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Strategic orientation and innovation performance at Dutch manufacturing SME’s: the overrated role of Market Orientation and Entrepreneurial Orientation

Reulink, R.B.J. (2012) Strategic orientation and innovation performance at Dutch manufacturing SME’s: the overrated role of Market Orientation and Entrepreneurial Orientation.

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Abstract:This study researched differences in strategic orientations at small and medium sized enterprises in the Netherlands and the effect of strategic orientations on innovation performance. Research on strategic orientations and its effect on innovation performance provide four general orientations: resource orientation (RO), market orientation (MO), entrepreneurial orientation (EO) and learning orientation (LO). Data is collected using questionnaires to identify strategic orientation characteristics and innovation performance at manufacturing SME’s in the Netherlands. After excluding companies with less than 10 or more than 250 fulltime employees and companies younger than three years, exactly 100 “clean” cases remained. Regression analysis provides evidence that the four strategic orientations are best represented in a moderating model where MO and RO lead to innovation performance and EO and LO are moderating this relationship. The results show that RO leads to radical innovation where it develops a unique resource base and searches the environment for channels to exploit. Developing, accumulating and deploying a unique resource base will enable a company to provide (potential) customers with a qualitative, total new and valuable product based on their latent needs (not on their current needs). Uniqueness of the resource base, dynamism effects of unique resources on the organization and synergy effects of the resources are maximizing the potential to create competitive advantage. MO leads to incremental innovations where it gathers information about customer needs, competitors and transfers this information throughout the organization to fully exploit it. Based on this information, existing products are improved on the short term to stay ahead of competitors. The conclusion of the theoretical framework argued that always a combination (balance) of RO and MO exists for both radical and incremental innovation. However, the regression analysis indicates that no combination of balance exists. RO only leads to radical innovation and MO only leads to incremental innovation. For developing radical innovations, moderator entrepreneurial orientation has no effect on the resource orientation relationship with radical innovation performance. EO refers to the behavioral processes essential for entering new or established markets with new or existing goods or services, particularly in dynamic competitive environments. Entrepreneurial organizations are better able to match their internal organization by changing and shaping the environment and allocate resources to exploit uncertain business opportunities. The three dimensions of EO are: risk taking, proactiveness, and autonomy. The effect of EO on MO and incremental innovations is on the other hand remarkable. Where MO leads to incremental innovations when EO is low, no relation exists when EO is high. With regard to moderator LO, the results show that companies with low LO are most likely to develop incremental innovations through MO. High LO, tantamount to generative (or double loop) learning, is most beneficial for the development of radical innovations through RO. LO refers to the ability of an organization to develop new knowledge or insights that have the potential of influencing (strategic) behavior. LO has two dimensions: commitment to learning and shared vision. Two learning modes can be recognized; Adaptive learning (single loop) refers to detect and correct errors within the boundaries of the organization where generative learning (double loop) refers to detecting and correcting errors and questioning the boundaries of the organizations implying that organizational members are willing to question long-held assumptions about its mission, customers, markets, products or technologies (out-of-the-box thinking). One must recognize that the development of radical and incremental innovations cannot be implemented within the same processes. The challenge, for smaller SME’s in particular, is to manage both processes sequentially or simultaneously. This requires different internal characteristics, strategic orientations and external environment. SME’s must therefore have dynamic capabilities (the ability to integrate, build, and reconfigure internal and external competencies to address rapidly-changing environments). It represents organizational and strategic routines by which 5 organizations identify and deploy new resource combinations (bundles) as markets emerge, collide, split, evolve, and die and market opportunities shift. Managers should be able to sense and shape opportunities and threats, seize market opportunities and maintain competitiveness by reconfiguring, obtaining, protecting and bundling the company resources Unsuccessful companies could have problems aligning their internal organization with the strategy and the external environment when internal or external conditions change. Ideally, separate business units must be set up, but at SME’s the ability to create separate business units is not always possible. Therefore, managers and CEO’s of SME’s must consider ambidexterity in their product development processes and day-to-day routines. Simultaneously or sequentially managing the two contradictory processes requires companies to be ambidextrous. This study provides evidence that ambidexterity is needed at SME’s also, not only at larger companies. However, SME’s with fewer resources than large multinationals are mostly not able to incorporate two different alignments within their organization at the same time. Therefore, managers or employees themselves need to be ambidextrous, the organizational structure must support clear and qualitative communication about goals, vision and mission for both exploitative and explorative activities. The opportunity to exercise social contacts, recognition and teambuilding facilitate the needed culture. Furthermore, ambidextrous individuals have to transfer knowledge top down and horizontal throughout the organization and need decision making authority to act effectively. With regard to financing the development of radical innovations with turnover from existing products, resource leveraging is important to consider. Resources can be “leveraged” to reduce the gap between market opportunities and existing resources. Resource leveraging is an alternative for downsizing in disengaging resources for new strategic objectives. Resource leveraging seeks to get the most out of the existing resources by concentrating them more effectively on key strategic goals; by accumulating them more efficiently, by complementing one kind of resource with another to create higher order value; by conserving resources wherever possible; and by recovering them from the marketplace in het shortest possible time. Reflecting on the article of Hamel & Prahalad (1993) about “Strategy as stretch and leverage”, the following can be concluded. Focus on internal capabilities and resources (RO) and organizational learning (LO) lead to the development of radical innovations with an inside-out approach. However, its success does not depend on the degree of LO, but it does contribute to the success. The results show that with LO the radical innovation performance is slightly higher. Vision and commitment (to learning) give an additional boost that maybe provides companies with more lucrative new opportunities. One would expect that with “ambition” also entrepreneurial elements (EO) are visible like proactiveness and risk taking. The results of this study do not support this expectation. This does however fits the theory of strategic intent. With shared intent, companies must set a long term plan but also control for incremental step in between. These incremental adjustments reduce the degree of risk and proactiveness. This study finds that resource orientation is important for developing radical innovations, market orientation is only important for developing incremental innovations, the role of entrepreneurial behavior is highly overrated for radical innovation development and even hampers the development of incremental innovations and organizational learning contributes to the development of radical innovations, but also hampers the development of incremental innovations. Reflecting on the present literature on strategic orientations and their effect on innovation performance one can only conclude that the role of market orientation and entrepreneurial orientation is highly overrated and researchers must separate incremental and radical innovation performance to see these dynamics. Research must not continue to invent concepts around market orientation and entrepreneurial behavior to explain radical innovation development (for example “proactive MO”), but should focus on building further on and testing the focus on resources and internal capabilities as the driver of developing new products, new services, new methods of production, new markets, new sources of supply and new ways of organizing.
Item Type:Essay (Master)
Van der Meer & van Tilburg
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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