Pensee Journal

Vol 76, No. 4;Apr 2014

Innovation types as mediating variables between environment and

organizational performance
Yamakawa Tsuja, Peter; Ph.D.
Universidad Esan
Tel: (511) 317-7200; E-mail: pyamakawa@esan.edu.pe
Ostos Mario, Jhony; Ph.D.
Universidad Esan
Tel: (511) 317-7200; E-mail: jostos@esan.edu.pe
Abstract
Several papers consider the environment as an important element in achieving superior organizational
performance, including the role of organizational innovation as a mediating variable. However, some
authors object there is not evidence and testing of the mediating role of this variable. This paper examines
various types of organizational innovation as a mediating variable between environment and organizational
performance. Our empirical research examined technical and administrative innovation as types of
innovation. A survey with a sample of Peruvian service companies found technical innovation, though not
administrative innovation is a significant mediating variable between an organizations environment and
performance. However, our findings warrant the assertion that companies must leave behind their
perception that administrative innovation is not a relevant tool to enhance organizational performance.
Key words: environment, innovation, organizational performance.
1.

Introduction

Numerous papers argue that organizational performance is related to the innovativeness of the organization
and the adaptation of the company to a changing environment. The environment affects innovation
management. The more innovation responds to the needs of a changing environment, the better the
organizations performance will be (Birkinshaw & Mol 2008, Tidd 2001). Along this line of thinkingway,
Rubera and Kirca (2012) made a meta-analytic review of the firms innovativeness and its performance
outcomes. Miller, Fern and Cardinal (2007) propose innovation offers the possibility of creating new
products to improve commercial value.
The variables under study include the environment, innovation, and organizational performance. Although
defined differently by various researchers, their meanings are similar. The environment involves the
uncertain and complex external factors that influence the performance of an organization (Tidd 2001).
Innovation is the generation of ideas and new products, processes and administrative approaches to reach
the organization's objectives (Birkinshaw, Hamel & Mol 2008; Seaden et al. 2003; Damanpour 1996).
Organizational performance is the perceived global performance of the firms management (Olson, Slater&
Hult 2005).
Our review of the literature shows the relationships between the environment, innovation and performance
require further exploration. Tidd (2001) holds a better understanding of the environment can result in better
innovations. From this same viewpoint, certain studies on innovation describe it as a mediator of other
variables. Alipour and Karimi (2011) suggest it might be a mediator between organizational learning and
performance, while Lau, Yam and Tang (2011) regard it as a mediator between modularity and
performance. Likewise, Han, Kim and Srivastava (1998) underscore the environment as a key element
when introducing internal changes in organizations.
This article contributes to the study of the mediating effect of innovation from a qualitative perspective
using survey information. We propose management should change their perception of innovation to achieve
a balanced adoption of both technical and administrative innovation, as a more effective approach than
adopting them individually.

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The purpose of this paper is to examine the various types of organizational innovation as mediating
variables between the organizations environment and performance. This analysis requires exploring
technical and administrative innovation as types of organizational innovation.
2.

Literature Review

2.1 Environment
The environment is an external force that influences innovation and other internal organizational decisions.
Barkema, Baum and Mannix (2002) assert the environment changes as markets and technology move
towards greater integration and globalization. Consequently, managing the environment creates new
challenges for management.
Various authors have examined the environment using different concepts that however carry similar
meanings. Zhou, Yim and Tse (2005) examine the environment from the viewpoints of demand uncertainty,
technological upheavals and competitive intensity; Han, Kim and Srivastava (1998), and Olson, Slater and
Hult (2005) examine market and technological turmoil; and Tidd (2001) proposes analyzing uncertain and
complex environments.
Other authors link the environment to innovation. Mahmood and Rufin (2005) relate the environment's
behavior with the ability to create innovation within companies, while Zhou, Yim and Tse (2005) attribute
the environment a causality role in implementing innovation.
This study analyzes the environmental variable as a set of uncertain and complex activities taking place in
the environment and influencing the organization; Tidd (2001) proposes analyzing the environment from
this viewpoint, as the environment requires different responses from the firms management and innovation.
2.2 Innovation
Organizational innovation is defined in various ways, but all these definitions ultimately carry similar
meanings and revolve around the generation of ideas and implementing new products, processes and
administrative approaches to reach the firm's objectives. (Birkinshaw, Hamel & Mol 2008; Seaden et al.
2003; Damanpour 1996).
Our review of the literature identified several approaches to classifying the types of innovation. Damanpour
(1996) proposes analyzing radical, incremental, administrative, technical, product and process innovation.
Rubera and Kirca (2012) consider radical and incremental types of innovation. Sorescu and Spanjol (2008)
examine radical and incremental innovations tied to organizational performance. Gilbert (2003) proposes
disruptive innovation, while Sheremata (2004) classifies innovation as compatible, incompatible, radical
and incremental.
An organization can adopt several types of innovation. Damanpour (1991) mentions that among the
numerous types of innovation, the most frequent are: (a) technical and administrative; (b) product and
process; and (c) radical and incremental. Our study considers organizational innovation as technical and
administrative innovation, both evidencing the various adoption processes in organizations social and
technical systems (Damanpour 1996). Other studies on innovation, including Ussahawanitchakit (2012)
and Han, Kim and Srivastava (1998), have established a difference between technical and administrative
innovations.
2.3 Organizational performance
Organizational performance results from the link between environmental behavior patterns and the
organizations internal factors. Rubera and Kirca (2012) hold the companies' ability to innovate has a direct
impact on the organizations financial condition and value. The better the relationship between an
organization's internal factors and the environment, the stronger its performance. (Tidd 2001).
Several methods are available to assess a firms performance based on varying factors. Choosing one or
another will depend on the company's goal (Lee & Miller 1996). Gopalakrishnan (2000) points out that
performance can be assessed based on efficiency, i.e. the relationship between resource inputs and outputs;
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effectiveness, that reflects the organizations growth and worker satisfaction; and its financial results, i.e.
return on assets, investment and earnings. Langerak, Hultink and Robben (2004) relate performance to
financial and market indicators.
Several types of measures are used when analyzing organizational performance, including objective ones,
like financial and market indicators (Langerak, Hultink & Robben 2004); subjective ones, like perceived
global performance (Olson, Slater & Hult 2005); or a combination of both (Gopalakrishnan 2000). This
study measures the perceived global performance of company management, as proposed by Olson, Slater
and
Hult
(2005).
2.4 Hypothesis
Several references in the literature point to the relationship between the environment, innovation and
performance. Damanpour, Walker and Avellaneda (2009) hold organizations adopt innovations as a
response to technological changes and competition. Ussahawanitchakit (2011) proposes organizational
innovation has become a fundamental strategy to encourage success in changing environments and enhance
organizational performance.
Han, Kim and Srivastava (1998) hold the environment is a key element in organizational performance and
they propose innovation may act as a mediator between these two variables. Tidd (2001) holds better
organizational performance can be achieved by introducing innovations, but also through better
environmental assessment. Other authors propose to examine the relationship between the environment and
organizational innovation in improving organizational performance (Olson, Slater & Hult 2005; Tidd 2001;
Han, Kim & Srivastava 1998; Damanpour 1996, 1991).
Damanpour (1996) points to extensive existing research in the field of organizational innovation. However,
because of its limited scope, such research fails to cover all the factors operating in a changing environment.
In agreement with Damanpour, Li and Atuahene-Gima (2001) relate innovation to various environmental
change factors. Several conclusions can be drawn from the literature on the relationship between innovation
and performance. Damanpour, Szabat and Evan (1989) focus on the vital importance of technical
innovation for performance, while administrative innovation may only be needed to achieve a balance
between the organization's social and technical structures. Ussahawanitchakit (2012) proposes technical
and administrative innovation as valuable strategies for survival and success in changing environments.
Han, Kim and Srivastava (1998) find a robust relationship between technical and administrative innovation,
on the one hand, and organizational performance, on the other, although their conclusions may be valid
only for the banking industry sub-sector. Damanpour, Szabat and Evan (1989) hold that adopting both
technical and administrative types of innovation will have a greater impact on organizational performance,
rather than if only one were adopted. Figure 1 shows the proposed relationships between these hypotheses.
Organizational
innovation

H2 (+)

Technical
innovation
H1 (+)

Environment
H4 (+)
M ediator

Administrative
innovation

H3 (+)

Organizational
performance
H5 (+)

Direct effect
M ediating effect

Figure 1. Technical and administrative innovations as mediators of the relationship between the
environment and organizational performance

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Based on the above arguments, this research proposes the following hypotheses:
H1: The environment is positively related to organizational performance.
H2: The environment is positively related to technical innovation.
H3: Technical innovation mediates the relationship between the environment and organizational
performance.
H4: The environment is positively related to administrative innovation.
H5: Administrative innovation mediates the relationship between the environment and organizational
performance.
3.

Methodology and model

According to Ettlie and Rosenthal (2011), we need more research about innovation in service companies.
This study analyzes the services sector firms in Lima, Peru, with 50 or more workers. This industry employs
over 60% of the economically active population (INEI 2012), and it is an important driver of Perus
economic growth. The industrys annual average growth rate exceeded 6% in the past eight years, with the
only exception in 2009, when the growth rate decreased due to the international crisis. Growth is expected
to remain on an upward trend. Meanwhile, other authors, including DAlvano and Hidalgo (2012), Draghici
and Petcu (2011), Damanpour, Walker and Avellaneda (2009), and Gopalakrishnan (2000) have also
investigated innovation in service companies.
3.1 Sample
Company size is a relevant variable in innovation studies. For Gopalakrishnan (2000), workers in large
companies have a different sense of belonging and valuation, compared to small company workers. To
reflect this assumption, this study focuses on intermediate and large companies with more than 50 workers.
Data was gathered through a survey with 192 management level executives at several service companies
headquartered in Lima, Peru. The surveys were delivered and collected personally. Incorrectly filled or
incomplete surveys were discarded, resulting in a total 104 valid surveys, or a 54.2% response rate.
Respondents included 27 managers (26%), 40 department heads (38%), 12 supervisors (12%) and 25
analysts (24%). The sampled service companies included from the banking, insurance, commerce,
transportation, consultancy, technology, education, tourism and telecommunications subsectors,
principally.
The survey comprised four sections, each addressing one study variable. To assess the environment, and
technical and administrative innovation, we designed new items based on the concepts proposed by Tidd
(2001), Li and Atuahene-Gima (2001), Olson, Slater and Hult (2005), Han, Kim and Srivastava (1998),
Damanpour, Szabat and Evan (1989), and Damanpour (1996). To assess the organizational performance,
we used the tool proposed by Olson, Slater and Hult (2005).
3.2 Measurement
We defined the environment as the set of external uncertain and complex activities that have an impact on
the organization. To evaluate the reliability of the environment variable, we computed Cronbachs Alpha
coefficient, resulting in a 0.874 indicator, above the generally accepted 0.7 figure. (Klein, Astrachan &
Smyrnios 2005). The environment variable comprised 10 items, which were measured as a simple average
of responses.
Regarding the types of innovation, we defined administrative innovation as changes in organizational
structures, human resources and/or administrative processes (Damanpour 1996). To determine each
variables reliability, we computed Cronbachs Alpha coefficient. The resulting values were 0.907 for
technical innovation and 0.863 for administrative innovation. A factorial analysis using a varimax rotation
helped in testing the validity of technical innovation and administrative innovation. As regards technical
innovation, we identified five items with a loading rate above 0.70 and an explained variance of 38.57 %,
while administrative innovation yielded five items with a loading rate above 0.70 and an explained variance
of 30.96 %. For both technical and administrative innovations, we computed a simple average of obtained
responses.
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Organizational performance is the overall perceived result of business management. This definition is
proposed by Olson, Slater and Hult (2005), who, through the respondents' declared perceptions, seeks to
assess the qualitative and quantitative outcomes that might be important for the organization. To evaluate
this variable's reliability, we computed Cronbachs Alpha and obtained a 0.845 coefficient value. The firms
performance is evaluated as comprised of three items which were measured as the simple average of
responses.
Table 1 shows the statistical outcomes for factor loadings and Cronbachs alpha used in the study. All the
variables were measured using the Likert scale where 1 stands for total disagreement with the statement,
and 5 reflects total agreement.
Table 1. Results of measure validation (N=104)
Variables
Factor loading Cronbachs Alpha
Environment (E)

0.783 - 0.967

0.874

Technical Innovation (TI)

0.832 - 0.891

0.907

Administrative Innovation (AI)

0.702 - 0.897

0.863

Organizational Performance (OP)

0.844 - 0.895

0.845

3.3 Model specification

The model study of the relationships between the variables appears below. A multiple regression analysis
tested the relationships between the hypotheses.
Model 1: OP = 01 + 1E +
Model 2: TI = 02 + 2E +
Model 3: OP = 03 + 3E + 4TI +
Model 4: AI = 04 + 5E +
Model 5: OP = 05 + 6E + 7AI +
Where:
E = Environment
OP = Organizational performance
TI = Technical innovation
AI = Administrative innovation
4.

Findings

The normality (Kolmogorov-Smirnov) and variance homogeneity tests (Levenne statistics) yielded positive
for all the variables (environment, technical innovation, administrative innovation and organizational
performance). Baron and Kennys (1986) verification process, also used by Rattanaphaphtham (2012),
helped asses the mediating effect of innovation. Table 2 shows the statistical outcomes of the correlations
proposed in the hypotheses.
Model 1, related to hypothesis 1, shows the resulting relationship between the environment and
organizational performance. These results point to a positive and significant relationship between these
variables (=0.399; p<0.05). Consequently, H1 is accepted.
Model 2, related to hypothesis 2, shows the resulting relationship between the environment and technical
innovation. These results point to a positive and significant relationship between these variables (=0.659;
p<0.05). Consequently, H2 is accepted. Table 2. Results of regression analysis
Model 3, related to hypothesis 3, shows the results of the multiple regression between the study variables,
where organizational performance is the dependent variable, and the environment and technical innovation
are the independent ones.
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According to the mediating method suggested by Baron and Kenny (1986), and also used by
Rattanaphaphtham (2012), these results show technical innovation mediates the relationship between the
environment and organizational development, further evidenced by the three following regression
equations.
Table 2. Results of regression analysis
Independent variables

Model 1
OP
0.399 (**)

Environment

Dependent variables
Model 2
Model 3
Model 4
TI
OP
AI
0.659 (**)

n.s.

Model 5
OP

0.265 (*)

0.399 (**)

0.04
3.86 (*)

0.12

0.257 (**)

Technical innovation
Administrative innovation
R

n.s
0.12
13.52 (**)

0.25
35.13 (**)

0.18
10.97 (**)

n.s

(*) p < .10; (**) p < .05; n.s = p > .10

N=104 surveys

In model 1, the environment shows a positive and significant relationship with organizational performance
(=0.399; p<0.05); in model 2, the environment shows a positive and significant relationship with technical
innovation (=0.659; p<0.05); and in model 3, technical innovation shows a positive and significant
relationship with organizational performance (=0.257; p<0.05), while the environment does not show a
positive or significant relationship to performance.
Consequently, technical innovation fully mediates the relationship between the environment and
organizational performance. As a result, H3 is accepted. Figure 2 summarizes the results proposed in
hypotheses 1, 2 and 3.

= .659**

Technical
innovation
= .399**

Environment
= n.s.

= .257**

Organizational
performance

M ediator
Direct effect
M ediating effect

(*) p < .10; (**) p < .05; n.s = p > .10

N = 104 surveys

Figure 2. Results of mediation by technical innovation between the environment and organizational
performance
Model 4, related to hypothesis 4, shows the relationship between the environment and administrative
innovation. These results point to a positive but not significant relationship between the environment and
administrative innovation (=0.265; p<0.10). Consequently, H4 is rejected.
Model 5, related to hypothesis 5, shows the results of the multiple regression between the study variables,
where organizational performance is the dependent variable, and where the environment and administrative
innovation are the independent ones.

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These results show that administrative innovation does not mediate between the environment and
organizational performance, as evidenced by the three following regression equations.
In model 1, the environment has a positive and significant relationship with organizational performance
(=0.399; p<0.05); in model 4, the environment shows a positive but not significant relationship with
administrative innovation (=0.265; p<0.10); and in model 5, administrative innovation does not show a
significant relationship with organizational performance, while the environment does have a positive and
significant relationship with performance (=0.399; p<0.05).
Consequently, administrative innovation does not mediate the relationship between the environment and
organizational performance, and H5 is rejected. Figure 3 summarizes the results for these hypotheses.

= .399**

Environment
= .399**.
= .265*

Administrative
innovation

Organizational
performance
= n.s

M ediator
Direct effect

M ediating efect

(*) p < .10; (**) p < .05; n.s = p > .10

N = 104 surveys

Figure 3. Results of mediation by administrative innovation between the environment and

organizational performance
5.

Conclusions, implications and future research

Our research goal is to examine the types of innovation as mediating variables between the environment
and organizational performance. The survey we conducted at 104 companies provides evidence that
technical innovation mediates between the environment and organizational development but administrative
innovation does not mediate between the environment and organizational performance.
This research proposes a qualitative perspective of the mediating effect of these types of innovation, as our
analysis of variables used perceptual information gathered through surveys. Other researchers having used
similar methods include Damanpour, Walker and Avellaneda (2009), Olson, Slater and Hult (2005),
Tegarden, Saranson, Childers and Hatfield (2005), and Gopalakrishnan (2000).
Statistical findings are extremely significant in determining the mediating role of technical innovation
between the environment and performance. Administrative innovation does not perform this mediation role.
This means companies, when identifying changes in the environment, will prioritize technical innovation,
compared to administrative innovation, to accomplish their objectives or improve performance, based on
the assumption that technical innovation will make a greater contribution than administrative innovation to
organizational performance. Companies should change this perception and adopt both types of innovation
to ensure better outcomes. This assertion is supported by Ussahawanitchakit's proposition (2012) that
technical and administrative innovation are positively related to competitive advantages, in turn related to
performance improvements. Damanpour, Walker and Avellaneda (2009) hold the combined adoption of
these types of innovation by service companies would influence behavior, develop capacities and have
effects on organizational performance.
A positive and significant relationship can be identified between the environment and organizational
performance, thus pointing to the fact that service companies take into account the environment's behavior
when making decisions. This is consistent with Lees (2012) conclusions that turbulences in the
environment have an influence on organizational performance.
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Regarding the relationship between the environment and technical innovation, our investigation found both
variables have a positive and significant influence, further indicating companies take into account
environmental behavior when making decisions about changes in products, services or production
processes. Our findings reflect Ussahawanitchakits conclusions (2012), according to which technical
innovation reflect changes in the environment and thereby impact a company's operations through new
production processes, products and services.
Our findings point to a very weak correlation between the environment and administrative innovation,
further underscoring that firms decisions to introduce changes in their organizational structure, human
resources and/or administrative processes do not take into account the environments behavior as a priority
variable. In this respect, our findings do not support Ussahawanitchakit's proposition (2012), according to
which administrative innovation would lead to business success in the long term and, in addition, helps
companies to counteract environmental turbulence.
Previous research on the relationships between the environment, innovation and performance points to
insufficient evidence and testing on the mediating role of this variable. This research can enrich the
literature by proposing a qualitative perspective of the mediating effect of the types of innovation (technical
and administrative), as our analysis of variables used survey-based perceptual information.
We found technical innovation is a significant mediating variable between the environment and
organizational performance; while administrative innovation is not a mediating variable. This finding
reveals management perceives technical innovation is important to reach objectives or improve the firms
performance. This approach should be reformulated by firms, because balanced adoption of both, technical
and administrative innovation, are more effective in the organization than implementing only one of them.
(Ussahawanitchakit 2012; Damanpour, Walker & Avellaneda 2009)
Our research explores the behavior of service industry companies, generally, in an emerging economy.
Consequently, findings cannot be generalized to all service industry sub-sectors nor to other industries.
Future studies should examine other markets, such as manufacturing industry. This proposition matches
conclusions reached by Zhou, Yim and Tse (2005), who hold the impact of innovation varies by market
type.
Our study's conclusions are based on perception data gathered through surveys. Consequently, our findings
may be influenced by the perceived magnitude factor, such as "very much" or "little" innovation scale,
which may vary among sub-sectors, e.g. banking or education. Future studies should explore the relative
importance of perceived information and compare findings between companies within the same sub-sector.

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