Unraveling the links between dimensions of innovation and organizational performance

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Abstract

Economists typically define innovation as a process or practice that is new to an industry; hence they emphasize a firm's speed of innovation relative to other firms in the industry. Organizational theorists, on the other hand, usually focus on the number of products or processes that are new to the firm; hence, they emphasize innovation magnitude. This study builds a bridge between these two approaches by exploring the link between two dimensions of innovation—speed and magnitude—and two measures of a firm's performance—objective financial reports and executive ratings of perceived effectiveness. We propose that each dimension of innovation will be associated with a different measure of firm performance. Using data from the commercial banking industry, we find interesting results that partially support our predictions based on the theory that different dimensions are indeed linked to different measures of performance. Implications for future research and practice are discussed.

Introduction

As the millennium draws to a close, the pace of economic, social, and technological change has increased dramatically. Change is ubiquitous and pervasive, and innovation facilitates the process of adaptation to many of these changes. As Hitt & Hoskisson (1991) argue, the ability of firms to develop new technologies is at the heart of strategic competitiveness. Therefore, the only way for a firm to sustain a competitive advantage is to constantly upgrade its facilities and activities through innovation (Porter, 1990; Drew, 1997). Understandably, researchers in this climate display a strong “pro-innovation” bias Kimberly 1981, Abrahamson 1991 and visualize innovation as an organizational activity that is inherently beneficial.

There is little agreement on what it means to be innovative, however. On the one hand, economists view innovation as a product, process, or practice that is new to the industry Acs & Audretsch 1990, Dosi 1988, Nelson & Winter 1977, Winter 1984; consequently, they emphasize “innovation speed,” or a firm's quickness to access and use an innovation relative to other firms within an industry. On the other hand, organization theorists define innovation as a product, process, or practice that is new to the firm Aiken & Hage 1971, Kimberly & Evanisko 1981. Here, the emphasis is on the number of new products or processes adopted by the firm, or “innovation magnitude” (Downs & Mohr, 1976).

Likewise, current researchers examine the issue of innovation from several directions. Some researchers attempt to identify the environmental and structural correlates that facilitate innovation Zaltman, Duncan & Holbek 1973, Aiken & Hage 1971, Kimberly & Evanisko 1981, whereas others look to the outcomes of innovation Lawrence & Dyer 1983, Lengnick-Hall 1992, Yamin, Gunasekaran, & Mavondo 1999. Innovation outcomes that have been analyzed include the extent of diffusion of innovations (Anderson & Tushman, 1990), the efficiency and competitiveness of firms and industries Chandler 1977, Hax 1989, Yamin, Gunasekaran, & Mavondo 1999, and the overall effectiveness of the innovation (Schroeder, 1990).

The objective of this study is to use a multidimensional view of innovation and organizational performance and examine more closely the links between these concepts. At present, the relative benefits of innovation speed and innovation magnitude are unclear to both researchers and practitioners, because most studies either do not separate these dimensions or tend to emphasize one dimension to the neglect of the other. For example, the measure of speed is often based on the adoption of a single innovation (or, at best, a few); the results may not be generalizable to other innovations. If a firm adopted an innovation earlier than others in one instance, it does not mean that it will exhibit the same behavior for all other innovations, hence valid innovation measures must be based on several innovations (Subramanian & Nilakanta, 1996). Likewise, studies that use innovation magnitude do not differentiate between speedy adopters and late adopters. This measure in essence, regards all adopters of innovations as innovative firms and nonadopters as noninnovative firms (Subramanian & Nilakanta, 1996). By excluding time of adoption, differences in the firm's readiness and propensity to innovate cannot be ascertained. Other studies have shown that there are real benefits to considering multiple dimensions of innovation Subramanian & Nilakanta 1996, Gopalakrishnan & Damanpour 2000. In this study, we unbundle the notion of innovation by considering two distinct dimensions. Further, we also use a multidimensional view of organizational performance to examine more closely the dynamics of the relationship between innovation dimensions and performance. The results of our study provide practitioners with empirical information that enable them to make more informed decisions about innovation and technology investments.

Section snippets

Dimensions of Innovation

The question with which we begin our research is: which of these two dimensions of innovation, speed or magnitude, is more closely linked to positive firm performance? Before we can make predictions to be tested, more detailed definitions of the two dimensions are needed. In particular, the probable benefits, generally understood, of each dimension need to be articulated.

Innovation speed indicates a firm's ability to capitalize on progressions in technology (Clark, 1987). It reflects an

Innovation Speed and Financial Performance

Marketing theorists have shown that over a broad cross section of industries, organizations that emphasize innovation speed gain market share Robinson 1988, Robinson 1990. Gains in market share are generally associated with higher revenues and higher profitability. Also, strategy theorists assert that such organizations, which we call early adopters, are able to erect “isolating mechanisms” because the knowledge contained in these innovations is not readily available to competitors Rumelt 1987,

Sample

The data for this study was collected from commercial banks in four northeastern states (New York, New Jersey, Connecticut, and Massachusetts) in the United States. Commercial banks were selected for several reasons. First, most studies of innovation have been conducted in the manufacturing sector, and in light of growing importance of the service sector we wanted to examine the link between innovation and performance in this sector. Second, deregulation in the industry has resulted in

Analysis of the Results

Table 1 presents the descriptive statistics—the means and the correlations of the study variables.

We did multiple regression analyses with average financial performance (1988–1992) as one dependent variable and perceived effectiveness as the second dependent variable. For each of the dependent variables we had two regression models. The first model used the two independent variables—innovation magnitude and innovation speed. The second model included the two control variables—organization size

Discussion

Overall, the results provide some initial support for our general assumption that innovation speed and innovation magnitude are linked to different measures of performance. More specifically, our analysis demonstrates that although innovation speed resulted in positive financial performance, it is not associated with executives' perceptions of such positive performance. Innovation magnitude is associated with executives' positive perceptions of firm performance even though it may not directly

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