2005-JM-GIMA-Resolving the Capability—Rigidity Paradox in New Product Innovation.Preview

Kwaku Atuahene-Gima

Resolving the Capability–Rigidity Paradox in New Product Innovation

Managers face an important strategic dilemma in product innovation:how to exploit existing product innovation competencies (competence exploitation) while avoiding their dysfunctional rigidity effects by renewing and replac-ing them with entirely new competencies (competence exploration).Although the resolution of what is termed the “capability–rigidity paradox”is considered a fundamental managerial task in enhancing product innovation out-comes and the firm’s competitive advantage, it has received little research attention.The author argues and finds support that market orientation provides a key to this paradox.Specifically, customer and competitor orientations ensure simultaneous investments in exploiting existing product innovation competencies and exploring new ones.The author also finds that the effects of these orientations on competence exploitation and exploration are differ-entially moderated by interfunctional coordination and perceived market opportunity.Regarding outcomes, compe-tence exploitation and exploration have opposing relationships with incremental and radical innovation perfor-mance.However, the relationship between competence exploration and radical innovation performance is positively moderated by interfunctional coordination.Overall, the results of this study suggest that market orienta-tion can prevent a firm from becoming operationally efficient but strategically inefficient by simultaneously engen-dering competence exploitation and exploration, which are differentially related to incremental and radical product innovation outcomes.

Kwaku Atuahene-Gima is Professor of Marketing and Innovation Manage-ment, China Europe International Business School (CEIBS) in Shanghai,and Professor of Innovation Management and Director of the Center for Innovation Management and Organizational Change, City University of Hong Kong (e-mail:kwaku@https://www.sodocs.net/doc/6418334954.html,).The author thanks the three anonymous JM reviewers for their constructive feedback.Previous ver-sions of this article also benefited from comments and suggestions by Namwoon Kim, Stan Slater, Ian Wilkinson, and Rajan Varadarajan.The article also benefited from presentations at the Center for Innovation Man-agement and Organizational Change, Department of Management, City University of Hong Kong, and at the 2004 annual meeting of the Academy of Management Conference in New Orleans.The author thanks Liang Xiangfen, Guoqing Guo, and Victor Lee for their assistance in developing the instrument and collecting the data and Ziguang Chen for assisting in analysis of the data.The work described in this article was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (No.CityU 1121/02H).

1In line with other researchers (e.g., Danneels 2002; Day 1994;

Grant 1996; Henderson and Cockburn 1994), I use the word “com-petence” interchangeably with ”capability.”

I

n the development of new products, firms face an impor-tant strategic dilemma: Exploiting existing competencies may provide short-term success, but competence exploitation can become a hindrance to the firm’s long-term viability by stifling the exploration of new competencies and the development of radical innovations (Levinthal and March 1993; March 1991). Although many firms are adept at exploiting existing capabilities, they appear to falter in simultaneously developing new ones (Dougherty 1992;O’Reilly and Tushman 2004). Leonard-Barton (1992) aptly terms this phenomenon the “capability–rigidity paradox.”1Many business observers (e.g., Abell 1999; Williamson 1999) view the resolution of this paradox as perhaps the toughest managerial challenge in sustaining a firm’s com-petitive advantage. Although the literature is replete with warnings about the dire consequences for firms unable to resolve this paradox, to date, attempts to find a solution have been limited to anecdotal reports (e.g., Abell 1999)and a few case studies (e.g., Danneels 2002; Dougherty 1992; Leonard-Barton 1992).

This study attempts to resolve this paradox and, in doing so, addresses four research gaps in the extant market-ing literature. F irst, the essence of the capability–rigidity paradox is that competence exploitation tends to crowd out competence exploration (Leonard-Barton 1992). Thus, the key to the paradox may be organizational factors that can ensure simultaneous investments in both the exploitation of existing product innovation capabilities and the exploration of new ones. The firm’s market orientation appears to be such a factor because scholars (e.g., Day 1994, p. 41; Hur-ley and Hult 1998, p. 47) posit that market orientation is a precursor to capability building. Reports of how DuPont overcame its problems in developing radical innovations (BusinessWeek 2003b, p. 103), Woolworth’s renewed ability to respond to upstart competitors such as Wal-Mart (Williamson 1999, pp. 119–20), and Hewlett-Packard’s leadership position in the printer business (BusinessWeek 2003a) appear to concur with this proposition. In each case,the firm’s resource allocations to exploit existing capabili-ties and to develop new ones were affected substantially by its knowledge of current and future customers and competitors.

Second, despite market orientation’s potential to unlock one of the most intriguing managerial dilemmas in product innovation, previous studies have examined its effect on the firm’s innovation performance with little attention to the possible mediation by product innovation competence exploitation and exploration (e.g., Atuahene-Gima 1995,1996; Baker and Sinkula 1999; Lukas and Ferrell 2000). In 61

Journal of Marketing

Vol.69 (October 2005),61–83

?2005,American Marketing Association

ISSN:0022-2429 (print),1547-7185 (electronic)

related research, Noble, Sinha, and Kumar (2002) find that exploitation mediates the link between competitor orienta-tion and firm performance, and Han, Kim, and Srivastava (1998) show that innovativeness mediates the link between customer orientation and performance but not between competitor orientation or interfunctional coordination and performance. However, these studies did not examine exploitation and exploration simultaneously. Noble, Sinha, and Kumar (2002, pp. 35–36) argue that high-performing firms not only gather market intelligence but also translate knowledge into learning and insightful strategic actions. Thus, they speculate that because exploration is a more active process involving programmatic discovery of new resources and technologies, it may play a more important role than exploitation in the transition of customer and com-petitor orientations to firm performance. With a focus on product innovation, in this study, I highlight the previously overlooked differential mediating roles of competence exploitation and exploration because findings could provide support for the central role that marketing theory ascribes to innovation capabilities in the link between market orienta-tion and innovation performance (Day 1994; Hurley and Hult 1998). For managers, support for a full or partial medi-ation will provide evidence of the differential power of the facets of market orientation on innovation competencies, thus ensuring better resource allocation decisions.

Third, resolving the capability–rigidity paradox also requires insights into why firms that have analogous cus-tomer and competitor knowledge exhibit differential capac-ities for competence exploitation and exploration. Grant (1996, p. 380) notes that the source of competitive advan-tage is how knowledge is coordinated and integrated among functional units rather than knowledge itself. This observa-tion implies the need to examine the moderating role of the firm’s coordination mechanisms in its use of customer and competitor knowledge. Although interfunctional coordina-tion is a key knowledge integration mechanism (Gatignon and Xuereb 1997), few studies examine how it facilitates the effects of customer and competitor orientations on the firm’s product innovation competencies.

Relatedly, Day (1994) observes that managers’mental models provide a shared ideology that enables collective interpretation of market reality, and thus these models play a key role in managerial decisions about capability enhancement and renewal. This insight resonates with research showing that managers are more willing to invest resources in new strategic initiatives when the market situa-tion is interpreted as an opportunity rather than as a threat (Dutton and Jackson 1987; White, Varadarajan, and Dacin 2003). Despite its salience, no studies report on how man-agers’interpretations of the market situation influence their decisions on product innovation competencies. I contend that the differential ability of firms to transform analogous customer and competitor knowledge into product innova-tion competencies lies in their differential interfunctional coordination abilities and in the interpretation of the market situation as an opportunity rather than as a threat (i.e., per-ceived market opportunity).

Fourth, competence exploitation and exploration are believed to have direct but opposing and interactive rela-tionships with incremental and radical innovations (see Levinthal and March 1993; March 1991). Thus, a search for a solution to the capability–rigidity paradox necessarily requires the determination of whether by enhancing incre-mental innovations competence exploitation crowds out competence exploration and inhibits radical innovations (Leonard-Barton 1992). More important, the interactive effect of competence exploitation and exploration deter-mines the nature of their balance, which ensures the firm’s simultaneous pursuit of incremental and radical innova-tions. In addressing this research gap, I also note that researchers in both marketing (e.g., Day and Wensley 1988, p. 7; Gatignon and Xuereb 1997) and strategy (e.g., Grant 1996; Henderson and Cockburn 1994) observe that superior resources are converted into positional advantages through the firm’s knowledge integration processes. Thus, I suggest that interfunctional coordination not only transforms cus-tomer and competitor orientations into product innovation capabilities but also plays the dual role of integrating inno-vation capabilities to facilitate incremental and radical inno-vations. Figure 1presents the conceptual model I tested to address the previously identified research gaps.

Theory Development Successful product innovation demands that a firm must exploit its existing competencies while trying to avoid their dysfunctional rigidity effects by renewing and replacing them with entirely new ones (Leonard-Barton 1992). A competence or capability refers to the knowledge, skills, and related routines that constitute a firm’s ability to create and deliver superior customer value (Day 1994, p. 38). Thus, it reflects behavior processes that engender proce-dural knowledge or skill (i.e., knowing how to do some-thing) (Kogut and Zander 1992). This definition reflects the notion that competencies are developed through path dependent learning processes (Henderson and Cockburn 1994). In this study, competence exploitation refers to the tendency of a firm to invest resources to refine and extend its existing product innovation knowledge, skills, and pro-cesses. Its aims are greater efficiency and reliability of existing innovation activities. In contrast, competence exploration refers to the tendency of a firm to invest resources to acquire entirely new knowledge, skills, and processes. Its objective is to attain flexibility and novelty in product innovation through increased variation and experi-mentation. This distinction draws on March’s (1991, p. 85) view of exploitation as “the refinement and extension of existing competencies, technologies, and paradigms” and exploration as “experimentation with new alternatives that have returns that are uncertain, distant, and often negative.”Exploitation and exploration reflect an organizational atti-tude that manifests in investment decisions (Chandy and Tellis 1998, p. 477). Because the benefits of exploration are distant and uncertain, managers tend to put more resources into exploitation than into exploration (March 1991). Thus, the key to the capability–rigidity paradox may be factors that can prevent exploitation from crowding out exploration so that the firm can develop incremental and radical innova-tions simultaneously. The resource-based view (RBV) of

62/ Journal of Marketing,October 2005

Customer Orientation Competitor Orientation Perceived market

opportunity

Competence

exploitation

Incremental

innovation

performance

Radical

innovation

performance

Competence

exploration

Interfunctional

coordination

Control Variables

?Firm size

?Organizational slack

?Behavior control

?Output control

?Product development alliance

?Environmental turbulence

?Market launch capability

Denotes relationships supported in this study

Resolving the Capability–Rigidity Paradox / 63

that a firm’s internal capabilities are a function of its inter-actions with the market, the opportunities available to it, and the limitations of its current capabilities (Schroeder, Bates, and Junttila 2002, p. 106). For this reason, Cockburn, Henderson, and Stern (2000) observe that managers are sensitive to environmental cues such that the origins of the firm’s competitive advantage may lie in their ability to invest in appropriate internal competencies in response to those cues. Barney and Zajac (1994, p. 6) echo this view, noting that “as firms learn how to overcome specific com-petitive challenges, they develop potentially valuable resources and capabilities.” Levinthal and Myatt (1994, p.

46) also explain that how a firm’s capabilities evolve is inti-mately linked with its knowledge about how the competi-tive markets it serves evolve.

Marketing theory coincides with these tenets of the RBV. For example, Day’s (1994, p. 41) thesis on capabili-ties of market-driven firms posits that the superior market-sensing capabilities of firms “inform and guide both span-ning and inside-out capabilities,” such as product development capabilities. Several other studies note that market orientation plays a role in building firm capabilities for innovation (Atuahene-Gima and Ko 2001; Hurley and Hult 1998; Slater and Narver 1995; Sorescu, Chandy, and Prabhu 2003) and for dealing with economic crisis (Grewal and Tansuhaj 2001). Some scholars suggest that a focus on current market conditions could lead a firm into a “compe-tency trap” by diverting attention away from emerging cus-tomers and competitors (Christensen and Bower 1996). However, Barnett, Greve, and Park (1994, p. 12) argue that an awareness of changing market conditions “can cause current practices in the organization to be considered inade-quate. Hence, a firm that faces competition is more likely to refine current routines or to make innovations” (emphasis added). In particular, market-oriented firms not only respond to current market conditions but also anticipate future market conditions (Chandy and Tellis 1998; Day 1994; Kohli and Jaworski 1990; Slater and Narver 1995). With deeper knowledge of the current and future customers and competitors, managers become dissatisfied with the inadequacies of current capabilities, which results in invest-ments in new capabilities (Huff, Huff, and Thomas 1992) and insightful strategic change (Noble, Sinha, and Kumar 2002, p. 35). In brief, both the RBV and marketing theory indicate that a firm cannot exploit its existing innovation capabilities or develop new ones without knowledge of market conditions. Thus:

H1: Customer orientation is positively related to (a) compe-tence exploitation and (b) competence exploration.

H2: Competitor orientation is positively related to (a) compe-tence exploitation and (b) competence exploration.

The moderating rol e of interfunctional coordination. This construct refers to the degree to which the functional units in the firm interact, communicate, and coordinate with one another to collect and use market information (Jaworski and Kohli 1993; Narver and Slater 1990). Knowledge has attributes (e.g., complexity, tacitness) that make it difficult to create and transfer it within the firm (Galunic and Rodan 1998; Kogut and Zander 1992; Szulanski 1996). Thus, Grant (1996) and other researchers (e.g., Zahra, Ireland, and Hitt 2000; Zahra and Nielson 2002) note that the conversion of knowledge into value-creating processes depends on the firm’s knowledge integration mechanisms. Interfunctional coordination enables firms to synthesize, integrate, and apply current and newly acquired external knowledge (Hen-derson and Cockburn 1994; Kogut and Zander 1992). Mar-keting scholars acknowledge the internal stickiness of mar-ket knowledge and highlight the integrative role of interfunctional coordination (Day 1994, p. 44; Olson, Walker, and Ruekert 1995). Building on this literature, I suggest that interfunctional coordination moderates the effects of customer and competitor orientations on product innovation competencies for two reasons. First, it results in lateral communication that deepens knowledge flows across functional boundaries. By enhancing efficient knowledge exchange, it ensures that the firm generates new and broad-ened insights from market knowledge through constant reinterpretation of each functional perspective (Grant 1996; Kohli and Jaworski 1990). Second, interfunctional coordi-nation builds trust among different functional units, creating conditions for harnessing the diverse functional perspec-tives in the use of market information (Jaworski and Kohli 1993; Narver and Slater 1990). This permits a critical, unbi-ased assessment of the firm’s product innovation competen-cies and enables the cross-fertilization of ideas that ensure better decisions about refining existing competencies and developing new ones (Zahra, Ireland, and Hitt 2000).

H3: The positive effect of customer orientation on (a) compe-tence exploitation and (b) competence exploration is

stronger when interfunctional coordination is high than

when it is low.

H4: The positive effect of competitor orientation on (a) com-petence exploitation and (b) competence exploration is

stronger when interfunctional coordination is high than

when it is low.

The moderating rol e of perceived market opportunity. This construct refers to the tendency of managers to inter-pret a market situation as having positive rather than nega-tive implications for the firm, as representing a potential gain rather than loss, and as being controllable rather than uncontrollable. Opportunities and threats are the mental schemata that commonly underlie managers’interpretations of the market environment. Dutton and Jackson (1987, p. 80, emphases in original) describe a threat as a “negative situation in which loss is likely and over which one has rel-atively little control,” and an opportunity as a “positive situ-ation in which gain is likely and over which one has a fair amount of control.” Because a market situation typically involves both threats and opportunities, it is often defined by the three continua: positive–negative, gain–loss, and controllable–uncontrollable (Thomas, Clark, and Gioia 1993); these are reflected in the preceding definition of per-ceived market opportunity.

Mental models shape managerial interpretations of a market situation, thereby significantly influencing how a firm’s market orientation affects the development and use of its capabilities (Day 1994, p. 43). Managers who perceive

64/ Journal of Marketing,October 2005

threats rather than opportunities in the market tend to become risk averse and respond to market events by focus-ing on current domains in which they perceive greater con-trol in order to improve efficiency and reliability of opera-tions (Thomas, Clark, and Gioia 1993). In contrast, managers who perceive market opportunities engage in actions that involve greater risk and resource commitments (Dutton and Jackson 1987). It follows that perceived market opportunity is more likely to enhance competence explo-ration than competence exploitation. In addition, perceived market opportunity is more likely to amplify the positive effect of customer and competitor orientations on compe-tence exploration than on competence exploitation. The logic is that such a mental model imbues managers with greater boldness and proactiveness, thus encouraging a more critical assessment of the efficacy of the firm’s current competencies. Interpretation of a market situation as an opportunity also helps engender greater support in the firm for initiatives to overcome its competence deficiencies to take advantage of the opportunity discovered (White, Varadarajan, and Dacin 2003).

H5: The positive effect of customer orientation (a) on compe-tence exploitation is weaker when the perceived market

opportunity is high than when it is low and (b) on compe-

tence exploration is stronger when the perceived market

opportunity is high than when it is low.

H6: The positive effect of competitor orientation (a) on com-petence exploitation is weaker when the perceived market

opportunity is high than when it is low and (b) on compe-

tence exploration is stronger when the perceived market

opportunity is high than when it is low.

Effects of Competence Exploitation and Exploration on Innovation Performance Resolving the capability–rigidity paradox also requires an assessment of the effects of the firm’s product innovation competencies on its performance in incremental and radical innovations (Dougherty 1992; Leonard-Barton 1992). Per-formance refers to the number of new product innovations introduced by the firm, percentage of sales of new product innovations, and the relative frequency of introducing inno-vations compared with competitors. Incremental innova-tions are product improvements and line extensions that are usually aimed at satisfying the needs of existing customers. They involve small changes in technology and little devia-tion from the current product-market experiences of the firm. In contrast, radical innovations involve fundamental changes in technology for the firm, typically address the needs of emerging customers, are new to the firm and/or industry, and offer substantial new benefits to customers (Chandy and Tellis 1998). Exploiting existing competencies increases efficiency and productivity through the search for and use of solutions to customer problems in the neighbor-hood of the firm’s current experience (March 1991). Thus, competence exploitation increases incremental innovations and may hinder radical innovations because it focuses atten-tion on variety reduction and productivity improvements in existing products (Christensen and Bower 1996; Danneels 2002). Competence exploration involves experimentation that focuses on emerging markets and technologies for ideas to produce radical rather than incremental innovations that offer entirely new value for customers. Leonard-Barton (1992) finds that current competencies lead to new product projects that align with those competencies and hinder those lacking such alignment.

H7: Competence exploitation is (a) positively related to incre-mental innovation performance and (b) negatively related

to radical innovation performance.

H8: Competence exploration is (a) negatively related to incre-mental innovation performance and (b) positively related

to radical innovation performance.

March (1991) argues for a balance between exploitation and exploration tendencies, cautioning that a firm that is too oriented toward exploitation is likely to suffer because of a lack of novel ideas. Similarly, a firm that is too oriented toward exploration suffers the costs of experimentation without gaining many of its benefits because it exhibits too many new and risky ideas and little refinement of its exist-ing competencies. This notion of balance reflects the RBV tenet that competitive advantage is a function of the unique bundling of heterogeneous resources and capabilities that increases the complexity and ambiguity of organizational actions (Amit and Schoemaker 1993; Barney 1991). F or example, according to Reed and DeF illippi (1990, p. 93, emphasis added), “ambiguity may be derived from the com-plexity of skills and/or resource interactions within compe-tencies and from interaction between competencies.” From this perspective, the interaction between competence exploitation and exploration reflects a complex capability whose value exists only in their relationship (Colbert 2004). Although each of competence exploitation and exploration may affect a firm’s innovation performance, their interrela-tionship provides an additional source of competitive advantage beyond those provided by each one individually (see Colbert 2004, p. 349). This notion of balance is often interpreted as implying that firms need to combine high exploitation with high exploration to achieve superior per-formance. However, this overlooks March’s (1991) caution that both exploitation and exploration have inherent limita-tions. Indeed, exploitation and exploration thrive under dif-ferent organizational conditions, which makes their combi-nation difficult (O’Reilly and Tushman 2004).

Thus, Nerkar (2003) argues that the notion of balance could also imply that a high (low) exploitation needs to be coupled with a low (high) exploration to enhance firm per-formance. Too much exploration could be costly because the firm may move from one new idea to the next without exploiting prior learning and experience (Levinthal and March 1993; March 1991). In addition, novel products may be underdeveloped, and their fit with customer needs may be unknown. A dose of exploitation tempers these potential excesses of exploration by helping the firm evaluate and assimilate new ideas more effectively (Danneels 2002). Similarly, too much competence exploitation involves costs because the firm lacks the novel skills and knowledge to generate new insights in product innovation (March 1991). Overcoming these costs requires a dose of exploration (March 1991, p. 71). Given the different notions of balance, I posit the following nondirectional hypotheses:

Resolving the Capability–Rigidity Paradox / 65

H9: The interaction between competence exploration and exploitation is related to (a) incremental innovation per-

formance and (b) radical innovation performance.

The moderating rol e of interfunctional coordination. The RBV suggests that it is the heterogeneity not only of competence endowments but also of competence deploy-ment abilities that accounts for differences in competitive advantage among firms (Barney 1991). The competitive advantage that a firm’s capabilities confer depends largely on the efficiency with which they are integrated (Day and Wensley 1988; Grant 1996). For example, Henderson and Cockburn (1994, p. 65) suggest that a firm’s competitive advantage is enhanced when its “component competencies”

(i.e., knowledge and skills) are combined with “architec-tural competencies” (i.e., the ability to coordinate an exten-sive flow of information within the firm to use component competencies). Without such coordination, conflicts and mistrust among functions stand in the way of a firm’s effec-tive use of its capabilities (Zahra and Nielson 2002). Inter-functional coordination reduces cross-functional conflict and promotes commitment and the efficient combination of different functional insights that are necessary for turning a firm’s competencies into superior customer value (Kohli and Jaworski 1990; Olson, Walker, and Ruekert 1995). Indeed, Gatignon and Xuereb (1997) find that interfunc-tional coordination enables the firm to use its resources to achieve desired innovation characteristics and outcomes. Thus, I posit that interfunctional coordination strengthens the positive and weakens the negative aspects of compe-tence exploitation and exploration on incremental and radi-cal innovation performance. Formally,

H10: The positive effect of competence exploitation on incre-mental innovation performance is stronger when inter-

functional coordination is high than when it is low.

H11: The negative effect of competence exploitation on radical innovation performance is weaker when interfunctional

coordination is high than when it is low.

H12: The negative effect of competence exploration on incre-mental innovation performance is weaker when inter-

functional coordination is high than when it is low.

H13: The positive effect of competence exploration on radical innovation performance is stronger when interfunctional

coordination is high than when it is low.

Other Potential Antecedent Factors

In addition to the previously described factors, product innovation competencies and outcomes may be affected by several other firm-specific and environmental factors. F or example, firms with domain defensive strategies tend to defend their existing markets by preserving traditional product lines, suggesting a tendency for competence exploitation and incremental innovation. In contrast, firms that pursue domain offensive strategies have high first-mover predispositions and thus a penchant for new compe-tencies to develop radical innovations (Abell 1993, 1999). The firm’s willingness to cannibalize (i.e., its propensity to reduce the actual or potential value of its investments in current products), its incumbency, and the degree of domi-nance of the firm in the industry all may influence the firm’s tendencies for competence exploitation and explo-ration and for incremental and radical innovations (Chandy, Prabhu, and Antia 2003; Chandy and Tellis 1998, 2000).

The firm’s new product control systems are particularly salient for innovation competencies and their outcomes (e.g., Cardinal 2001; Olson, Walker, and Ruekert 1995) because they affect managers’assessment of performance risk (Atuahene-Gima and Li 2002; Hitt et al. 1996). Specif-ically, output control (the measurement and reward of pro-ject teams based on results achieved) encourages low-risk activities, such as competence exploitation and incremental innovations. This is because project members bear a dispro-portionate share of the project’s performance risk and thus develop risk-averse behaviors. In contrast, behavior control (the measurement and reward for the achievement of process and strategic objectives rather than their outcomes) engenders exploration and radical innovations by encourag-ing risk-seeking behaviors (Hitt et al. 1996). Factors such as firm size and slack reflect greater resources and market power to exploit existing competencies, build new ones, and develop innovations (Chandy and Tellis 1998; Gatignon and Xuereb 1997). In addition, product development alliances also affect a firm’s innovation capabilities and success by exposing it to external knowledge and opportunities (Li and Atuahene-Gima 2002; Rindfleisch and Moorman 2001).

Environmental turbulence reflects rapid market and technological changes that managers perceive as hostile and stressful conditions for their firm. Turbulence often renders current firm competencies obsolete (Tushman and Nelson 1990), leading managers to upgrade existing capabilities and develop entirely new ones (Day 1994). Finally, market launch capability, which refers to the firm’s ability to design and implement new product launch activities effectively, should affect innovation performance (Day and Wensley 1998). Although this review shows several potential control factors in testing the proposed model, F igure 1 shows the variables for which data were available.

Research Methods

Sample and Data Collection

China is an ideal context for this study because the com-plexity and dynamism of this transitional environment means that firms must confront the challenges of new (often dysfunctional) competition and also collapsing capabilities (Li and Atuahene-Gima 2001, 2002). Thus, scholars suggest that success in China’s market requires both prospector (exploration) and defender (exploitation) orientations (Luo and Park 2001, p. 145). As a testimony to the importance of market orientation in competence exploitation and explo-ration, Luo (2002, p. 60) reports that Kodak’s success in China is due to the adaptation of its existing competencies and the development of new ones to respond to market changes.

The instrument was prepared in English and then trans-lated into Chinese. It was checked for accuracy following the conventional back-translation process. It was tested with 25 managers who had at least three years’business experi-ence in China to ensure the face validity and appropriate-

66/ Journal of Marketing,October 2005

Resolving the Capability–Rigidity Paradox / 67

2The interviewer returned each completed questionnaire along

with the business card of the respondent. This procedure facilitates (1) quality control by allowing for independent verification through telephone calls to ascertain that the informants were inter-viewed and that they completed the questionnaires and (2) the delivery of the summary of the research results to informants.

ness of the measures in the Chinese context. The sample was 500 firms located in Guangdong province; they were randomly selected from a mailing list of 1650 electronics firms provided by a local consulting firm. An interviewer scheduled appointments with two key informants in each firm, presented the questionnaire to them, and collected the questionnaire after completion. In China, this procedure is critical for ensuring quality control and reliability of the data (Li and Atuahene-Gima 2001, 2002).2I received 227usable questionnaires for a participation rate of 45.4%.Given the on-site data collection, a test of response bias by comparing early and late respondents was not appropriate. I compared a sample of participating and nonparticipating firms. The analysis of variance test was not significant for firm age (F = 1.05), number of employees (F = .98), and sales (F = 1.32), suggesting no response bias.

To assess informants’quality, they indicated on a seven-point scale their degree of knowledge (1 = “very limited knowledge,” 7 = “very substantial knowledge”) about the issues under study. The means for the first and second infor-mants were 6.22 and 6.31, respectively. The first informant (marketing managers 75%, chief executive officers [CEOs]20%, and research and development [R&D] managers 5%;mean industry experience = 12.50 years; mean firm experi-ence = 9.45 years) gave data on customer and competitor orientations, incremental and radical innovations, environ-mental turbulence, market launch capability, and product development alliances. The second informant (marketing managers 25%, CEOs 60%, and R&D managers 15%;mean industry experience = 13.97 years; mean firm experi-ence = 10.69 years) provided data on competence exploita-tion and exploration, interfunctional coordination, per-ceived market opportunity, slack, firm size, output, and behavior controls. This procedure separates the informants for the measures for the main predictor and criterion vari-ables, thus eliminating common method bias (Slater and Atuahene-Gima 2004). I pooled the data because the analy-sis of variance test showed that the constructs did not differ significantly (p > .10) among different respondents.Measures and Validation

Table 1reports the measures and their sources. I ran two confirmatory factor analyses, grouping measures of theoret-ically related constructs to ensure acceptable parameter estimate-to-observation ratios. The fit indexes reported in Table 1 indicate that each model fits the data reasonably well. All the t-values for the estimated factor loadings for the theoretical constructs are significant, suggesting conver-gent and discriminant validity. I conducted a series of con-firmatory factor analyses to test whether a two-factor model of their measures would fit better than a one-factor model for every pair of constructs (Bagozzi, Yi, and Philips 1991).As further evidence of the discriminant validity of the mea-

68/ Journal of Marketing,October 2005

T A B L E 1C o n f i r m a t o r y F a c t o r A n a l y s i s o f M e a s u r e s

C o n s t r u c t a n d S o u r c e O p e r a t i o n a l M e a s u r e s o f C o n s t r u c t M o d e l 1

M o d e l F i t I n d e x e s :

χ2= 662.89,d .f .= 423;χ2/d .f .= 1.57;R M S E A = .04,G F I = .90,C F I = .93,a n d N N F I = .92S F L a t -V a l u e

1.W e r e g u l a r l y m e e t c u s t o m e r s t o l e a r n a b o u t t h e i r c u r r e n t a n d p o t e n t i a l n e e d s f o r n e w p r o d u c t s ..681

2.102.W e c o n s t a n t l y m o n i t o r a n d r e i n f o r c e o u r u n d e r s t a n d i n g o f t h e c u r r e n t a n d f u t u r e n e e d s o f c u s t o m e r s ..801

3.933.W e h a v e a t h o r o u g h k n o w l e d g e a b o u t e m e r g i n g c u s t o m e r s a n d t h e i r n e e d s ..8510.52

4.I n f o r m a t i o n a b o u t c u r r e n t a n d f u t u r e c u s t o m e r s i s i n t e g r a t e d i n o u r p l a n s a n d s t r a t e g i e s ..65

10.52

5.W e r e g u l a r l y u s e r e s e a r c h t e c h n i q u e s s u c h a s f o c u s g r o u p s , s u r v e y s , a n d o b s e r v a t i o n s t o g a t h e r c u s t o m e r i n f o r m a t i o n ..82

14.50

6.W e h a v e d e v e l o p e d e f f e c t i v e r e l a t i o n s h i p s w i t h c u s t o m e r s a n d s u p p l i e r s t o f u l l y u n d e r s t a n d n e w t e c h n o l o g i c a l d e v e l o p m e n t t h a t a f f e c t c u s t o m e r s ’n e e d s ..51

7.72

7.W e s y s t e m a t i c a l l y p r o c e s s a n d a n a l y z e c u s t o m e r i n f o r m a t i o n t o f u l l y u n d e r s t a n d t h e i r i m p l i c a t i o n s f o r o u r b u s i n e s s .

.76

12.94

1.W e r e g u l a r l y c o l l e c t a n d i n t e g r a t e i n f o r m a t i o n a b o u t t h e p r o d u c t s a n d s t r a t e g i e s o f o u r c o m p e t i t o r s ..558.88

2.W e s y s t e m a t i c a l l y c o l l e c t a n d a n a l y z e i n f o r m a t i o n a b o u t p o t e n t i a l c o m p e t i t o r a c t i v i t i e s ..619.13

3.M a n a g e r s i n t h i s f i r m r e g u l a r l y s h a r e i n f o r m a t i o n a b o u t c u r r e n t a n d f u t u r e c o m p e t i t o r s w i t h i n t h e c o m p a n y ..6911.51

4.O u r k n o w l e d g e o f c u r r e n t a n d p o t e n t i a l c o m p e t i t o r s ’s t r e n g t h s a n d w e a k n e s s e s i s v e r y t h o r o u g h .

.75

12.94

1.T h e a c t i v i t i e s o f f u n c t i o n a l u n i t s a r e t i g h t l y c o o r d i n a t e d t o e n s u r e b e t t e r u s e o f o u r m a r k e t k n o w l e d g e ..60

8.99

2.F u n c t i o n s s u c h a s R &D , m a r k e t i n g , a n d m a n u f a c t u r i n g a r e t i g h t l y i n t e g r a t e d i n c r o s s -f u n c t i o n a l t e a m s i n t h e p r o d u c t d e v e l o p m e n t p r o c e s s e s ..74

10.89

3.R &D a n d m a r k e t i n g a n d o t h e r f u n c t i o n s r e g u l a r l y s h a r e m a r k e t i n f o r m a t i o n a b o u t c u s t o m e r s , t e c h n o l o g i e s , a n d c o m p e t i t o r s ..72

10.78

4.T h e r e i s a h i g h l e v e l o f c o o p e r a t i o n a n d c o o r d i n a t i o n a m o n g f u n c t i o n a l u n i t s i n s e t t i n g t h e g o a l s a n d p r i o r i t i e s f o r t h e o r g a n i z a t i o n t o e n s u r e e f f e c t i v e r e s p o n s e t o m a r k e t c o n d i t i o n s ..64

9.97

5.T o p m a n a g e m e n t p r o m o t e s c o m m u n i c a t i o n a n d c o o p e r a t i o n a m o n g R &D , m a r k e t i n g , a n d m a n u f a c t u r i n g i n m a r k e t i n f o r m a t i o n a c q u i s i t i o n a n d u s e ..63

9.37

6.P e o p l e f r o m m a r k e t i n g , R &D , a n d o t h e r f u n c t i o n s p l a y i m p o r t a n t r o l e s i n m a j o r s t r a t e g i c m a r k e t d e c i s i o n s .f

1.% o f t o t a l s a l e s f r o m i n c r e m e n t a l p r o d u c t i n t r o d u c e d b y y o u r f i r m i n t h e l a s t t h r e e y e a r s (l e s s t h a n 5%, 5%–10%, 11%–15%, 16%–20%, >20%)..89

13.25

2.T h i s f i r m f r e q u e n t l y i n t r o d u c e d i n c r e m e n t a l n e w p r o d u c t s i n t o n e w m a r k e t s i n t h e l a s t t h r e e y e a r s (1 = “s t r o n g l y d i s a g r e e ,”5 = “s t r o n g l y a g r e e ”)..59

7.70

3.C o m p a r e d t o y o u r m a j o r c o m p e t i t o r , t h i s f i r m i n t r o d u c e d m o r e i n c r e m e n t a l n e w p r o d u c t s i n t h e l a s t t h r e e y e a r s (1 = “s t r o n g l y d i s a g r e e ,”5 = “s t r o n g l y a g r e e ”)..67

9.76

4.N u m b e r o f i n c r e m e n t a l p r o d u c t s i n t r o d u c e d b y t h e f i r m i n t h e l a s t t h r e e y e a r s (c o n v e r t e d i n t o f i v e -p o i n t s c a l e :1–10, 10–15, 16–30, 31–75, m o r e t h a n 75).f

1.% o f t o t a l s a l e s f r o m r a d i c a l p r o d u c t i n t r o d u c e d b y y o u r f i r m i n t h e l a s t t h r e e y e a r s (l e s s t h a n 5%, 5%–10%, 11%–15%, 16%–20%, >20%).81

13.83

2.N u m b e r o f r a d i c a l p r o d u c t s i n t r o d u c e d b y t h e f i r m i n t h e l a s t t h r e e y e a r s (c o n v e r t e d i n t o a f i v e -p o i n t s c a l e :0–3, 4–6, 7–9, 10–12, >12).77

10.01

3.C o m p a r e d t o y o u r m a j o r c o m p e t i t o r , t h i s f i r m i n t r o d u c e d m o r e r a d i c a l n e w p r o d u c t s i n t h e l a s t t h r e e y e a r s (1 = “s t r o n g l y d i s a g r e e ,”5 = “s t r o n g l y a g r e e ”)..78

11.56

4.T h i s f i r m f r e q u e n t l y i n t r o d u c e d r a d i c a l n e w p r o d u c t s i n t o m a r k e t s t o t a l l y n e w t o t h e f i r m i n t h e l a s t t h r e e y e a r s (1 = “s t r o n g l y d i s a g r e e ,”5 = “s t r o n g l y a g r e e ”).

.88

14.02

R a d i c a l i n n o v a t i o n p e r f o r m a n c e c (C h a n d y a n d T e l l i s 1998)

I n c r e m e n t a l i n n o v a t i o n p e r f o r m a n c e c (C h a n d y a n d T e l l i s 1998)

I n t e r f u n c t i o n a l c o o r d i n a t i o n b (N a r v e r a n d S l a t e r 1990;Z a h r a a n d N i e l s o n 2002)

C o m p e t i t o r o r i e n t a t i o n b (N a r v e r a n d S l a t e r 1990)

C u s t o m e r o r i e n t a t i o n b (N a r v e r a n d S l a t e r 1990)

Resolving the Capability–Rigidity Paradox / 69

d e v e l o p m e n t p r o c e s s )?.75

13.37

70/ Journal of Marketing,October 2005

2.Q u a l i t y o f d e c i s i o n s m a d e r a t h e r t h a n t h e r e s u l t s a c h i e v e d ..6810.03L i 2002)

Resolving the Capability–Rigidity Paradox / 71

T A B L E 2C o r r e l a t i o n M a t r i x a n d D e s c r i p t i v e S t a t i s t i c s o f M e a s u r e s

S t a n d a r d V a r i a b l e s

M e a n D e v i a t i o n 1

2345678910

1112131415

1.C u s t o m e r o r i e n t a t i o n 3.33.941

2.C o m p e t i t o r o r i e n t a t i o n

3.05.79.19**13.P e r c e i v e d m a r k e t o p p o r t u n i t y 2.561.09.13*.20**1

4.I n t e r f u n c t i o n a l c o o r d i n a t i o n 3.06.92.12.36**.33**1

5.C o m p e t e n c e e x p l o i t a t i o n 3.14.80.29**.24*.25**.14*1

6.C o m p e t e n c e e x p l o r a t i o n 3.46.80

.42**.22**

.29**.19**

.41**1

7.I n c r e m e n t a l i n n o v a t i o n p e r f o r m a n c e 3.41.72

.38**

.34**

.29**

.35**.35**

–.40**1

8.R a d i c a l i n n o v a t i o n p e r f o r m a n c e 2.86.90.17*.23**.22**.38**–.40**.38**.36**1

estimated moderated regression equations to test the hypotheses. I mean centered customer and competitor ori-entations, interfunctional coordination, and perceived mar-ket opportunity before creating the interaction terms (Aiken and West 1991). A Levine test for the threat of unequal vari-ances was not significant (p> .10) for any of the variables indicating the presence of homoskedasticity. On the basis of studentized residuals and Cook’s D tests, I deleted five out-lier cases. Visual inspection of the plots of the histogram and normal probability plots reaffirmed the multivariate normality of the data (Hair et al. 1998). The variance infla-tion factors in each regression model were all below two, indicating that multicollinearity was not a serious problem. An interview survey raises the potential that errors of pre-diction may not be independent of one another over the sequences of cases (Tabachnick and F idell 1989, p. 133). However, the Durbin–Waston statistic check for noninde-pendence of errors was not significant in the regression models.

Effect of Market Orientation on Competence Exploitation and Exploration

Table 3(Model 1) shows that the control variables explain 21% of the variance in competence exploitation. Adding the independent variables in Model 2 increased R2by 6% (?F = 3.72, p< .05). I added the interaction terms in Model 3, which resulted in a further increase in R2of 1% (?F = 1.10, not significant [n.s.]). Model 3 shows that customer orienta-tion is positively related to competence exploitation (b = .13, p< .01), in support of H1a. Competitor orientation is positively related to competence exploitation (b = .16, p< .05), in support of H2a. These relationships are not moder-ated by interfunctional coordination or by perceived market opportunity. Thus, H3a, H4a, H5a, and H6a are not supported. Perceived market opportunity is a predictor of competence exploitation rather than a moderator (b = .11, p< .05). Three control variables are related to competence exploita-tion: organizational slack, firm size, and environmental turbulence.

The data in Table 3 (Model 4) show that the control variables explain 23% of the variance in competence explo-ration. The independent variables increase R2by 11% (?F = 7.44, p< .001) (Model 5). The interaction variables con-tributed an additional 9% (?F = 6.56, p< .001) to explained variance (Model 6). The data in Model 6 show that cus-tomer orientation is positively related to competence explo-ration (b = .26, p< .001), in support of H1b. Competitor ori-entation has a significant, positive effect on competence exploration (b = .16, p< .001), in support of H2b. I discuss the significance of the differential strength (based on stan-dardized coefficients) of the effects of customer and com-petitor orientations on competence exploitation and explo-ration subsequently.

The product of customer orientation and interfunctional coordination is positively related to competence exploration (b = .10, p< .01), in support of H3b. To gain further insight into these relationships, using the unstandardized coeffi-cients and following procedures that Aiken and West (1991) outline, I plotted the interactions and conducted simple slope tests. The simple slope test involved splitting the moderator (interfunctional coordination) into a high group (two standard deviations greater than the mean) and a low group (two standard deviations less than the mean) and reestimating the relationship between customer orientation and competence exploration. The plot in Figure 2, Panel A, shows that when interfunctional coordination is high, the positive relationship between customer orientation and competence exploration is stronger (simple slope: b = .28, t= 3.98, p< .001) than when it is low (simple slope:b = .21, t = 3.67, p< .001).

The interaction term for competitor orientation and interfunctional coordination is positively related to compe-tence exploration (b = .12, p< .05), in support of H4b. Fig-ure 2, Panel B, shows that when interfunctional coordina-tion is greater, there is a positive link between competitor orientation and competence exploration (simple slope: b = .34, t = 3.36, p< .001). There appears to be no relationship between the two constructs when interfunctional coordina-tion is low (simple slope: b = .09, t = 1.10, n.s.). Interfunc-tional coordination is a pure moderator because it is unre-lated to competence exploration.

The interaction between customer orientation and per-ceived market opportunity is positively related to compe-tence exploration (b = .12, p< .001), in support of H5b. The plots in F igure 3, Panel A, show that the positive link between customer orientation and competence exploration is stronger when perceived market opportunity is high (sim-ple slope: b = .42, t = 5.73, p< .001) than when it is low (simple slope: b = .14, t = 2.29, p< .05). Similarly, the product of competitor orientation and perceived market opportunity is positively related to competence exploration (b = .11, p< .01), in support of H6b. F igure 3, Panel B, shows a positive relationship between competitor orienta-tion and competence exploration when perceived market opportunity is high (simple slope: b = .38, t = 4.06, p< .001) but no relationship when it is low (simple slope: b = .01, t = .13, n.s.). Perceived market opportunity is a quasi moderator because it also has a positive relationship with competence exploration (b = .10, p< .01). Three control variables are related to competence exploration: organiza-tional slack, behavior, and output controls.

Effects of Competence Exploitation and Exploration on Innovation Performance

Table 4presents the results for incremental and radical innovation performance. The addition of the independent variables to the control variables in Model 2 increased R2 by 7% (?F = 7.20, p< .001) over the explained variance in incremental innovation performance in Model 1. The inter-action variables increased R2by 1% (?F = 1.36, n.s.) in Model 3. Competence exploitation is positively related to incremental innovation performance (b = .16, p< .01), in support of H7a. In contrast, competence exploration is nega-tively related to incremental innovation performance (b =–.14, p< .01), in support of H8a. Interfunctional coordina-tion does not moderate these relationships but rather is a predictor of incremental innovation performance (b = .15, p< .001). Thus, H9a, H10and H12are not supported, because none of the interaction terms is significant. Output control, a control variable, was positively related to incre-

72/ Journal of Marketing,October 2005

mental innovation performance. I replicated the analyses using the measure of incremental innovation performance obtained from the second survey. The results remain unchanged.

Model 5 in Table 4 shows that the independent and moderator variables increase explained variance in radical innovation performance by 12% (?F = 11.82, p< .001) over the explained variance in Model 4. The interaction terms contribute an additional 8% to explained variance (?F = 7.05, p< .001) (Model 6). Competence exploitation is neg-atively related to radical innovation performance (b = –.14, p< .05), in support of H7b and H8b,whereas the effect of competence exploration is positive (b = .14, p< .05). The interaction between competence exploitation and explo-ration is negatively related to radical innovation perfor-mance (b = –.17, p< .001), in support of H9b. The plot in F igure 4, Panel A, shows no relationship between compe-tence exploration and radical innovation performance when competence exploitation is high (simple slope:b = –.04, t =–.43, n.s.), but it shows a positive effect when competence

Resolving the Capability–Rigidity Paradox / 73

74/ Journal of Marketing,October 2005

–1C o m p e t e n c e E x p l o r a t i o

n

Customer Orientation –2

–1–1012

C o m p e t e n c e E x p l o r a t i o n

Competitor Orientation FIGURE 2

Interaction of Interfunctional Coordination and Customer and Competitor Orientations on Competence

Exploration

C o m p e t e n c e E x p l o r a t i o n

Customer Orientation

C o m p e t e n c e E x p l o r a t i o n

Competitor Orientation 01

012

–1

–2–101201

2

–1

–2–1FIGURE 3

Interaction of Perceived Market Opportunity and Customer and Competitor Orientations on Competence

Exploration

exploitation is low (simple slope: b = .26, t = 3.63, p <.001). The plot in Figure 4, Panel B, shows the reverse rela-tionship; that is, there is a nonsignificant relationship between competence exploitation and radical innovation performance when competence exploration is low (simple slope: b = .13, t = 1.45, n.s.) but a significant, negative effect when it is high (simple slope: b = –.28, t = –3.62, p <.001).

The interaction term for interfunctional coordination and competence exploitation is positively related to radical innovation performance (b = .12, p < .05), in support of H 11. However, F igure 5, Panel A, suggests that at higher levels of interfunctional coordination, competence exploita-tion has no relationship with radical innovation perfor-mance (simple slope: b = .09, t = 1.24, n.s.), but at lower levels, it has a negative effect (simple slope:b = –.19, t =

TABLE 4

Regressions Analysis of the Effects of Product Innovation Competence Exploitation and Exploration on

Innovation Performance

Incremental Innovation Radical Innovation

Performance Performance Variables Hypotheses Model 1Model 2Model 3Model 4Model 5Model 6 Control Variables

Constant 1.82 1.09.87 1.50.31.25

(4.61)***(2.66)***(2.01)*(2.87)***(.59)(.47) Organizational slack .08.01.08.23.11.17

(1.77)?(.23)(.16)(3.64)***(1.73)?(2.77)** Firm size (log of number –.03–.04–.03.03.02.05 of employees)(–.52)(–.67)(–.55)(.43)(.29)(.76) Environmental turbulence.13.06.07.15.06.08

(1.64)?(.83)(.95)(1.62)?(.72)(1.00) Behavior control–.09–.11–.12.02.02.02

(–1.03)(–1.17)(–1.24)(1.66)?(1.68)?(1.42) Output control.13.11.17–.13–.15–.15

(1.77)?(1.62)?(1.77)?(–1.32)(–1.67)?(–1.78)?Product development –.01–.02–.00–.17–.08–.06 alliance(–.17)(–.23)(–.06)(–2.21)**(–1.15)(–.95) Market launch capability .02.01.00.17.14.17

(.66)(.21)(.02)(3.12)***(2.70)**(3.48)** Customer orientation.19.14.14.04.04.03

(3.78)***(2.68)**(2.58)**(.67)(–.71)(.48) Competitor orientation.19.12.12.13.01.02

(3.14)**(1.95)*(2.08)*(1.65)?(.15)(.29) Perceived market –.08–.03–.02–.05–.06–.09 opportunity(–1.47)(–.57)(–.05)(–.85)(–1.03)(–1.59) Independent Variables

Competence exploitation H7a.11.16–.19–.14

(1.62)*(2.10)**(–2.19)**(1.60)* Competence exploration H8a–.15–.14.25.14

(–2.31)**(–2.08)**(2.99)***(1.67)* Interfunctional .16.15.24.25 coordination(2.86)***(2.84)***(3.52)***(3.87)*** Relevant Interaction Effects

Competence exploitation ×H9a.06–.17 competence exploration(1.20)(–2.94)*** Competence exploitation ×H10.06.12 interfunctional coordination (1.11)(1.83)* Competence exploration ×H12.06.20 interfunctional coordination(.91)(2.24)*** R2.27.34.35.21.33.41 Adjusted R2.23.30.30.17.28.36

F value7.25***7.76*** 6.60*** 5.16***7.34*** 6.60***?R2.07.01.12.08 Partial F value7.20*** 1.3611.82***7.05*** Degrees of freedom10/19913/19616/19310/20013/19716/194

?p< .10.

*p< .05.

**p< .01.

***p< .001.

Notes:I report unstandardized regression coefficients (t-values are in parentheses;I used a two-tailed test for control variables and a one-tailed test for all hypotheses except H9a and H9b).

–2.90, p< .01). F inally, the positive link between compe-tence exploration and radical innovation performance is stronger when interfunctional coordination is high (b = .20, p< .01), in support of H13. This result is confirmed by the plots in F igure 5, Panel B, which show that competence exploration is related to radical innovation performance when interfunctional coordination is high (simple slope: b = .42, t = 5.32, p< .001), but it has no effect when it is low (simple slope: b = –.02, t = –.18, n.s.). Interfunctional coor-dination serves as a quasi moderator for this outcome

Resolving the Capability–Rigidity Paradox / 75

76/ Journal of Marketing,October 2005

1

2

R a d i c a l I n n o v a t i o n P e r f o r m a n c

Competence Exploitation

–1

–2

0120

1

2

R a d i c a l I n n o v a

t i o n P e r f o r m a n c e

Competence Exploration

–2–1012–2–1

FIGURE 4

Interaction of Competence Exploitation and Competence Exploration on Radical Innovation Performance

0120

1

2

R a d i c a l I n n o v a t i o n P e r f o r m a n c e

Competence Exploration

–2–10120

1

2

R a d i c a l I n n o v a t i o n P e r f o r m a n c e

Competence Exploitation

–1

–2–1FIGURE 5

Interaction of Interfunctional Coordination and Competence Exploitation and Competence Exploration on

Radical Innovation Performance

because it is also positively related to radical innovation performance (b = .25, p < .001). Market launch capability,organizational slack, and output control predicted radical innovation performance. A replication analysis that substi-tuted the measures for radical innovation performance obtained from the second survey with those from the pri-mary survey confirmed the original findings.Evaluating the Direct Effects of Market Orientation on Innovation Performance

My model (see Figure 1) posits that competence exploita-tion and exploration fully mediate the effects of customer and competitor orientations on innovation performance. I used Baron and Kenny’s (1986) tests of mediation to verify

this claim. With the entry of competence exploitation and exploration (see Table 4, Model 3), the effects of customer orientation (b = .19, p< .001) and competitor orientation (b= .19, p< .01) on incremental innovation performance are reduced (but remain significant): customer orientation (b = .14, p< .01) and competitor orientation (b = .12, p< .05). This suggests partial mediation. In contrast, Table 4 (Model 5) shows that with the entry of competence exploitation and exploration, the significant effect of com-petitor orientation on radical innovation performance (b = .13, p< .10) in Model 4 becomes nonsignificant (b = .01, n.s.). This suggests full mediation. Customer orientation has no direct effect on radical innovation performance, suggest-ing that its effect occurs entirely through its positive influ-ence on competence exploration previously reported in Table 3. Thus, the mediating proposition is partially sup-ported. Table 5summarizes the hypotheses and empirical conclusions of the study.

Discussion and Implications Marketing scholars have paid little attention to resolving the capability–rigidity paradox despite its immense hindrance to the effective management of product innovation, an activity that lies at the heart of marketing’s role in enhanc-ing the firm’s competitive advantage (Day 1994). In this study, I examined the role of market orientation in resolving this paradox. The results advance the marketing literature in several ways. First, the results show that both customer and competitor orientations guide managerial decisions to allo-cate resources to exploit existing product innovation com-petencies and to develop new ones. These findings support propositions in the RBV and marketing theory that because market-oriented firms are sensitive to environmental cues, they are in a better position than their non-market-oriented counterparts to uncover and overcome potential internal competence deficiencies (Barney and Zajac 1994; Day

TABLE 5

Summary of Hypotheses and Empirical Conclusions

Expected Empirical Hypotheses Sign Conclusions H1:Customer orientation is positively related to

https://www.sodocs.net/doc/6418334954.html,petence exploitation.+Supported

https://www.sodocs.net/doc/6418334954.html,petence exploration.+Supported H2:Competitor orientation is positively related to

https://www.sodocs.net/doc/6418334954.html,petence exploitation.+Supported

https://www.sodocs.net/doc/6418334954.html,petence exploration.+Supported H3:The positive effect of customer orientation on competence:

a.Exploitation is stronger when interfunctional coordination is high than when it is low.+Not supported

b.Exploration is stronger when interfunctional coordination is high than when it is low.+Supported H4:The effect of competitor orientation on competence:

a.Exploitation is stronger when interfunctional coordination is high than when it is low.+Not supported

b.Exploration is stronger when interfunctional coordination is high than when it is low.+Supported H5:The positive effect of customer orientation on competence:

a.Exploitation is weaker when the perceived market opportunity is high than when it is low.–Not supported

b.Exploration is stronger when the perceived market opportunity is high than when it is low.+Supported H6:The positive effect of competitor orientation on competence:

a.Exploitation is weaker when the perceived market opportunity is high than when it is low.–Not Supported

b.Exploration is stronger when the market opportunity orientation is high than when it is low.+Supported H7:Competence exploitation is

a.Positively related to incremental innovation performance.+Supported

b.Negatively related to radical innovation performance.–Supported H8:Competence exploration is

a.Negatively related to incremental innovation performance.–Supported

b.Positively related to radical innovation performance.+Supported H9a:The interaction of competence exploration and exploitation is related to incremental

innovation performance.N.A.Not supported H9b:The interaction of competence exploration and exploitation is related to radical innovation

performance.N.A.Supported H10:The positive effect of competence exploitation on incremental innovation

performance is stronger when interfunctional coordination is high than when it is low.+Not supported H11:The negative effect of competence exploitation on radical innovation performance

is weaker when interfunctional coordination is high than when it is low.+Supported H12:The negative effect of competence exploration on incremental innovation performance is

weaker when interfunctional coordination is high than when it is low.+Not supported H13:The positive effect of competence exploration on radical innovation performance is

stronger when interfunctional coordination is high than when it is low.+Supported Notes:N.A.= not applicable.

Resolving the Capability–Rigidity Paradox / 77

1994; Hurley and Hult 1998; Schroeder, Bates, and Junttila 2002). Instead of being plagued by the capability–rigidity paradox, it appears that market-oriented firms are able to make judicious judgments in resources allocations for prod-uct innovation competencies based on market information. Yet expenditures for acquiring and using market knowledge are typically considered operating costs. This study pro-vides justification for the view that such expenditures must be considered investments rather than operational costs of the firm (Srivastava, Shervani, and Fahey 1998).

Second, I find that the effects of customer and competi-tor orientations on competence exploration (unlike compe-tence exploitation) are positively moderated by interfunc-tional coordination. This implies that because competence exploration is a highly risky and uncertain endeavor, the use of market information to inform such a process requires a high degree of interfunctional coordination. In contrast, because of its greater experience with existing competen-cies, a firm’s use of market information to guide resource allocation for competence exploitation does not necessarily require high interfunctional coordination efforts. A related finding is that because of the uncertainties and risks involved in developing radical innovations, firms require greater interfunctional coordination in deploying both exist-ing and new competencies for this purpose. As people from different functions interact, there is likely to be reinterpreta-tion of one another’s perspectives in deploying the firm’s competencies (Henderson and Cockburn 1994), developing new solutions, and recombining existing competencies for use in new product areas (Zahra and Nielson 2002). Inter-functional coordination helps explain the differential capac-ities of firms to exploit existing competencies and to explore new ones simultaneously to develop radical innova-tions and thus escape the capability–rigidity paradox.

Third, I find that a managerial mental model that per-ceives the market environment as an opportunity rather than as a threat has significant implications for the firm’s deci-sion to develop entirely new product innovation competen-cies. A possible explanation for this result is that with such a mental model, managers are likely to discover compe-tence gaps that need to be overcome to benefit from the available market opportunities. Because customer and com-petitor orientations lead to greater understanding of the firm’s strengths and weaknesses in relation to those of its competitors (Day and Wensley 1988), when perceived mar-ket opportunity is high, managers are more likely to develop new competencies than to focus entirely on exploiting exist-ing ones. Perceived market opportunity reduces the per-ceived costs of investments into new competencies (White, Varadarajan, and Dacin 2003). This is an important insight because scholars tend to examine the role of market orienta-tion on product innovation activities without explicitly con-sidering how the managers’interpretations of the market conditions affect the linkages. The role of mental models may represent an underdeveloped aspect of the study of market orientation and should be given attention in future studies.

Fourth, the new evidence of the differential direct and interaction effects of competence exploitation and explo-ration on product innovation performance is particularly poignant. Although the differential effects affirm conven-tional wisdom, the negative effect of their interaction on radical innovation performance is counterintuitive. It implies that competence exploration will be more valuable to the firm when it is matched with a lower level of compe-tence exploitation, and vice versa. Because too much of both competence exploitation and exploration may have undesirable costs for the firm (March 1991; Nerkar 2003), this result implies that a firm at the forefront of new knowl-edge creation through exploration is more likely to succeed in developing radical innovations by recombining this knowledge with some level of exploitation. Existing compe-tencies provide the necessary absorptive capacity to use new competencies (Danneels 2002). Conversely, a firm that is extremely competent in exploiting its current competen-cies will be successful with radical innovation only with a little dose of exploration. This finding reflects the argument that many radical innovations are the locus of a meeting between a problem and its solution, even when neither the problem nor the solution is itself new (Galunic and Rodan 1998; Kogut and Zander 1992). This insight is apt in the context of this study in which firms may exploit existing capabilities in new ways to solve emerging customer prob-lems (Luo 2002). Radical innovations to the Chinese market often result from the recombination of known technology and market elements. The product novelty stems from the act of combination, not necessarily from the novelty of the technology and market solutions combined.

Finally, the differential strengths of the direct effects of customer and competitor orientations on competence exploitation and exploration are noteworthy. Competitor orientation has a greater effect on competence exploitation, a key driver of incremental innovation performance, than does customer orientation. This suggests that compared with customer focus, competitor-centered practices enable firms to marshal resources to meet more immediate threats of competitors through competence exploitation and incre-mental innovations (Noble, Sinha, and Kuma 2002). Thus, the partial mediation of the effects of customer and com-petitor orientations on incremental innovation performance by competence exploitation and exploration suggests that examining only their direct effects leads to an underestima-tion of their differential explanatory power. F urthermore, compared with competitor orientation, customer orientation has a stronger effect on competence exploration, which is the only means by which customer orientation is positively linked to radical innovation performance. Yet competence exploration fully mediates the positive effect of competitor orientation on radical innovation performance. These find-ings provide some support for Noble, Sinha, and Kumar’s (2002, p. 36) conjecture that exploration plays a stronger role in the transition of customer and competitor orienta-tions to firm performance than does exploitation. Given that competence exploration involves the acquisition of entirely new knowledge and skills, these results suggest that it is through customer rather than competitor orientation that firms build stronger capacities for radical innovation. I con-tend that these differential effects may be the result of firms having greater knowledge of their future customers than of their future competitors. Indeed, few, if any, empirical

78/ Journal of Marketing,October 2005

frameworks exist for marketing managers to identify and analyze future competitors. Deeper insight is necessary in future research on how firms develop competitor orienta-tions. In brief, in failing to examine the differential routes by which customer and competitor orientations affect inno-vation performance, these findings imply that previous research may have arrived at a premature and perhaps an overly simplistic view of the relationships.

Theoretical Contributions

This study contributes to marketing theory in five main respects: F irst, the study incorporates market orientation into the RBV research stream that views firms as respond-ing to environmental conditions through existing competen-cies and the development of new ones (Barney and Zajac 1994; Cockburn, Henderson, and Stern 2000). According to the RBV, knowledge is the most important resource that a firm can control, but the challenge is how firms turn knowl-edge into internal competencies for innovation (Barney 1991; Kogut and Zander 1992). By addressing the link between customer and competitor orientations and product innovation competencies, this study meets this challenge and presents a new perspective of the role of market orien-tation in product innovation; that is, market orientation can contribute to competitive advantage insofar as it elicits and reinforces investments in existing product innovation com-petencies and simultaneously leads to the development of new competencies. Although marketing scholars have theo-rized about this linkage (e.g., Day 1994; Hurley and Hult 1998), there has been no empirical evidence until now. This evidence contributes to the marketing literature by provid-ing a new theoretical mechanism by which market-oriented practices are linked to incremental and radical innovations simultaneously.

Second, the finding of a significant moderating role of interfunctional coordination resonates with research that suggests a dual role for organizational coordination mecha-nisms: one of transformation of knowledge into functional competencies (Grant 1996) and one of integration of func-tional competencies into performance outcomes (Grant 1996; Henderson and Cockburn 1994). The knowledge-sharing benefits of interfunctional coordination ensure the collective assimilation of efforts among functional units to use market knowledge to engender competence exploration. In addition, by enhancing connectedness among functional units, interfunctional coordination ensures the effective use of the firm’s new product innovation competencies to engender radical innovation outcomes. These findings underscore the wisdom of a disaggregated view of market orientation and suggest a more nuanced view of the differ-ent roles of interfunctional coordination than has previously been provided in the extant literature.

Third, resource allocations for capability building involve a trade-off between exploitation and exploration (March 1991). In finding a significant moderating impact of the firm’s perceived market opportunity on the effect of cus-tomer and competitor orientations on competence explo-ration, this study reveals an important managerial factor that may enable firms to strike an appropriate trade-off. The finding validates Day’s (1994) thesis about the salience of managers’mental models in using market information to build firm capabilities. It also emphasizes the notion that building new capabilities does not involve the mere acquisi-tion and use of market knowledge. More critically, the process involves the use of interpretation schema to deter-mine how the managers respond to the market situation (White, Varadarajan, and Dacin 2003). This finding throws new light on why different firms faced with the same objec-tive market conditions develop different product innovation capabilities.

Fourth, this study contributes to marketing theory by being perhaps among the first to test empirically the propo-sition that competence exploitation and exploration have direct and opposing relationships with incremental and rad-ical innovations performance. In particular, the negative impact of their interaction on radical innovation perfor-mance suggests new theoretical implications that are unavailable in the extant literature: Both exploitation and exploration require a little dose of each other to enhance radical innovations. This study suggests that a firm must exploit some level of its current competencies to leverage its new competencies to develop radical innovations. This echoes Danneels’s (2002, p. 1097) finding that “rather than trapping the firm, current competencies may be used as leverage points to add new competencies.” The additional new insight that is missing in the literature but is offered here is that existing competencies, when coupled with some level of new competencies, may also enhance radical inno-vations. This new insight lends some support to the idea that effective balancing of exploitation and exploration requires a high–low matching rather than a high–high matching (Nerkar 2003). Further research should address the organi-zational designs and processes that could ensure appropriate levels of interaction between competence exploitation and exploration.

F ifth, given the context of this study, the results have implications for the role of market orientation in the firm’s adaptation to turbulent environments. As I argued previ-ously, the significant risks and uncertainties in a transitional environment indicate that firms in China must confront not only the challenge of new competition, changing technolo-gies, and new customer preferences but also collapsing capabilities (Li and Atuahene-Gima 2002). Exploitation of existing capabilities may not be adequate and may quickly become hazardous to competitive advantage. Systematic efforts are necessary to track the market changes and to assess the firm’s competence deficiencies to refine existing competencies and to develop the necessary new ones for the new environment. By empirically linking market orientation to the simultaneous exploitation and exploration of product innovation capabilities and outcomes in China, I demon-strate that market orientation has promise for understanding how firms adapt to complex and turbulent environments. Managerial Implications

Studies indicate that market-based assets, such as market orientation, play an important role in creating and sustain-ing shareholder value and should play an equally significant role in investment decisions (Srivastava, Shervani, and

Resolving the Capability–Rigidity Paradox / 79

Fahey 1998). By showing that market orientation affects product innovation competencies, this study reinforces this perspective and provides further empirical evidence with which marketing managers can buttress the argument that marketing expenditures may be better viewed as capital investments rather than as operational costs. Therefore, the results suggest an important role for marketing managers in planning and executing the firm’s resource allocation deci-sions about product innovation. To exercise this role, mar-keting managers can use the results reported here to make the case for increased interface with finance to ensure (1) that resource allocation decisions take into account the firm’s needs for new product innovation competencies and (2) that such decisions are appropriately guided by the firm’s knowledge of current and emerging market conditions.

Traditionally, resource allocation in product innovation has been largely guided by the level of sales (e.g., R&D as percentage of sales) and competitors’expenditures and/or based on innovation typologies, such as process and product innovations. This study suggests an additional criterion: competence exploitation and exploration to prioritize resource allocation in product innovation. The ten-item measure for competence exploitation and exploration used in this study could be a useful starting point for marketing managers in developing such a decision-making yardstick. In addition, the results suggest that marketing managers should be sensitive to the need for knowledge sharing and integration among functional units within the firm. This is because the mere allocation of a scarce resource to compe-tence exploitation and exploration is unlikely to yield radi-cal innovations without effective coordination among cross-functional units to translate this competence into effective outcomes.

This study suggests that to ensure the effective alloca-tion of resources for new competencies, marketing man-agers should work to prevent threat-rigidity tendencies when interpreting the market situation in the firm. When marketing managers successfully persuade other functional units about the potential opportunities that market condi-tions offer, the firm is likely to consider its current innova-tion capabilities critically and devote resources to the explo-ration of new ones. In doing so, marketing managers would be helping prevent competence exploitation from crowding out competence exploration in their firms. Therefore, reduc-ing threat-rigidity tendencies in the interpretation of market information should be an important task for marketing man-agers. This could be achieved by marketing’s advocacy for functional diversity, reward systems that encourage risk tak-ing, and interdependencies among functions in the acquisi-tion and use of market information.

F inally, findings suggest that because marketing man-agers have the ability to balance the potential tension between competence exploitation and exploration, they are likely to experience greater success in their efforts to enhance the firm’s product innovation. As the results indi-cate, managers may need to combine high competence exploration with low competence exploitation (and vice versa) to develop radical innovations. This requires careful attention to the use of ambidextrous structures that separate exploration and exploitative activities (O’Reilly and Tush-man 2004). As an example, F irstDirect and SKF set up autonomous new business units to develop new competen-cies for new markets, but they left the exploitation of exist-ing competencies to existing business units (Abell 1999). Limitations and Directions for Further Research This study has several limitations. F irst, the measure for market orientation neither captures all its different compo-nents nor covers all the various stakeholders (e.g., suppli-ers) that are likely to be the focus of a firm’s information collection efforts (Matsuno and Mentzer 2000). I measured innovation competence and performance across three years. However, the question remains whether market orientation may be causally an antecedent to competence and perfor-mance across multiple years. Thus, a second limitation of the study is that causal relationships cannot be inferred in the results reported. Further research might adopt a longitu-dinal design to tease out these linkages more clearly. Third, I used data from a sample of firms from a single industry. Although this offered several advantages for this study, it limits the generalizability of the results. Finally, I controlled only for a limited set of the potential antecedents of product innovation competencies and outcomes because of data limitations.

In addition to alleviating these limitations, there are other fertile avenues for further research. F irst, although I focused on product innovation competencies, the theory I developed herein can conceivably apply to several other organizational competencies that Day (1994) describes as spanning and inside-out capabilities. F urther research should examine the potential effects of market orientation on these other capabilities. Second, I show that market ori-entation may have relatively stronger effects on competence exploration and on radical innovations. This echoes Atuahene-Gima’s (1995, p. 279) argument that “in contrast with incremental innovations, firms need greater degree of market orientation not only to cope with the high level of uncertainties associated with developing radical innovations but also in establishing and educating the market.” Yet some scholars argue that market orientation may lead to compe-tency traps that stifle competence exploration and radical innovations. To date, however, the literature lacks clarity on the nature and types of these traps and the effect that market orientation has on them. The linkage between market orien-tation and competency traps requires empirical scrutiny in further research to advance the understanding of product innovation.

Third, this study suggests a synergistic perspective of interfunctional coordination by considering both the direct and the moderating effects of this integrative mechanism.

F urther research should adopt this perspective in studying other formal (e.g., cross-functional teams) and informal (e.g., social networking) integrative mechanisms to ensure a better understanding of the outcomes of customer and com-petitor orientations. Although it is useful for sharing ideas and gathering interpretations, interfunctional coordination may also carry costs. However, there is little research that considers costs and drawbacks of interfunctional coordina-

80/ Journal of Marketing,October 2005