THE IMPACT OF INFORMATION ON INNOVATIVENESS OF SMALL FIRMS: DEVELOPING AND TESTING A COMPETING MODEL.

• Author: Mukherji, Ananda

INTRODUCTION

Of the US workforce (as of October 2018) of about 127.5 million employed in the private sector (fred.stlouisfed.org/series/USPRIV), about 59 million are employed by 30.2 million small businesses (sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf). Publicly available information indicates that small businesses, usually defined as businesses employing fewer than 500 persons, contribute nearly half of the nation's nonfarm GDP. In addition, small businesses are critical for a majority of innovations and play a significant role in employment generation. Entrepreneurs have an important role in creating wealth, both personal and societal, and have been the subject of a great deal of study (Baron, 1998). "It is widely recognized that entrepreneurs--people who formulate new ideas, recognize opportunities, and translate these into added value to society by assuming the risk of starting a business--are a major source of economic growth for many economies" (Hatten, 1997; Holt, 1992; cited in Baron, 1998, p. 276). Despite this, greater focus is paid toward studying and researching the large companies that are typically listed in Fortune and Forbes magazines. Business schools also craft syllabi and pedagogy focusing far more on understanding and operating large, formal firms and have a far lower emphasis on small entrepreneurial firms. Some of this is slowly changing with more courses in entrepreneurship being taught and increased volume of theory building and empirical research being carried out on small firms.

In this research of small businesses, we make the case that while market orientation and entrepreneurial orientation are necessary conditions for innovativeness, the sufficient conditions are the importance of information generation and information usage on innovativeness and performance. We will make all of these various terms more explicit as we develop our paper. The notion of an orientation is one of a position or a preference. An orientation is usually the result of a process that is undertaken and achieved over a period of time and is similar to proficiency. Management, including information management, is the process of dealing with and controlling things which, in this case, is information. We make the case and attempt to highlight through our research that while orientation is a necessary condition for innovativeness, the sufficient condition for innovativeness and financial success is information management. We look upon orientation as a form of culture that is extremely important for firms, including small firms. Two firm level orientations that are both extremely important and have undergone extensive discussion and research are market orientation and entrepreneurial orientation. Market orientation reflects the extent to which firms establish the satisfaction of customer needs and wants as an organizing principle of the firm (Jaworski & Kohli, 1993). Entrepreneurial orientation, on the other hand, is the extent to which the identification and exploitation of potential opportunities constitute an organizing principle of the firm (Lumpkin & Dess, 1996). Entrepreneurial orientation is also associated with issues of risk, boldness, and initiative (Baker & Sinkula, 2009).

It is important at this point to present the results of an excellent paper by two researchers, as our work is closely connected to theirs. The two researchers, Baker and Sinkula (2009), examined the role of market orientation and entrepreneurial orientation on profitability. They first reexamined prior research that reported a direct effect of market orientation on profitability but there was no direct impact of entrepreneurial orientation on profitability, and their empirical work supported past findings. They concluded that there was an intervening variable, innovation success that mediated between the two orientations and profitability. They came to this conclusion based on the work of Day (1994) who suggested that firms that learn more effectively than their competitors have the ability for more rapid improvement which can be translated into new product success, profitability, market share, and competitive advantage. In other words, both market orientation and entrepreneurial orientation are learning constructs (Baker & Sinkula, 1999, 2002; Slater & Narver, 1995) and are closely connected with the two orientations. In this research, we refer to the model presented and tested by Baker and Sinkula (2009) as Model 1. When they tested this four-construct model with innovation success as a mediator between the two orientations and profitability, they found significant paths between market orientation and profitability (P2), entrepreneurial orientation and innovation success (P3), and innovation success and profitability (P5). The path between market orientation and innovation success (P1) was non-significant, and the path between entrepreneurial orientation and profitability (P4) was not tested. They also tested competing models and made the case that their model had a superior fit compared to the other models tested.

THE RESEARCH PROPOSITION

Our proposition in this research is to extend the work of Baker and Sinkula (2009), which we will explain in the next section. While their contributions have been valuable, we feel that the model would benefit by including relevant additional constructs. The two constructs we have in mind are information generation and information usage. We assert that both the orientations under discussion are essentially inherent and cultural, built and developed over a period of time and, as we stated, is a necessary condition for both learning and innovation. However, the sufficient condition is to use these two orientations meaningfully by collecting data, analyzing data meaningfully, disseminating data within the firm, and responding effectively on the usage. In other words, information management forms the critical sufficient condition that we consider very important for firms to have innovativeness. Thus, the marketing concept that emanates from a marketing orientation is a "distinct organizational culture, a fundamental shared set of beliefs and values that puts the in the center of the firm's thinking about strategy and operations" (Deshpande & Webster, 1989, p. 3). However, the critical activity is to translate the philosophy and orientations into practice, and this is done through market-oriented behaviors (Jaworski & Kohli, 1996). Market oriented behaviors are defined in terms of three behavioral processes which are the generation, dissemination, and responsiveness to market information (Jaworkski & Kohli, 1990). Empirical evidence demonstrates that firms that are actively market-oriented outperform their less market--oriented rivals on a wide variety of performance metrics (Cadogan, Souchon, & Proctor, 2008; Cano, Carrillat, & Jarillo, 2004; Kirca, Jayachandran, & Bearden, 2005).

Information generation is the acquisition of data concerning the firm's customers, markets, and rivals from sources external to the firm (Cadogan et al., 2008). Under information usage, we include analysis, dissemination, and responsiveness. This refers to the transfer of information across departments and to individuals who require it for decision-making and responsiveness is the use of information to develop and implement plans (Cadogan et al., 2008; Kohli & Jaworski, 1990). These are the two variables we plan to include in Model 1 to form Model 2. What we propose to do is to test Model 1, which resembles the model tested by Baker and Sinkula (2009). Then we will construct Model 2, which will include information generation and information usage. We will argue and attempt to prove that Model 2 is superior to Model 1 both in terms of improved goodness of fit indicators and increased explained variance.

THEORY AND HYPOTHESES DEVELOPMENT

The central construct common to both Model 1 and Model 2 is innovativeness. Baker and Sinkula (2009) term the construct as innovation success. However, a close examination of the items used to measure innovation, innovation success or innovativeness have considerable overlap and the distinctions are really a matter of degree rather than of kind. We use the term innovativeness without distinguishing between process and...