THE IMPACT OF INNOVATIVENESS ON THE PERFORMANCE OF SMALL BUSINESSES: TESTING AN INTEGRATED MODEL.

• Author: Mukherji, Ananda

INTRODUCTION

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 nearly 59 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 20 people, create the largest number of jobs, and are significantly ahead of large corporation 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. While we focus on the concept of innovativeness in this research, it is important to understand the difference between innovativeness and innovation. While the distinction may appear to be slight, the difference is important. 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. The adoption of innovation is generally intended to contribute to the performance or effectiveness of the firm (Damanpour, 1991) and provide it positional advantage (Hult, Hurley, & Knight, 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 important factors that influence business performance (Burns & Stalker, 1961; Hurley, Hult, & Tomas, 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. (2004), "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" (p. 429). What we theorize and develop is an investigation into the antecedents to innovativeness which we develop into a consolidated model that we empirically test. To start with, we argue that most firms when faced with a degree of discomfort in their 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. Suppliers and meaningful partnerships with suppliers are another source of ideas that help with the innovative process, and finally organizational learning, where a firm's employees are encouraged and willing to respond to competitors' abilities to try new ways of doing things. Innovativeness can thrive and flourish when a firm is a learning organization. This requires, according to Zaltman et al. (1973), a culture of "openness to the innovation" (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 in order to recognize the need for new ideas and actions within the organization.

In the sections that follow, we develop a consolidated structural equation model linking the various constructs together. To test the research model, we conducted 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 innovativeness is central to a firm's adaptation to its environmental exigencies and the impact of innovation on financial performance through timely and well-executed strategies.

THEORETICAL FRAMEWORK

In developing our model, we will argue that the antecedents to innovativeness are competitive intensity, customer orientation, relationships with suppliers and organizational learning. It should be noted that the concept of relationships is a complex and broad one, but in this research we restrict relationships between the focal firm and its suppliers. This is done for reasons of parsimony and to ensure that we limit the scope of this important construct for purposes of manageability. We next proceed to examine the plausibility of these constructs being antecedents to innovativeness and offer definitions and arguments in support. We will show that innovativeness impacts financial performance, not directly, but through strategic orientation, which is the implementation or executable aspect of a firm's innovative capabilities. An organizational culture that supports innovativeness as way to obtain positional advantage becomes a source of sustained competitive advantage for the firm (Barney, 1986).

The Impact of Competitive Intensity

Competitive intensity, the principal exogenous construct in our research model, is a complex and multi-dimensional construct that addresses a number of interrelated factors. Competitive intensity results from changes in the growth of sales in the industry, competition based on price, the extent of rivalry, the ease of entry and rate of change in production/service technologies (Baker & Sinkula, 2009). Competitive intensity indicates the degree of competitive rivalry and is an external factor that impacts the firm (Feng et al., 2019) over which a firm typically has little control. High levels of competitive intensity can alter customer perceptions (Feng et al., 2014) as price competition among firms increases along with choices that consumers face. Employees, with regard to customers, are under pressure to provide a differentiated product or service, increased personalized care, greater emotional satisfaction, create greater value and improved relationships (Feng et al., 2019). Consequently, increased levels of competitive intensity have a direct impact on customer orientation, innovativeness, organizational learning and strategic orientation, and these are detailed in the first set of hypotheses, H1. We now explain these constructs in more detail along with arguments and suggest four hypothesized relationships that connect competitive intensity with four endogenous constructs, namely, customer orientation, innovativeness, organizational learning and strategic orientation.

Competitive Intensity and Customer Orientation

Given what we theorize are the pressures that are created by high levels of competitive intensity, the firm, in order to survive and prosper, has to have a focused and well-developed sense of assessing its customer and its market. A term used by Likoum et al. (2018), market-sensing capability, captures the essence of being customer oriented. According to Day (1994), market-sensing capability or customer orientation is a "business's ability to acutely understand and have an insight of the macromarket environment or the operating ecosystem and its potential impact on competitors, customers, and other stakeholders" (as cited in Likoum, 2018, p. 4). Customer orientation is the aptitude to observe, assess, continuously monitor and make relevant decisions to changes in technology and market (Likoum et al., 2018). Businesses with such competencies and capabilities are better equipped in discerning potential opportunities and threats from the environment (Fang, 2014). Customer orientation is a combination of different things including strategizing based on customers' needs, understanding how employees contribute value for customers, providing superior levels of service, being customer-satisfaction focused and freely sharing information (Baker & Sinkula, 2009; Hooley et al., 2005; Zhou & Li, 2010). Increasing levels of competitive intensity will have a direct effect on increasing focus on customer orientation. Based on the above, we make the following hypothesis:

H1a: There is a positive relationship between competitive intensity and customer orientation.

Competitive Intensity and Innovativeness

As stated earlier, like some other researchers (Hult et al., 2004; Likoum et al., 2018), we make an important conceptual distinction between innovativeness and innovation. We consider the former as an antecedent and stimulus of the latter. When there are significant competitive pressures, or competitive intensity, an organization has to become innovative. Innovation, the result of innovativeness, is a "means for changing an organization, whether as a response to changes that occur in its internal or external environment or as a preemptive move taken to influence the environment. Because environments evolve, firms must adopt innovations over time and the most important innovations are those that allow the firm to achieve some sort of competitive advantage, thereby contributing to its performance" (Damanpour, 1991; Henard & Syzmanski, 2001; Porter, 1990; as cited in Hult et al., 2004, p. 431).

From a resource-based perspective, "firms succeed in attaining a competitive advantage by crystallizing their internal competencies into valuable and inimitable assets, and by adapting these to fluctuating environmental constraints to maintain a certain competitive advantage edge" (Teece, Pisano, & Shuen, 1997; as cited in Likoum et al., 2018, p. 3). There are overlapping definitions of innovativeness and one of them is a firm's general competence in developing and providing the market with new products or services, or entering new markets by means of innovative processes or strategic orientations (Alexiev et al., 2016; Wang & Ahmed, 2004). A firm's innovativeness is...