THE IMPACT OF CUSTOMER PERFORMANCE AND INNOVATION: FINANCIAL PERFORMANCE OF SMALL BUSINESSES: STUDYING A RESEARCH MODEL.

• Author: Mukherji, Ananda

INTRODUCTION

As the economic landscape shifts in the US, as the psychological contract between an individual and their employer is subject to considerable change, the importance of entrepreneurship and being an entrepreneur becomes more salient than ever before. The term psychological contract refers to the unwritten, intangible agreement between an employee and their employer that describes the informal commitments, expectations and understandings that make up their relationship (https://www.charliehr.com/blog/what-is-the-psychological-contract/). The size and scope of small businesses in the US is quite telling. There are about 30.2 million small businesses in the US that employ fifty-nine million people, or about 47.5% of the labor force, according to the US Small Business Administration (sba.gov). The SBA also states that small businesses, especially firms employing fewer than twenty people, created the largest number of jobs, and were significantly ahead of large corporations in job creation. One of the key variables associated with the success and growth of businesses is their ability to innovate and bring about innovative products and services to the marketplace. We focus on the importance of innovation in this research, the factors that help create it, and the role innovation plays in improved financial performance. It is widely agreed that innovation is the ability to introduce a new method, idea, product, or service that is advantageous to the firm. Innovation results in new methods, ideas, products, or processes being introduced either into the firm or its markets or both. Innovativeness refers to a willingness to support creativity and experimentation in new product development, technology adoption, and internal processes and procedures (Mengue & Auh, 2006; Knight, 1997; Lumpkin & Dess, 1996). The adoption of innovation is intended to contribute to the performance or effectiveness of the firm (Damanpour, 1991) and provide it positional advantage (Hult et al., 2004). For innovation to occur there need to be conditions to foster it and this is where the concept of innovativeness has primacy. Innovativeness is the firm's capacity to engage in innovation, which is the introduction of new products, processes, or ideas in the organization, and this capacity is among the most crucial factors that influence business performance (Burns & Stalker, 1961; Hurley et al., 1998; Porter, 1990). The key word is capacity, and we will attempt to look for variables that impact and affect the capacity to be innovative.

According to Hult et al., "it is through innovativeness that managers devise solutions to business problems and challenges, which provide the basis for survival and success of the firm well into the future. Innovativeness is one if the factors over which management has considerable control" (2004, p. 429). What we theorize and develop is an investigation into the antecedents to innovation which we develop into a consolidated model that we then empirically test. To start with, we argue that most firms when faced with a degree of discomfort in its competitive environment are usually under pressure to innovate. If the competitive intensity is low, there is less pressure to be innovative and the reverse holds true, in that increased competitive pressures compel firms to be creative and innovative to simply survive. Competitive intensity needs to be coupled with customer orientation so that customers' needs and wants are incorporated. Innovativeness can thrive and flourish when a firm is a learning organization. This requires, according to Zaltman et al., a culture of "openness to innovation" (1973, p. 64). Openness is an integral part of organizational learning and includes whether the members of an organization are willing to consider the adoption of innovation or whether they are resistant to it (Hult et al., 2004). Van de Ven (1986) refers to this as the management of an organization's cultural attention to recognize the need for innovative ideas and actions within the organization.

This paper has two objectives. One is to propose and test a conceptual model that examines the impact of customer performance as the principal exogenous variable, and the impact this construct has on information usage and information sources, and on organizational assets and organizational capabilities, and the effect of all five on innovation. The research also studies the impact of innovation on financial performance, as well as the effect of different intervening and mediating models in the model. The framework that is developed as a synthesis of previous conceptual contributions in the area including the work of Baker and Sinkula (1997), Bierly and Daly (2007), Cadogan et al. (2008), Greenley and Oktemgil (1997), Hooley et al. (2005), and Wang (2008). Two is to test the various scales for measuring the various latent constructs. Tested scales were used but the actual research model was conceptualized and designed specifically for this research.

In the sections that follow, we develop a consolidated structural equation model linking the various constructs together. To test the research model, we conduct a survey-based study of small firms. The survey contains the questions and items that capture the essence of the various constructs in our model. We examine how innovation is central to a firm's ability to cope with and manage environmental pressures appropriately, and the impact of innovation on financial performance.

THEORETICAL FRAMEWORK

In developing our model, we will argue that the antecedents to innovation are customer performance, information usage, organizational assets, information sources, and organizational capabilities. We also examine the impact of innovation, organizational assets, and organizational capabilities on financial performance. We use customer performance (Hooley et al., 2005) to measure both customer loyalty and customer satisfaction compared to competitors. Information usage is the collecting, sharing, and effectively handling of information (Cadogan et al., 2008). Information sources address the use of relevant information, brainstorming, and inputs from external consultants (Greenley & Oktemgil, 1997). Organizational capabilities are the organization's expertise in different areas of business including finance, human resource, operations, and marketing (Hooley et al., 2005). Innovation is a measure of an organization's level of differentiation and distinct competitive advantage (Baker & Sinkula, 2009), a superior ability to launch new products and/or services compared to competitors (Hooley et al., 2005), and an ability to try new ways of doing things and for employees to behave in original and novel ways (Wang, 2008). The rest of this section expands upon these constructs and explains the hypothesized paths and relationships among the different latent variables. We present the hypothesized research model as detailed in Figure 1.

The Impact of Customer Performance

Customer performance, the principal exogenous construct in our research model, is a complex and multi-dimensional construct that addresses two interrelated factors--satisfaction and loyalty (Hooley et al., 2005. It is the extent to which a firm has a level of customer performance that is higher than its competitors. While the measure by itself is quite straightforward, what may occasionally be missed is the time, effort, and resources required to achieve elevated levels of customer performance. Indeed, customer performance is an essential component of firm level resources and assets than can be understood more properly from a resource-based view (RBV) (Barney, 1991). The RBV suggests that competitive advantage, which results in superior performance, stems from the possession and deployment of resources that are superior to those of competitors (Hooley et al., 2005). The ability to have asset stock accumulation of customer and loyalty, among others, and to deploy those accumulated stocks strategically is precisely how the RBV works (Dierickx & Cool, 1989). Such resource stocks that are inimitable or resistant to duplication by competitors is what make the unique resources both advantageous and sustainable (Reed & DeFillippi, 1990). Resources that generate advantages like customer performance are those resources that possess traits of enabling competitively superior value to customers (Barney, 1991); resist duplication by competitors (Dierickx & Cool, 1989), and whose value can be appropriated by the organization (Collis & Montgomery, 1995). In the RBV of the firm, the principal function is the creation, integration, application of knowledge (Conner & Prahalad, 1996; Grant, 1996; Nonaka, 1994; Spender, 1996). In the RBV, the essence of strategy, the development of sustainable competitive advantages, is the identification, development, and application of key resources, and the resources most likely to lead to sustainable competitive advantage is the firm's unique knowledge base (Barney, 1991; Grant, 1996; Peteraf, 1993).

A focus on customers, integral to a marketing concept, is a "distinct organizational culture, a fundamental shared set of beliefs and values that put the customer at the center of the firm's thinking about strategy and operations" (Deshpande & Webster, 1989, p. 3). There is also considerable empirical evidence that firms that are market- and customer-oriented typically outperform their less market-oriented rivals on a wide variety of performance metrics (Cano et al., 2004; Kirca et al., 2005). There are numerous downstream advantages of developing sufficient levels of loyalty and satisfaction, as we will attempt to demonstrate in this research that have a significant impact on superior financial performance. Increased levels of customer performance have a direct impact on information usage, organizational assets, and innovation and these relationships are detailed in the first set of hypotheses, H1. We...