acceptable
fit indicesa
JMTM
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Impact of
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capability
115
Construct reliabilityb
(Corr)2c
Organizational innovation
0.578
0.932
0.515
Product innovation
0.646
0.927
0.490
Process innovation
0.592
0.909
0.490
Marketing innovation
0.621
0.897
0.515
Notes: aAVE 2i /n, (number of items i 1, , n, i standardized factor loading); bCR (i)2/
((i)2+(i)), (number of items i 1 n, i standardized factor loading, i error term); cthe highest
squared correlation between the factor of interest and the remaining factors
Table IV.
Validity of
innovation
dimensions
performance
constructs
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116
Table V.
Exploratory factor
analysis of firms
performance
V033
V034
V032
V035
V036
V024
V025
V022
V026
V028
V030
V029
V027
Eigenvalue
Cumulative variance per cent
Cronbach
Latent factors
Table VI.
Validity of firms
performance
constructs
Financial performance
Constructs
Factor loading
Product quality Operational performance
0.883
0.856
0.823
0.775
0.761
0.875
0.873
0.836
0.815
5.531
42.547
0.895
3.152
66.796
0.893
0.863
0.814
0.804
0.769
1.121
75.415
0.906
Construct reliabilityb
(Corr)2c
Product quality
0.690
0.940
0.269
Operational performance
0.724
0.888
0.037
Financial performance
0.631
0.936
0.269
Notes: aAVE 2i /n, (number of items i 1, . n, i standardized factor loading); bCR (i)2/
((i)2+(i)), (number of items i 1, . n, i standardized factor loading, i error term); cthe
highest squared correlation between the factor of interest and the remaining factors
method) to estimate the causal relations between the latent variables and confirm or
refute the hypothesis presented earlier (1-6). Figure 2 presents the estimated
standardized parameters for the causal paths and the results of the squared multiple
correlations for the endogenous factors.
Based on Figure 2, it is apparent that innovation capability has a significant and
positive effect, primarily, on operational performance (1: b 0.704, p o 0.000) and
secondarily on product quality (2: b 0.304, p o 0.002). Thus, the 1 and 2 of the
present study are accepted. Overall, 49.6 per cent of the variation in operational
performance is explained by innovation capability. By contrast, the 3 is not accepted
(3: b 0.158, p 0.119), meaning that innovation capability does not have a
significant effect on financial performance. The companys financial performance is
significantly and positively influenced by operational performance (5: b 0.583,
p o 0.000), however, it is negatively influenced by product quality (4: b 0.311,
p 0.000). Thus, the 4 is rejected while the 5 is accepted. Finally, according to the
findings, product quality is significantly and positively influenced by a companys
operational performance (6: b 0.314, p 0.001), resulting in the acceptance of the
6. Overall 32.5 per cent of the variation in product quality can be explained by
innovation capability and firms operational performance. Furthermore, 34.9 per cent of
V001
V002
0.695
V003
0.889
V004
0.892
0.712
0.763
0.304
0.814
V009
V032
0.645
V010
0.838
V011
0.757
0.314
Process
Innovation
0.611
V014
V015
Marketing
Innovation
0.657
0.716
0.807
Financial
Performance
0.349
0.158
Innovation
Capability
0.763
0.687
0.673
V034
V035
V036
0.704
0.747
V018
0.810
V019
0.761
Operational
Performance
0.496
V020
0.783
V021
0.811
V027
0.896
V028
0.866
V029
117
V033
0.876
Organizational
Innovation
0.767
V017
0.883
0.919
0.583
0.832
0.781
0.311
0.782
0.811
V012
Impact of
innovation
capability
V026
V025
Product
Quality
0.325
Product
Innovation
0.582
V007
V024
V022
0.838
V030
Figure 2.
Theoretical model,
showing estimated
standardized
parameters for the
causal paths and the
results of the squared
multiple correlations
Table VII.
Relationships
between constructs
Relationships
Standardized
regression
weights
0.096
0.106
0.138
0.102
0.110
0.083
SE
0.000*
0.002
0.119
0.000*
0.000*
0.001
p-value
0.349
0.496
0.325
NS
Squared multiple
correlation
coefficient
Accept hypothesis
Accept hypothesis
Reject hypothesis
Reject hypothesis
Accept hypothesis
Accept hypothesis
Hypothesis
test results
JMTM
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We must point out that the success or failure of innovation capability depends on a
firms technological base (Koellinger, 2008). Firms accumulate their technological
knowledge constantly and continuously over time, so that they are forming their own
technological base as a set of informational inputs, knowledge and capabilities
(Galende, 2006). It is to be expected that more technologically specialized firms are more
innovative (Garcia-Vega, 2006), since a unique technological base is formed for each firm.
Indeed, there are significant differences between firms in terms of their technological base.
Wang et al. (2008) point out that firms have different strengths and weaknesses in terms of
technology-based core capabilities. In addition, firm size provides a number of advantages
and is positively related to dynamic technological innovation performance (Stock et al.,
2002). More generally, larger size will allow a firm to accumulate a larger store of
technological knowledge and capabilities (Damanpour, 1991).
The proposed model that has been presented in this paper has a theoretical basis,
while, through its empirical validation, several useful points are revealed. More
specifically, it builds on the previous work of Loof et al. (2002), Kemp et al. (2003),
Sadikoglu and Zehir (2010), Jimnez-Jimnez and Sanz-Valle (2011), Yam et al. (2011)
and Gunday et al. (2011) in terms of the operationalization of the relationships that exist
between innovation and various dimensions of a firms performance. We extend the
existing research by exploring issues that have been missing in prior studies. More
specifically, a reliable and valid second-order model has been developed demonstrating
the existence of a broad concept that is determined by the successful implementation of
innovative activities mainly in SMEs. We introduce the second-order factor innovation
capability, that can be assessed indirectly through the assessment of its sub-factors
(innovation dimensions), which in turn can also be assessed indirectly through the
assessment of their indicators that are directly measured. Based on an extensive
literature review, this study represents the first research project in the innovation
management field that operationalizes innovation capability and empirically tests its
relationship with the three dimensions of manufacturing firms performance.
The next way in which the present study contributes to the literature is that it
examines relationships between firms innovation capability and their performance
dimensions together in a single model. To our knowledge, this is the first empirical
attempt at defining and confirming the casual path between innovation capability,
firms financial performance, operational performance and product quality. The
innovative manufacturing firms benefit from improvement in the value of operational
performance (1) and product quality (2). The findings are in line with the
observations of Sadikoglu and Zehir (2010), Gunday et al. (2011) and Peng et al. (2011)
which show that innovation has a significant and positive impact on firms operational
performance. In addition, Chudnovsky et al. (2006) claim that innovative companies
attain higher productivity levels than non-innovating ones. Their findings also
underline our suggestion that firms with high innovative capability are rewarded by
high product quality. Prajogo et al. (2008) also found a significant link between product
quality and product innovation, while Koufteros and Marcoulides (2006) report that
firms that have higher product innovation capability also have higher levels of product
quality. In fact, innovation, by exploiting new technologies, is often aimed at improving
several aspects of product quality.
Yet another important finding of this study is the positive but weak and
non - statistical significant sign of the relationship between innovation capability and
financial performance (3). It contributes to the current knowledge since doubt exists
among researchers and practitioners about the economic justification for innovation
Impact of
innovation
capability
119
JMTM
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and particularly about the direct impact of innovation on the financial benefits for focal
firms. Several researchers have asserted that innovation capability can positively
improve firms financial performance (Clayton and Turner, 1998; Hult et al., 2004;
Jenssen and Randy, 2006; Keskin, 2006). Oke et al. (2007), similar to the present study,
investigated SMEs and found that there is a link between innovation and sales
turnover growth in SMEs. The findings of Varis and Littunen (2010) also support the
view that the introduction of novel product, process and market innovations is
positively associated with SMEs growth. Nevertheless, the findings of this paper were
consistent with Panayides (2006) and Yang et al. (2009). They too found that there was
a lack of support for a significant positive relationship between innovation capability
and financial performance.
However, innovation capability was found to have a significantly positive effect on
operational performance which, in turn, was found to have a significantly positive
effect on financial performance especially of the manufacturing SMEs. In other words,
instead of a direct effect, innovation capability had an indirect impact on financial
performance mediated by operational performance. This lack of a direct relationship
can be explained by the fact that the implementation of innovation activities make a
firm invest in new technology, adopt flexible work practices and address all its
processes. So, the introduction of innovation activities entails extra cost and affects
profitability, especially of the manufacturing SMEs.
Likewise, the present study does not produce any evidence to support the
proposition that the improved product quality is positively related to financial
performance (4). Our findings are more consistent with the work of Fynes and Voss
(2001), whose empirical research has not provided strong support for a quality
performance financial performance relationship. However, the evidence provided in
this paper suggests that operational performance does significantly contribute to
financial performance (5). In particular, this research indicates that manufacturing
capability coming from the innovation capability of a company must be taken into
account to explain its contribution to financial performance. The present study findings
are consistent with many previous researches (Naveh and Marcus, 2005; Jang and Lin,
2008; Ou et al., 2010) and enable us to conclude that operational performance is a
determinant of financial performance.
Finally, the results of the present study suggest that by improving the elements of
operational performance, a company improves product quality and consequently
makes the products more attractive to customers (6). To our knowledge, this is one of
the few empirical attempts to define and confirm the casual path between firms
operational performance and product quality.
6. Conclusion
In this study, a theoretical model has been developed that focuses on the Greek
manufacturing sector. All the scales have been tested through rigorous statistical
methodologies including the pilot test method, EFA, CFA, construct reliability and
validation of the second-order factor model. Four distinct innovation dimensions have
been identified on the basis of overall innovation of manufacturing firms. Two of these
innovation dimensions are characterized by pure process and product oriented
innovation activities; a third is based on the introduction of organizational innovations
and a fourth one is characterized by marketing changes. This approach to the variety
of innovation dimensions is sufficient to depict the different firms innovation
strategies within the manufacturing sector.
Furthermore, important contributions to the existing literature can be derived from the
results of this paper. This study is one of the first attempts to link the innovation
capability of a firm with the three dimensions of firm performance, thus contributing to
the theoretical development of organizational innovation and narrowing the literature gap
in several ways. First, enlarging the analysis of innovation beyond the technological
domain and introducing organizational and marketing dimensions, provides a much
richer and more complex picture of firms innovation strategies and performance. The
statistical evidence presented in Section 4 has shown that these four different dimensions
of innovation are expressed by a second-order factor, namely firm innovation capability.
Second, the evidence provided in this paper suggests that the innovation capability has
no direct impact on manufacturing firms financial performance. This is of course a little
different from the traditional innovation philosophy and research. Yet our study does
show that innovation capability directly contributes to product quality and operational
performance, while indirectly contributing to financial performance through the
moderator of operational performance. This result is an important contribution and has
important implications (within the constraints of the study sample size). Third, this study
indicates that operational performance must be taken into account to explain its positive
contribution to product quality. Thus, in order for a manufacturing company to increase
its performance and gain competitive advantages, it should focus on increasing the level
of innovation that is implemented. This is potentially a major contribution to the
innovation and operations management literature. Finally, our findings support the fact
that innovation strategy is an important major driving force behind firm performance and
should be developed and executed as an integral part of business strategy. In short, this
result confirms the importance of innovation and provides support for the encouragement
of innovation in manufacturing companies.
Managerial implications
The findings of the present study carry managerial messages. Managers should put
additional emphasis on innovation capability as it is an important element for
achieving improved overall firm performance and sustainable competitive power. The
relationship between innovation capability and firm performance may provide a guide
as to how companies should achieve better performance by using innovation. Firms
that do not focus on the four innovation dimensions may have to look elsewhere to find
ways to survive. In order to achieve greater advantages from the adoption of
innovation, managers should focus on practices that directly increase the level to which
the innovation dimensions are achieved. Having a clear understanding of the exact
nature of innovations will help firms to prioritize their market, production and
technology strategies, to be followed by an appropriate subsequent plan of action. The
conclusions of this study seem to be especially important for smaller and younger firms
and for those firms operating in highly turbulent environments. Thus, this can help a
manufacturing SME withstand the current downturn and survive in an unstable and
financially unhealthy business environment. The fact that the current economic
downturn and financial crisis prevail not only in Greece but in many other European
countries too, strengthens this point of view and managerial message. This study has
also added implications for governments and consultants whose aim is to support the
strategic development efforts of companies (especially SMEs). So, our study offers clear
practical implications for managers who desire to choose strategies and allocate
resources in order to improve their companys operational performance and product
quality. Indeed, when innovation becomes a way of life, companies are not competing in
Impact of
innovation
capability
121
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terms of innovations per se; rather they are competing for company-wide devotion that
will transform innovation into competitiveness. There is no doubt that the twenty-first
century will be credited with being the century of innovation. The message from this
study is that creating a successful innovation platform may prove to be the most
critical catalyst for a companys success.
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Appendix
Dimensions
Impact of
innovation
capability
Items
Code
Product innovation
The company introduces new and innovative products into
the market
The company has the capability to bring in new knowledge or
technologies to develop new products
Company efforts to develop new products in terms of hours/persons,
team and training involved
The company has the capability to use new materials, new product
function and new design
The companys products are modified and improved
The company enhances the manufacturing technology of
new products
129
V001
V002
V003
V004
V005
V006
Process innovation
The company has a pioneer disposition to introduce new processes
The company has the capability to adjust the processes at
all levels concerning the production process, inventory, distribution,
logistics, etc.
The company displays clever response to new processes introduced by
others companies
The company improves existing machinery and equipment.
The company uses machinery adaptations and develops original
processing solutions
V007
V008
V009
V010
V011
Marketing innovation
The company has close relationship management with major
customers
The company has good knowledge of different market segments
The company has a highly efficient sales-force
The companys product distribution is efficient
The company has good knowledge of market conditions
Organizational innovation
The company has good coordination and cooperation of R&D, sales,
marketing and manufacturing departments
The company has high level integration and control of the major
functions
The company has a high capacity for developing and gaining access to
new technologies
The company has a high level of capability at identifying the
innovative strategy of competitors
The company is highly capable of identifying external opportunities
and threats
Product quality
Products perceived quality compared with that of
competitors
Products reliability
Products general performance
Products durability
Products conformance to companys specifications
V012
V013
V014
V015
V016
V017
V018
V019
V020
V021
V022
V023
V024
V025
V026
(continued )
Table AI.
Dimensions of
innovation, firm
performance and
associated items
JMTM
26,1
130
Dimensions
Items
Operational performance
Companys productivity
Companys efficiency
Companys costs of supplies, production and sales
Companys process effectiveness
Companys delivery of products to customers on time and
in the right place and quantity
Financial performance
Companys profitability
Companys financial results
Companys net profit margin
Companys sales growth during the last three years
Companys cash flow
Companys market growth during the last three years
Code
V027
V028
V029
V030
V031
V032
V033
V034
V035
V036
V037
Table AI.
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