Innovation Strategy and Firm Performance: An empirical study of publicly listed firms (Betriebswirtschaftliche Studien in forschungsintensiven Industrien) 3834917559, 9783834917553

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Nanja Strecker Innovation Strategy and Firm Performance

GABLER EDITION WISSENSCHAFT Betriebswirtschaftliche Studien in forschungsintensiven Industrien Herausgegeben von Prof. Dr. Jens Leker, Prof. Dr. Søren Salomo und Prof. Dr. Gerhard Schewe

Im Mittelpunkt dieser Schriftenreihe steht das Management von Unternehmen, die sich durch ein hohes Engagement im Bereich der Forschung und Entwicklung auszeichnen. Die Reihe richtet sich einerseits an Leser in der Wissenschaft und andererseits an Leser in der Praxis, die im Rahmen ihrer Tätigkeit auf der Suche nach neuen anwendungsorientierten Problemlösungen sind. Die Schriftenreihe ist nicht auf Veröffentlichungen aus den Instituten der Herausgeber beschränkt.

Nanja Strecker

Innovation Strategy and Firm Performance An empirical study of publicly listed firms

With a foreword by Prof. Dr. Søren Salomo

GABLER EDITION WISSENSCHAFT

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

Dissertation Karl-Franzens-Universität Graz, Österreich, November 2007

1st Edition 2009 All rights reserved © Gabler | GWV Fachverlage GmbH, Wiesbaden 2009 Editorial Office: Claudia Jeske / Sabine Schöller Gabler is part of the specialist publishing group Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Printed on acid-free paper Printed in Germany ISBN 978-3-8349-1755-3

Foreword In practically oriented studies, innovation strategy is consistently identified as a key success factor for innovation performance as well as sustainable, overall firm performance. Empirical research has, in comparison to other aspects of innovation management, not devoted much attention to this topic. In addition to this lack of empirically validated results, there is a deficit of clear definition in terms of what is actually meant by innovation strategy. Nanja Strecker’s dissertation starts there and concentrates on three central questions: What characterizes innovation strategy of companies? To what extend does a relationship between innovation strategy and a firm’s performance exist and which critical conditions need to be considered for this relationship? Nanja identifies and answers these practically as well as scientifically highly relevant and interesting research questions. The research was conducted in a highly competent manner. Particularly worth emphasizing is the coherent deduction of the conceptual framework as well as the hypotheses, considering prior empirical evidence in a very comprehensive manner. The good conceptual part is even exceeded by the sophisticated empirical study. Impressively, Nanja proves her methodological competence and diligence when analyzing her data. The presented results are very interesting and, to a large extend, support the formulated hypotheses. Moreover, the present study states meaningful suggestions for future research in innovation management. For management practice in particular, Nanja’s research provides interesting advice on how to improve firms’ innovation management. Those who face the task to define a firm’s innovation strategy can find highly relevant information on the dimensions characterizing this strategy, which together are critical for a firm’s overall performance.

Dr. Søren Salomo, Professor for Innovation Management, Danish Technical University, DTU Copenhagen, March 2009

Preface Innovation has become a prime source of gaining and sustaining a competitive advantage in the market. While a large research body addresses the question of individual innovation projects, a firm´s overall innovation strategy has received much less attention. Should innovations be driven by market orientation and a close relation to customers or rather a strong technology orientation with a world leading R&D department behind? Should a company focus on radically new products or rather a steady stream of incremental ones? Is a diverse portfolio of unrelated innovation projects beneficial or should a firm focus its innovation projects in deliberately chosen innovation fields? These strategic questions form part of innovation strategy. The objective of this dissertation is to understand innovation strategy better and its relation with a firm´s overall performance. First ideas to this dissertation topic came up during my time as a consultant at The Monitor Group. Particularly the concept of innovation fields had raised our attention. There was anecdotal evidence, but no systematic one. For the purpose of this study, innovation field orientation was put into a broader context of innovation strategy. First of all, I want to thank my PhD advisor, Prof. Dr. Søren Salomo (Danish Technical University Copenhagen) for his competent advice and generous oversight. Another thank you goes to the 138 company representatives who participated in the empirical study, and to Gregor Einetter, who successfully chased after them. A very cordial thank you goes to my PhD mate, Antje Lutz. She not only served as a critical discussion partner, but we shared all the challenges of the PhD programme. My partner, Kevin, was another very valuable discussion partner. He ensured that the theoretical part of this work stayed linked to the reality of companies. Last but not least, Steffen Gackstatter and Iason Onassis, former colleagues from Monitor, not only helped to crack the one or other content question, but also offered their broad network for the empirical study. My father, Günther Strecker, did not get tired to make me consider a PhD at all. Him and Gitta Abele, I also wanted to thank for all their life long support and lessons, not taught at any school. Kevin was the key moral

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support. Thank you for always being behind me during these sometimes challenging times. Last but not least, I wanted to thank my sister, Jutta Strecker, and several other people from the medical field who helped me get through typing a dissertation thesis, even though my body is not built for it.

Nanja Strecker

Table of Contents Table of Contents ........................................................................... IX Tables ..........................................................................................XV Figures ...................................................................................... XVII Abbreviations ........ ..................................................................... XIX Symbols .......................................................................................XX Chapter I

Introduction .................................................................1

1 Research Problem and Relevance ....................................................1 1.1 On the Importance of Innovation ..............................................1 1.2 How to be successful through innovation? ..................................3 2 Objectives of Study .......................................................................5 3 Structure of Document...................................................................9 Chapter II

Literature Review........................................................ 11

1 Innovation Strategy..................................................................... 11 1.1 Definitions ........................................................................... 11 1.1.1 Definition of Strategy .................................................. 11 1.1.2 Definition of Innovation ............................................... 13 1.1.3 Definition of Innovation Strategy................................... 16 1.2 Innovation Strategy Typologies and Dimensions........................ 18 1.2.1 Methodical considerations ............................................ 18 1.2.2 Innovation Strategy Typologies and Dimensions .............. 19 1.2.3 Innovation Strategy Dimensions of This Study ................ 23 1.2.3.1 Innovativeness ...................................................... 29 1.2.3.2 Distance to Core Business ....................................... 30 1.2.3.3 Driver of Innovation ............................................... 32 1.2.3.4 Innovation Field Orientation..................................... 35 1.2.3.5 Overview of Four Innovation Strategy Dimensions ...... 39 2 Innovation Strategy and Performance ............................................ 40 2.1 Innovation Performance and Firm Performance ......................... 40 2.1.1 Innovation Performance ............................................... 40

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2.1.2 Innovation and Firm Performance.................................. 41 2.2 Innovation Strategy and Performance...................................... 42 2.2.1 Innovation Strategy and Performance ............................ 42 2.2.2 Innovativeness and Performance................................... 46 2.2.3 Distance to Core Business and Performance.................... 50 2.2.4 Driver of Innovation and Performance............................ 52 2.2.5 Innovation Field Orientation and Performance ................. 55 3 Innovation Strategy and Firm Context............................................ 58 3.1.1 Business Strategy as Contingency ................................. 61 3.1.2 Environmental Uncertainty as Contingency ..................... 64 Chapter III

Research Hypotheses .................................................. 69

1 Conceptual Framework ................................................................ 69 2 Hypotheses ................................................................................ 70 2.1 Success Hypotheses.............................................................. 70 2.1.1 Hypothesis 1: Innovativeness and Performance............... 70 2.1.2 Hypothesis 2: Distance to Core Business and Performance 73 2.1.3 Hypothesis 3: Driver of Innovation and Performance........ 76 2.1.4 Hypothesis 4: Innovation Field Orientation & Performance 80 2.2 Contingency Hypotheses........................................................ 85 2.2.1 Business Strategy as Contingency ................................. 85 2.2.1.1 Hypothesis 5a: Innovativeness, Business Strategy, and Performance.................................................... 86 2.2.1.2 Hypothesis 5b: Distance to Core Business, Business Strategy, and Performance ...................................... 87 2.2.1.3 Hypothesis 5c: Driver of Innovation, Business Strategy, and Performance ...................................... 88 2.2.1.4 Hypothesis 5d: Innovation Field Orientation, Business Strategy, and Performance ...................................... 89 2.2.2 Environmental Uncertainty as Contingency ..................... 90 2.2.2.1 Hypothesis 6a: Innovativeness, Environmental Uncertainty, and Performance .................................. 90 2.2.2.2 Hypothesis 6b: Distance to Core Business, Environmental Uncertainty, and Performance ............. 92 2.2.2.3 Hypothesis 6c: Driver of Innovation, Environmental Uncertainty, and Performance .................................. 93 2.2.2.4 Hypothesis 6d: Innovation Field Orientation, Environmental Uncertainty, and Performance ............. 97 2.3 Summary of Hypotheses........................................................ 98

Table of Contents

Chapter IV

XI

Empirical Study ........................................................ 101

1 Research Design ....................................................................... 101 2 Sample and Data ...................................................................... 105 2.1 Sample Frame.................................................................... 105 2.2 Quantitative Survey ............................................................ 106 2.3 Document Analysis ............................................................. 109 2.3.1 Methodology ............................................................ 109 2.3.2 Comparison with Survey Results and Outcome .............. 112 2.4 Financial Databases ............................................................ 115 3 Operationalization of Constructs .................................................. 117 3.1 Methodical Considerations.................................................... 117 3.2 Operationalization of Innovation Strategy Variables ................. 120 3.2.1 Measure for Innovativeness........................................ 120 3.2.2 Measure for Distance to Core Business......................... 122 3.2.3 Measure for Driver of Innovation ................................. 124 3.2.4 Measure for Innovation Field Orientation ...................... 126 3.3 Operationalization of Performance Variables ........................... 130 3.3.1 Measure for Innovation Performance............................ 130 3.3.2 Measures for Firm Performance................................... 131 3.3.2.1 Tobin’s q............................................................. 132 3.3.2.2 Total Return on Share Relative to Industry .............. 133 3.4 Operationalization of Contingency Variables............................ 134 3.4.1 Measure for Business Strategy .................................... 134 3.4.2 Measure for Environmental Uncertainty ........................ 135 3.5 Operationalization of Control Variables................................... 137 4 Results .................................................................................... 138 4.1 Descriptive Statistics ........................................................... 138 4.1.1 Demographic Characteristics ...................................... 138 4.1.1.1 Firm Size ............................................................ 138 4.1.1.2 Industry Sector.................................................... 140 4.1.1.3 R&D Expenditure.................................................. 141 4.1.2 Descriptive Results for Innovation Strategy Variables ..... 143 4.1.2.1 Descriptive Results for Innovativeness .................... 143 4.1.2.2 Descriptive Results for Distance to Core Business ..... 146 4.1.2.3 Descriptive Results for Driver of Innovation ............. 148 4.1.2.4 Descriptive Results for Innovation Field Orientation... 150 4.1.3 Descriptive Results for Performance Variables ............... 154 4.1.4 Innovation Strategy – Performance Correlations............ 155

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4.1.5 Descriptive Results for Contingency Variables ............... 156 4.2 Validation of Measures ........................................................ 159 4.2.1 Methodical Considerations .......................................... 159 4.2.2 Validation of Innovation Strategy Variables................... 161 4.2.2.1 Validation of Innovativeness .................................. 161 4.2.2.2 Validation of Distance to Core Business ................... 162 4.2.2.3 Validation of Driver of Innovation ........................... 164 4.2.2.4 Validation of Innovation Field Orientation ................ 165 4.2.3 Validation of Innovation Performance........................... 167 4.2.4 Validation of Contingency Variables ............................. 169 4.2.4.1 Validation of Business Strategy .............................. 169 4.2.4.2 Validation of Environmental Uncertainty .................. 170 4.2.5 Validation of First-Order Constructs ............................. 171 4.2.5.1 Validation of Innovation Strategy (1st Order)............ 171 4.2.5.2 Validation of Innovation Performance (1st Order) ...... 172 4.2.5.3 Validation of Contingency Factors (1st Order) ........... 173 4.2.6 Validation of Second-Order Constructs ......................... 174 4.2.6.1 Validation Innovation Strategy (2nd Order)............... 174 4.3 Testing of Hypotheses ......................................................... 174 4.3.1 Methodical Considerations .......................................... 175 4.3.2 Innovation Strategy – Performance Relationship............ 176 4.3.2.1 Second Order Innovation Strategy Dimensions ......... 176 4.3.2.2 First Order Innovation Strategy Dimension .............. 179 4.3.3 Contingencies........................................................... 181 4.3.3.1 Moderated Regression Results for Business Strategy . 181 4.3.3.2 Moderated Regression Results for Environmental Uncertainty ......................................................... 183 4.3.4 Summary of Hypotheses Testing ................................. 185 4.4 Innovation Field Orientation ................................................. 186 Chapter V

Discussion & Implications........................................... 191

1 Discussion of Results ................................................................. 191 1.1 Which dimensions charaterize innovation strategy? ................. 191 1.2 To what extent does a relationship exist between innovation strategy and firm-level performance? .................................... 193 1.2.1 Does a relationship exist between innovativeness and performance? ........................................................... 194 1.2.2 Does a relationship exist between distance to core business and performance? ........................................ 195 1.2.3 Does a relationship exist between driver of innovation and performance? ..................................................... 197 1.2.4 Does a relationship exist between innovation field orientation and performance? ..................................... 199

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1.3 How do contingencies influence the relationship between innovation strategy and firm-level performance? ..................... 201 1.3.1 Does business strategy moderate the relationship between innovation strategy and performance?............. 201 1.3.2 Does environmental uncertainty moderate the relationship between innovation strategy and performance?............. 204 2 Implications ............................................................................. 206 2.1 Implications for Innovation Research ..................................... 206 2.2 Managerial Implications ....................................................... 210 3 Limitations & Outlook ................................................................ 213 Appendix:

Cover Letter and Questionnaire................................... 217

Bibliography ................................................................................ 225

Tables Table II-1:

Definitions of Strategy .................................................. 12

Table II-2:

Definitions of Innovation Strategy .................................. 16

Table II-3:

Overview of Research on Innovation Strategy .................. 20

Table II-4:

Overview of Innovation Strategy Dimensions ................... 25

Table II-5:

Research on Innovation Strategy & its Performance Effect . 43

Table II-6:

Research on Innovation Activity and its Performance Effect 45

Table II-7:

Recent Studies on Innovativeness and Performance .......... 47

Table II-8:

Studies on Distance to Core Business and Performance ..... 52

Table II-9:

Studies on Drivers of Innovation and Performance ............ 54

Table II-10: Studies on Innovation Field Orientation and Performance... 57 Table II-11: Research on Innovation Strategy and Contingencies ......... 60 Table II-12: Contingencies Studied in Innovation Research.................. 60 Table II-13: Environmental Uncertainty in Innovation Research............ 66 Table III-1: Summary of Hypotheses ............................................... 99 Table IV-1: Overview of Indicators from Financial Databases ............ 116 Table IV-2: Operationalization of Innovativeness............................. 122 Table IV-3: Operationalization of Distance to Core Business.............. 124 Table IV-4: Operationalization of Driver of Innovation...................... 126 Table IV-5: Operationalization of Innovation Field Orientation ........... 129 Table IV-6: Operationalization of Innovation Performance ................ 131 Table IV-7: Operationalization of Business Strategy......................... 135 Table IV-8: Operationalization of Market Uncertainty ....................... 136 Table IV-9: Operationalization of Technological Uncertainty .............. 136 Table IV-10: Employees in 2005 - by Sector and Continent ................ 139 Table IV-11: Total Sales 2005 (thousand €) - by Sector and Continent 140 Table IV-12: Sectors Represented in Sample.................................... 141 Table IV-13: Innovativeness – Descriptive Statistics.......................... 143 Table IV-14: Innovativeness – Quotes from Document Analysis .......... 145 Table IV-15: Distance to Core Business – Descriptive Statistics........... 146 Table IV-16: Distance to Core Business – Document Analysis ............. 147 Table IV-17: Driver of Innovation – Descriptive Statistics................... 148 Table IV-18: Driver of Innovation – Quotes from Document Analysis ... 150 Table IV-19: Innovation Field Orientation – Descriptive Statistics ........ 151 Table IV-20: Innovation Field Orientation – Document Analysis........... 153

Tables

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Table IV-21: Performance Variables – Descriptive Statistics................ 154 Table IV-22: Correlations: Innovation Strategy, Performance Variables 155 Table IV-23: Contingency Variables – Descriptive Statistics ................ 157 Table IV-24: Business Strategy – Quotes from Document Analysis ...... 158 Table IV-25: Innovativeness – Collinearity Statistics ......................... 161 Table IV-26: Distance to Core Business – Collinearity Statistics .......... 163 Table IV-27: Driver of Innovation – Collinearity Statistics................... 164 Table IV-28: Innovation Field Orientation – Collinearity Statistics ........ 166 Table IV-29: Innovation Performance – Collinearity Statistics ............. 168 Table IV-30: Business Strategy – Collinearity Statistics...................... 170 Table IV-31: Environmental Uncertainty – Collinearity Statistics.......... 171 Table IV-32: Innovation Strategy, 1st Order Constructs – Collinearity... 172 Table IV-33: Innovation Performance, 1st Order – Collinearity............. 173 Table IV-34: Business Strategy, 1st Order – Collinearity ..................... 173 Table IV-35: Environmental Uncertainty, 1st Order – Collinearity ......... 173 Table IV-36: Innovation Strategy, 2nd Order Constructs – Collinearity. 174 Table IV-37: Innovation Strategy (2nd) and Performance – Regression . 176 Table IV-38: Innovation Strategy (1st) and Performance – Regression . 180 Table IV-39: Business Strategy – Moderated Regression .................... 181 Table IV-40: Environmental Uncertainty – Moderated Regression ........ 184 Table IV-41: Summary of Results from Hypotheses Testing................ 185 Table IV-42: Innovation Field Orientation – Split Group Analysis ......... 186 Table IV-43: Selected Innovation Field Orientation Items – Means ...... 188

Figures Figure I-1:

Structure of Document.................................................. 10

Figure II-1: Innovation Strategy vs. Firm and Functional Strategies ..... 17 Figure II-2: Four Innovation Strategy Dimensions of This Study .......... 39 Figure III-1: Conceptual Framework ................................................. 70 Figure IV-1: Overview of Research Design....................................... 104 Figure IV-2: Response Process....................................................... 108 Figure IV-3: Overview of Sample Composition (n=122)..................... 108 Figure IV-4: Procedure of Qualitative Content Analysis ...................... 111 Figure IV-5: Results: Document Analysis vs. Quantitative Survey ....... 114 Figure IV-6: Reflective vs. Formative Measurement Model ................. 118 Figure IV-7: R&D Rates per Sector ................................................. 142

Abbreviations BU

Business Unit

DAX

Deutscher Aktien Index (top 30 German firms)

CEO

Chief Executive Officer

FTSE

Financial Times Stock Exchange 100 stock index

IFO

Innovation Field Orientation

Dow Jones Dow Jones Industrial Average Index N

Sample size

NASDAQ

NASDAQ stock market (index)

NPD

New Product Development

NPV

Net Present Value

Pro

Proactive (market orientation)

R&D

Research and Development

Re

Reactive (market orientation)

ROA

Return on Assets

SD

Standard Deviation

SIC

Standard Industry Classification

SPSS

Statistical Package for the Social Sciences

TecDax

Deutscher Technologie Index (top 30 technology firms)

TPDP

Technology Push and Demand Pull

TRS

Total Return on Share

VIF

Variance Inflation Factor

Symbols F

F-test

r R

Correlation coefficient 2

Coefficient of determination

Xmax

Maxium value

Xmean

Mean

Xmin

Minimum value

+

Positive relationship

-

Negative relationship

O

No relationship

8

U-shaped relationship

U

Inverted U-shaped relationship

Statistical Significance ***

Very significant, at the p1) or not (ratio