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Elsevier Editorial System(tm) for International Journal of Research in Marketing Manuscript Draft Manuscript Number: IJRM-D-14-00112R2 Title: MARKET ORIENTATION, KNOWLEDGE COMPETENCE, AND INNOVATION Article Type: SI: Marketing & Innovation Keywords: Market knowledge competence, market orientation, market-based innovation, U.S. versus China Corresponding Author: Dr. H. Erkan Ozkaya, Ph.D. Corresponding Author's Institution: California State Polytechnic University-Pomona First Author: H. Erkan Ozkaya, Ph.D. Order of Authors: H. Erkan Ozkaya, Ph.D.; Cornelia Droge, Ph.D.; G. Tomas M Hult, Ph.D; Roger C Calantone, Ph.D.; Elif Ozkaya, Ph.D. Abstract: This study focuses on two dimensions of market orientation and the corresponding dimensions of market knowledge competence: i.e., the customer and competitor dimensions. We examine whether customer and competitor orientations are transmuted into market-based innovation either directly, or through customer and competitor knowledge competencies indirectly. The findings support that knowledge competencies are indeed mediators of the positive relationships between orientations and market-based innovation. Also, market-based innovation mediates the positive relationships between customer and competitor knowledge competencies and overall firm performance. A cross-country comparison reveals that, in the U.S. as compared to Chinese firms, customer (or competitor) orientation leads to both higher customer (or competitor) knowledge competence and enhanced market-based innovations; in other words, the model's relationship strengths are greater in U.S. firms, indicating that they are better able to leverage customer (or competitor) orientation to obtain performance consequences.
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MARKET ORIENTATION, KNOWLEDGE COMPETENCE, AND INNOVATION
H. Erkan Ozkaya. Department of International Business and Marketing, California State Polytechnic University, Pomona, Building 164, Room: 3090. (t): (909) 869-2692. (e): [email protected] Cornelia Droge. Department of Marketing, Michigan State University, N370 North Business Complex, East Lansing MI 48824-1122. (t): (517) 432-6405. (e): [email protected] G. Tomas M. Hult. Department of Marketing, Michigan State University, N370 North Business Complex, East Lansing MI 48824-1122. (t): (517) 353-4336. (e): [email protected] Roger Calantone. Department of Marketing, Michigan State University, N370 North Business Complex, East Lansing MI 48824-1122. (t): (517) 432-6400. (e): [email protected] Elif Ozkaya. Department of International Business and Marketing, California State Polytechnic University, Pomona, Building 98C, Room: 320. (t): (909) 869-2692. (e): [email protected] ============================================================== ARTICLE INFO Article history: First received in March 17, 2014 and was under review for 5 months. ============================================================
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MARKET ORIENTATION, KNOWLEDGE COMPETENCE, AND INNOVATION
ABSTRACT
This study focuses on two dimensions of market orientation and the corresponding dimensions of
market knowledge competence: i.e., the customer and competitor dimensions. We examine
whether customer and competitor orientations are transmuted into market-based innovation
either directly, or through customer and competitor knowledge competencies indirectly. The
findings support that knowledge competencies are indeed mediators of the positive relationships
between orientations and market-based innovation. Also, market-based innovation mediates the
positive relationships between customer and competitor knowledge competencies and overall
firm performance. A cross-country comparison reveals that, in the U.S. as compared to Chinese
firms, customer (or competitor) orientation leads to both higher customer (or competitor)
knowledge competence and enhanced market-based innovations; in other words, the model’s
relationship strengths are greater in U.S. firms, indicating that they are better able to leverage
customer (or competitor) orientation to obtain performance consequences.
Keywords: Market knowledge competence, market orientation, market-based innovation, U.S.
versus China
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1. Introduction
Market orientation is a central concept in the marketing literature and its effects on
innovation and performance have been studied in detail (e.g., Hurley and Hult 1998, Kumar et al.
2011, Wei et al. 2012). This research focuses on customer and competitor orientations, which are
the components of market orientation that focus of the firm’s external environmental scanning
efforts (Narver and Slater 1990). However merely focusing on customers and competitors may
not guarantee market-based innovations. Knowing what the customers want and what
competitors are doing is very important, but transforming this information into innovation-
relevant knowledge may require a different set of competencies. We thus also focus on market
knowledge competence, comprised of customer and competitor knowledge competencies.
Market orientation (customer and competitor orientations), market knowledge competence
(customer and competitor knowledge competencies), and market-based innovations were chosen
as our focus because these constructs are domain-consistent (i.e., the domains are matched). Our
final dependent construct is overall firm performance.
The first objective of this study is to propose market knowledge competence as a
mediator of the relationships between market orientation and market-based innovations. Market
knowledge competence has attracted attention due to its positive effects on product innovation
and/or other performance consequences (Atuahene-Gima and Wei 2011; Johnson, Piccolotto,
and Filippini 2009; Li and Calantone 1998). However its knowledge transformation role hasn’t
been extensively examined by testing its full (or partial) mediation role between orientation and
innovation. Previous research on the direct paths from orientation to various performance
outcomes has been mixed. For example, Zhou et al. (2005) suggest that market orientation may
have a negative effect on market-based innovations; Frambach et al. (2003) found negative
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effects for competitor orientation and positive effects for customer orientation, whereas Perry
and Shao (2005) found the reverse; and Gotteland and Boule (2006) found a positive effect for
customer orientation and no effect for competitor orientation. These mixed results suggest
treating customer and competitor orientations separately (see also Frambach et al. 2003). We
focus on disentangling the direct versus indirect effects of customer versus competitor
orientation on market-based innovation, with market knowledge competencies as mediators.
The second objective of this study is to address the role of market-based innovation as the
mediator between market knowledge competencies and firm performance. The literature
indicates that market knowledge competence (or components thereof) may have a direct effect
on performance (e.g., Atuahene-Gima and Wei 2011; Johnson et al. 2009; Li and Calantone
1998; 1999). Others propose that market knowledge competence is related to antecedents of firm
performance (e.g., Jayachandran et al. 2004; Yeniyurt et al. 2005) and that the effects on firm
performance itself may be indirect. In our research, we treat customer and competitor knowledge
competencies separately, and then focus on disentangling their direct versus indirect effects on
firm performance, with market-based innovation as the mediator.
Finally, while there are several studies about market orientation and/or market knowledge
competence in a domestic U.S. context, studies in an international context are fewer. Due to
economic and other differences, the effects of model constructs can vary significantly among
countries. Thus the third objective of this study is to test whether the proposed relationships hold
across the U.S. versus China. We argue that U.S. firms are better able to leverage orientations to
obtain knowledge competencies and innovations (i.e., we argue that the effect sizes are larger in
the U.S.).
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We begin by defining terms and specifying the theoretical background for the model. We
then develop hypotheses, including hypotheses about differences in effect sizes. After discussing
samples and measures, we present the results for both the U.S. and China.
2. Theoretical Background
2.1. Definitions of Constructs
This research examines the relationships among orientations, knowledge competencies,
market-based innovation, and firm performance (in that order; see Figure 1). We begin by
defining all constructs and then develop the hypotheses.
***********Insert Figure 1 about here**********
“Orientation” constructs such as market orientation, technological orientation,
entrepreneurial orientation, and learning orientation can all be considered dimensions of the
higher-order construct named strategic orientation (Gatignon and Xuereb 1997; Grinstein 2008).
All orientation constructs are indicative of a culturally determined focus, specified by the
adjective used. Thus market orientation is defined in terms of a culture that effectively and
efficiently creates the necessary firm behaviors for the creation of superior value for buyers
(Narver and Slater 1990). According to Narver and Slater (1990), important behaviors relate to
acquiring and then disseminating information about buyers and competitors. Thus these authors
proposed three components to market orientation: customer orientation, competitor orientation
and inter-functional coordination. The first two, being orientation constructs, tap the focus or
subject of the firm’s information gathering activities (what/how do firms sense in the external
environment). The third taps the internal coordinating processes of the firm, which are usually
considered manifest of organizational structure. Our research focuses only on customer
orientation and competitor orientation, defined as the firm’s direction or general focus on its
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target customers and its target competitors respectively and concerning the gathering and
disseminating of information (Gatignon and Xuereb 1997; Narver and Slater 1990). Other
researchers have also excluded inter-functional coordination in their market or strategic
orientation constructs (e.g., Frambach et al. 2003; Gotteland and Boule 2006; Perry and Shao
2005), while some have modeled it as a moderating variable rather than as an independent
variable (e.g., Gatignon and Xuereb 1997). Furthermore, the effects of inter-functional
coordination on innovation consequences are well known (see for example Grinstein’s (2008)
meta-analysis). In contrast, the results have been mixed as to the various performance
consequences of customer versus competitor orientation. For example, De Luca et al. (2010) and
Im and Workman (2004) found no effects for either; Wong and Tong (2012) and Atuahene-Gima
(2005; for incremental but not radical innovation) found positive effects for both customer versus
competitor orientation; Frambach et al. (2003) found negative effects for competitor orientation
and positive effects for customer orientation, whereas Perry and Shao (2005) found the reverse;
and Gotteland and Boule (2006) found a positive effect for customer orientation and no effect for
competitor orientation. Frambach et al. (2003) suggested that treating them separately and
disentangling their effects should be a major direction for future research; we concur.
Market knowledge competence is defined as the processes that generate and integrate
market knowledge (Li and Calantone 1998), thus generating market knowledge stock. Market
knowledge competence is an organizational competence, and the resulting market knowledge is a
strategic asset (August and Coelho 2009). According to Li and Calantone (1998) and Atuahene-
Gima and Wei (2011), market knowledge competence has three components: customer
knowledge competence, competitor knowledge competence, and the marketing-research and
development (R&D) interface. Corresponding in domain to customer versus competitor
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orientation, we study only the two types of competence and do not include the marketing-R&D
interface (which reflects internal organizational structure). Customer versus competitor
knowledge competence are defined as the firm’s ability to generate and then use knowledge
pertaining to, respectively (a) customers' current and potential needs for products (including new
products); and (b) competitors' products and strategies (Li and Calantone 1998). Customer and
competitor knowledge competence together comprise market knowledge competence (which
corresponds in domain to market orientation). Henceforth, all references to market orientation or
to market knowledge competence mean the customer and competitor components only.
Market orientation is distinct conceptually from market knowledge competence because
the former concerns cultural norms and focus, while the latter concerns processes and abilities
(Li and Calantone 1998; Li and Cavusgil 1999). Market orientation leads to “market
information” because it focuses on acquiring information about customer and competitors
(Narver and Slater 1990); market knowledge competence leads to “market knowledge” by
processing customer and competitor information (Li and Calantone 1998). Information (know-
what) and knowledge (know-how) are different constructs (Rowley 2007).
Market-based innovation is defined to comprise innovations that depart from serving
existing, mainstream markets and that create a set of fringe, and usually new, customer values for
emerging markets (from Zhou et al. 2005). Market orientation, market knowledge competence,
and market-based innovation were chosen as the focus of this research because they are all
domain consistent, that domain being “market.” For the same reason, we excluded (for example)
technology-based innovation even though Zhou et al. (2005) suggest that market orientation
impacts both technology-based and market-based innovations. For consistency and parsimony,
we chose domain-matched constructs, and hence including technology-based innovation would
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demand inclusion of technology orientation and technology knowledge competence. This would
lead to complexity distracting from the focus of this paper. Similarly, we exclude aesthetic-based
innovation and related antecedent constructs (for example, aesthetic orientation).
Finally, we study overall firm performance compared to competitors. In this research,
firm performance comprises sales growth, return on investment, and profit level.
Market Knowledge Competence as a Knowledge Transformation Mechanism
An examination of Figure 1 overall reveals that the theoretical model proposes direct and
indirect relationships among orientation constructs, knowledge competence constructs, market-
based innovation, and firm performance. Market orientation determines which information
sources interest the firm (customers or competitors or both); knowledge competence involves
transforming information into knowledge. Orientations reflect what the firm wants to do or focus
on, while competencies reflect what the firm can do. Our study is thus based partly on the market
orientation literature and on the relationships between orientations and knowledge competencies.
Understanding competence’s role also builds on organizational learning theory. Learning
theory encompasses how and why learning takes place in organizations (Argyris and Schön
1978): learning theory supports the argument that knowledge competence leads to superior
outcomes (Atuahene-Gima and Wei 2011; Slater and Narver 1995). In particular, learning
facilitates innovation (Baker and Sinkula 2007; Brown and Duguid 1991; Zhou, Yim, and Tse
2005) through customer and competitor knowledge capabilities (Li and Calantone 1998; Li and
Cavusgil 1999). Thus our study examines how customer (/competitor) orientation is transformed
indirectly into market-based innovation via customer (/competitor) knowledge competence. The
well documented direct effect from market orientation to innovation (Hurley and Hult 1998; Hult
and Ketchen Jr 2001; Ngo and O’Cass 2012;; Zhou et al. 2005) together with the knowledge
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competenceÆ innovation relationship (Li and Calantone 1998; Li and Cavusgil 1999) suggest
possible indirect effects of market orientation on market-based innovation through knowledge
capabilities (i.e., partial or complete mediation by knowledge competencies of the orientation
Æinnovation relationships).
Teece et al. (1997) state that capabilities (such as customer/ competitor knowledge
competence) are tools for obtaining competitive advantage, often via product innovation. The
resource-based view defines organizational capabilities as the ability to use resources to generate
competitive advantages (Barney 2001). From this point of view, customer and competitor
knowledge competencies can be viewed as tools – again, primarily learning tools – for obtaining
higher order resources (Li and Calantone 1998). In our research, knowledge stocks about
customers and competitors reflect higher order resources, and the competencies in creating such
customer/competitor knowledge stocks are developed by the firm because the strategic focus is
on customer and competitor orientations. Hence, in general, orientations precede competencies.
3. Hypothesis Development
3.1. The Mediation Effects of Market Knowledge Competence
The findings in the literature indicate that market information collection efforts improve
innovativeness (Harmancioglu et al. 2010) and there is a significant relationship between market
orientation and product innovations (e.g., Sandvik and Sandvik 2004; Wei and Atuahene-Gima
2009; Wei et al. 2012). However a mere focus on customers and competitors may not guarantee
successful innovations. Also, as shown earlier in our justification for our focus on customer
versus competitor orientation only, the results have been mixed as to the various performance
consequences of these orientations. Accordingly, mediators have been proposed; for example,
Rodríguez-Pinto et al. (2011) examined the mediating effects of product quality and innovation
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speed between market orientation and new product performances. Our study is focused on
information transformation; i.e., the information gathered about customers and competitors needs
to be transformed into knowledge useful in creating product innovations. Hence we argue below
for the mediating role for market competence.
First, knowledge competence affects innovation, which is the minimum condition for
supporting a mediating role for knowledge competence in the orientationÆ innovation
relationship. According to Li and Calantone (1998; 1999), customer knowledge competence
enables a firm to explore innovation opportunities and to reduce the potential risks of mistaking
buyer needs, whereas competitor knowledge competence contributes to innovation by providing
diagnostic benchmarking. Their findings (1999) indicate that both customer and competitor
knowledge capabilities positively affect new product advantage. Similarly, Johnson et al. (2009)
indicate that overall market knowledge competence has a positive effect on new product success,
but they did not differentiate customer versus competitor dimensions.
Second, some researchers focusing on the orientationÆ innovation relationship have
examined mediators that could be considered related to knowledge competence. For example,
Gotteland and Boule (2006) focus on the instrumental use of marketing information as mediator:
they found mediation affecting customer but not competitor orientation relationships to new
product performance. Zhou et al.’s (2005) studied organizational learning as mediator of the
market orientationÆ market-based innovation relationship; their results indicate no mediation
and that market orientation negatively affects market-based innovations because when firms
focus on their current customers and competitors they miss the opportunities in new and/or
emerging markets. Finally, De Luca et al. (2010) found that R&D effectiveness mediates the
customer orientationÆ performance relationship. Again, some of these researchers did not
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differentiate customer versus competitor dimensions or focused on only one of these dimensions,
and a variety of performance outcomes were examined. However, the mediators examined –
instrumental use, learning, R&D effectiveness – are all related to various aspects of competence
in processing information in order to produce innovation-relevant knowledge stock. In other
words, the mediators examined are all related to various aspects of knowledge competence. The
results were mixed for both direct and mediated relationships.
We differentiate the effects of customer versus competitor knowledge competence as
mediators affecting respectively the customer orientationÆ market-based innovation and the
competitor orientationÆ market-based innovation relationships. Mediation is supported if
customer orientationÆ customer knowledge competence and customer knowledge
competenceÆ market-based innovation are both positive, hence indicating an indirect path
through customer knowledge competence. The direct effect customer orientationÆ market-based
innovation does not necessarily have to be positive for mediation to be supported. If both direct
and indirect effects are positive, mediation is partial; if only the indirect effects are positive,
mediation is full. We argue that information gathered through customer orientation is
transformed into knowledge through customer knowledge competence, and this in turn
engenders market-based innovations; i.e., we argue for an indirect effect and leave the possibility
of a direct effect open. Similar statements hold for constructs in the competitor domain. Thus:
H1a: Customer knowledge competence mediates the positive relationship between customer orientation and market-based innovation; H1b: Competitor knowledge competence mediates the positive relationship between competitor orientation and market-based innovation.
3.2. The Mediation Effects of Market-Based Innovation
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We have discussed the expected positive relationship between market knowledge
competence constructs and innovation in relation to Hypothesis 1. For example, Li and
Calantone (1999) found that customer and competitor knowledge competence affected new
product advantage, while Johnson et al. (2009) found effects on product success. Atuahene-Gima
and Wei (2011) found a direct effect of competitor (but not customer) knowledge competence on
new product performance (as well as indirect effects through mediators). Thus either customer or
competitor knowledge competence should be positively related to market-based innovation.
In turn, market-based innovation should be positively related to firm performance. There
is a vast literature supporting the positive relationship between product innovation constructs and
various measures of firm performance. For example, new products provide approximately one-
third of firms’ profits (Sivadas and Dwyer 2000) and forty percent of their sales in the past five
years (Schmidt and Calantone 2002). In particular, Zhou et al. (2005) indicate that market-based
innovations enhance firm performance because such innovations are embraced by new or
emerging markets; this may offer distinct competitive advantages such as first mover.
Overall, firms that have the competence to generate and utilize knowledge about their
customers (or competitors) should be able to develop innovations focused on new and emerging
markets, and firms developing these types of innovations would perform better. In other words,
we argue that market-based innovations may mediate the relationship between customer and
competitor knowledge competence and firm performance. Thus:
H2a: Market-based innovation mediates the positive relationship between customer knowledge competence and firm performance; H2b: Market-based innovation mediates the positive relationship between competitor knowledge competence and firm performance.
3.3. Cross-Country Comparison of Market Orientation Effects
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There are several studies testing market orientation in individual countries (Deshpandè et
al. 1993; Deshpandè and Farley 2004; Dwairi et al. 2007; Wei and Lau 2008; Zhou et al. 2008;
Zhou et al. 2005), but studies that compare effect sizes of market orientation and knowledge
competence between countries are very limited. Research indicates that both utilization levels
and the effects of market orientation may differ across countries. For example, U.S. managers
generally show higher levels of competitor and customer orientation than their Asian
counterparts (Huff and Kelley 2005). Past research suggests that market orientation has a
stronger effect on business performance in freer economies because firms in freer economies
have more experience in a competitive environment (Sin al. 2003; 2005). This effect size
difference may hold for products and services; e.g., customer orientation increases customer
service performance more in developed countries (England:14th in economic freedom) compared
to relatively less developed countries (Slovenia: 69th and Hungary: 49th in economic freedom)
(Theoharakis and Hooley 2008). As the statistics indicate, developed economies have higher
degrees of economic freedom. In a transition economy, market orientation may have no direct
impact on firm performance (Peng and Luo 2000).
Cross-country comparison studies in the literature primarily focus on the direct effects of
overall market orientation on firm performance. Few studies separate customer and competitor
orientations or the corresponding knowledge competence constructs. We argue that firms utilize
market orientation better in freer economies because they have more experience in a competitive
environment that forces them to monitor and respond to their customers and competitors.
Accordingly, we expect customer and competitor orientation to improve market knowledge
competence and market-based innovations more in the U.S. compared to China (i.e., the effect
sizes or betas are larger). In our research, the U.S. ranks high in economic freedom, 9th on the
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Index of Economic Freedom (IEE) (Number of Counties Listed: 179, Min: 0 Max: 89.7, M: 58.7,
SD: 14); however China ranks low on economic freedom (135th in IEE). Thus we expect that
firms in the U.S. (as compared to China) are better able to leverage customer or competitor
orientation into customer (/competitor) knowledge competence and subsequently engender
market-based innovation. Thus:
H3: In the U.S. as compared to China: Customer orientation has a stronger positive effect on (a) customer knowledge competence and (b) market-based innovation
Competitor orientation has a stronger positive effect on (c) competitor knowledge competence and (d) market-based innovation
4. Methods
4.1. Sampling and Data Collection
The dataset was collected from managers in the U.S. (N=288) and China (N=386), all of
whom had responsibilities for the development and/or launch of new products. A national
marketing research firm administered the survey in the U.S. and another national firm
administered the Chinese version in China. The Chinese version was developed by having an
individual translate the survey into Chinese, another individual translate back to English, and a
third person evaluated the resulting two English versions. The conclusion was that the items and
questions had essentially the same meaning.
Similar to previous studies (Hultink et al. 2003), screening questions were used to ensure
the eligibility of both companies and managers. These screening questions were as follows: (1)
Does your company have more than 25 employees? (2) Has your company developed and
introduced a new product in the past 5 years? (3) Are you responsible for the development and/or
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launch of a new product? (4) Do you have a general understanding about your company’s
strategies? (6) Do you have a general understanding about your company’s current market?
Respondents were informed about confidentiality and the purpose of the study. All
respondents received compensation from the research companies for their time and effort.
4.2. Measures and Measurement Model Testing
Most of the items were adopted from previous studies; all constructs and measurement
items can be found in the Appendix. Customer and competitor orientation items were adopted
from Narver and Slater (1990), whereas customer and competitor knowledge competence items
were adopted from Li and Calantone (1998). We adopted the market-based innovation items
from previous literature (Benner and Tushman 2003; Christensen and Bower 1996; Zhou, Yim,
and Tse 2005). All of these measurement items had 7-point scales ranging from 1=Not at all to
7=To a great extent. For the firm performance items, respondents evaluated their firm’s
performance compared to their competitors’ performance. These measurement items had 7-point
scales ranging from 1=Much Worse (than competitors) to 7=Much Better (than competitors).
Measurement was tested using CFA in AMOS. All items were tested simultaneously.
First, measurement equivalence across the U.S. and China was evaluated in three steps by: (1)
estimating an unconstrained 2-group CFA; (2) estimating a constrained model with factor
loadings set equal; and (3) testing the significance of the chi-square difference. The baseline
model showed configural invariance [χ (240)= 462.3; RMSEA= .037; CFI= .978; GFI= .929;
IFI= 978]. The chi-square difference (23.4, df :18, p = .174) was not significant suggesting that
the measurement models were not significantly different between the U.S. and China.
Then the measurement models were evaluated. The correlation matrices for the U.S. and
China are in Table 1. Table 2 (U.S.) and Table 3 (China) has the loadings, t-values, Cronbach
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alphas, internal composite reliabilities, and average variances extracted (AVEs). As per Fornell
and Larcker (1981): (1) coefficient α values and composite reliabilities are all greater than .70;;
(2) convergent validity was established, as AVEs for all constructs were greater than .50; and (3)
discriminant validity was established, as AVE was greater than the correlation between any
constructs squared. For example, in the U.S., the highest “squared correlation” was between
competitive knowledge competence and competitor orientation (.60), while both of the AVEs
were higher (.80 and .71 respectively; Table 2). In the China sample, the highest “squared
correlation” is between customer knowledge competence and competitor knowledge competence
(.57), while both of the AVEs are higher (.73 and .69 respectively; Table 3). This demonstrates
that the constructs used in the model are statistically different and they do not overlap.
*************Insert Table 1, Table 2, Table 3 about here***************
Since the data was collected from managers’ responses, common method variance (CMV)
needs to be addressed. CMV can be controlled through both procedural and statistical remedies
(Podsakoff et al. 2003). To address the procedural remedies, we ensured respondent anonymity,
reduced evaluation apprehension, reduced item ambiguity, improved item wording, and
separated the measurements of the predictor and criterion variables by introducing the predictor
variables at the beginning of the survey, followed by items that were not used in this study, and
lastly adding the criterion variables at the end of the survey). As for statistical remedies, we
applied Harman’s one factor test within a CFA setting. The model indicated poor fit (χ (135) =
1902; RMSEA =.214; CFI = .643; GFI =.549; p=.000). We also implemented the partial
correlation technique as suggested by Lindell and Whitney (2001). The significant zero-order
correlations remained significant (in both U.S. and China samples) after the partial-correlation
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adjustments were made. These results suggest that CMV is unlikely to affect the findings of this
study.
4.3. Method: Mediation Analyses
The significance of the individual indirect effects was calculated using the Hayes and
Preacher (2013) macro. This macro is a more advanced version of the widely used mediation
macro (Preacher & Hayes, 2008) and provides a superior bootstrap test compared to the Sobel
test (Zhao et al. 2010). It also enables the estimation of a multiple mediator model with multiple
independent variables. This allowed us to test the mediation effects of customer and competitor
knowledge competencies (multiple mediators) between customer and competitor orientations
(multiple independent variables) and market-based innovation (dependent variable), as well as
the mediation effects of market based-innovation between customer and competitor knowledge
competencies (multiple independent variables) and firm performance (dependent variable)
simultaneously. The significance level for the bias corrected confidence intervals was 95%.
4.4. Method: Country Comparison
Two-group path analysis was used to test the hypotheses. The unstandardized estimates
were used to compare the effects across countries (Calantone et al. 1996). The between-country
differences were tested in four steps: (1) testing an unconstrained model; (2) constraining
relationships between constructs to be equal across the two countries; (3) testing the significance
of the chi-square difference; and (4) if the chi-square difference is significant, freeing the paths
one-by-one. The chi-square difference between the constrained (χ (15) = 46.29) and the
unconstrained models (χ (4) = 5.56) was significant (df difference = 11; p < .05) suggesting
that there are differences in the paths between the U.S. and Chinese models. Afterwards, freeing
some of the constraints in a particular order significantly improved model fit.
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5. Results and Hypothesis Testing
Table 4 presents the parameter estimates and significance levels for the model in Figure
1, for the U.S. sample. The model fit statistics at the bottom of Table 4 indicate a good overall
fit (χ (4) =5.57; p=.234; CFI=.999; RMSEA=.024; IFI=.999; GFI =.997). The R2 for customer
and competitor knowledge competence were .57 and .62 respectively; the R2 was .58 for market-
based innovation and .27 for firm performance.
Hypothesis 1a-b: Mediation Effects of Knowledge Competence
Table 5 presents the total, direct, and indirect effects from the mediation analyses and
indicates mediation types (e.g., full vs. partial). These were calculated by the macro for U.S.
data. Table 5 shows that customer orientation (CustO) had a positive total effect on market-based
innovation (MktIn) (β =.1; p < .01). The direct effect was not significant (β = -.01; p > .05).
However the indirect effect through customer knowledge competence (CustKnow; β =.13) was
significant since the confidence interval [.05 .21] doesn’t include zero. This indicates full
mediation supporting H1a (i.e., only indirect paths are significant).
Competitor orientation (CompO) had a positive total effect on market-based innovation (β
=.63; p < .001). It has a positive direct effect (β =.44; p < .001), as well as an indirect effect
through competitor knowledge competence (β =.14; [.04 .24]). This indicates partial mediation.
Zhao et al. (2010) state that when (X→M)* (M→Y)* (X→Y) is positive, the partial mediation is
called a “complementary” mediation. Taking the values of (CompO → CompKnow)*
(CompKnow →MktIn) * (CompO → MktIn) from Table 4 produces (β = .68)* (β = .20)* (β =
.44), which is positive. Thus this is a complementary mediation supporting H1b.
5.1. Hypothesis 2: Mediation Effects of Market-based Innovation
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Customer knowledge competence (CustKnow) had a positive total effect on firm
performance (FirmPerf) (β =.34; p < .001), as well as a positive indirect effect through market-
based innovation (β =.06; [.03 .10]) (Table 5). The direct effect was also positive (β =.28; p <
.001) indicating partial mediation. Since [CustKnow → MktIn (β = .22)] * [MktIn → FirmPerf
(β = .28)] * [CustKnow → FirmPerf (β = .28)] was positive (from Table 4), this is
complementary mediation supporting H2a. As for competitor knowledge competence
(CompKnow), it had a positive total effect on firm performance (β =.23; p < .01); also the
indirect effect through market-based innovation (β =.15) was significant ([.08 .22]). However the
direct effect was not significant (β = .08; p > .05) indicating full mediation supporting H2b.
************Insert Table 4, Table 5 and Table 6 about here************
5.2. Hypothesis 3: Cross-Country Comparison of Market Orientation Effects
Table 6 contains the results comparing the U.S. and China parameters: significant chi-
squares indicate that were differences between U.S. and China samples. The path coefficients
(βs) were used to determine whether the path was stronger in the U.S. or China. For example,
the Customer Orientation → Customer Knowledge Competence path was significantly different
(χ = 10.63; p < .001) and stronger in the U.S. sample compared to China (U.S. β=.59 versus
β=.45 China). This supports H3a. Similarly, the Competitor Orientation → Competitor
Knowledge Competence (χ = 8.69; p < .01), and Competitor Orientation → Market-Based
Innovation relationships (χ = 11.36; p < .001) were both significantly different across samples
and these effects were stronger in the U.S. (β=.68 in the U.S versus β=.50 in China, and U.S.
β=.42 vs. β=.22 China respectively). These results support H3c and H3d.
H3b required a different analysis. The effect of Customer Orientation on Market-based
Innovation was fully mediated by Customer Knowledge Competence (Table 5). This full
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mediation means that the direct path, Customer Orientation → Market-Based Innovation, was
nonsignificant. Thus we had to test this effect without the mediating variable (Customer
Knowledge Competence). This alternative full model had a good fit (χ (9) = 16.4;
RMSEA=.50; CFI= .996), and the results were similar to the previous full model. The results for
the Customer Orientation → Market-Based Innovation direct relationship were now significant
in the U.S. sample. The results in Table 6 indicate that this relationship was significantly
different across samples (χ = 7.32; p < .01). This effect was positive in the U.S. sample (β=.09;
p< .05) but not significant in China ((β=-.06; p > .05). This supports H3b.
The results also indicate that only one other path, Customer Orientation → Competitor
Knowledge Competence, was significantly different across samples (χ = 4.16; p < .05).
6. Discussion
The theoretical model explored the relationships among market orientation, market
knowledge competence, market-based innovations and firm performance. Market orientation
comprises customer and competitor orientations; market knowledge competence comprises
customer and competitor knowledge competencies. Through discriminant validity tests, we
demonstrated that customer (/competitor) orientation and customer (/competitor) knowledge
competence are different constructs, and we tested all effects separately.
By testing the mediation role of market knowledge competence, this study demonstrated
a mechanism that transforms customer and competitor orientations into market-based
innovations. In addition, the mediation role of market-based innovation explained how customer
and competitor knowledge competencies lead to firm performance. Testing differences in
relationship strengths in U.S. and in China revealed that U.S. firms better utilize customer
(/competitor) orientation to generate customer (/competitor) knowledge competence and then
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create market-based innovations (i.e., the U.S. betas or effect sizes are greater than those for
Chinese firms). These results are discussed in detail below.
6.1 Mediation Effects of Knowledge Competence
The first set of findings concerns market knowledge competence mediating the
relationships between market orientation and market-based innovations. We found (as
hypothesized) that (a) customer knowledge competence was a mediator of the relationship
between customer orientation and market-based innovation; and that (b) competitor knowledge
competence was a mediator of the relationship between competitor orientation and market-based
innovation. Here, orientation and knowledge competence were domain-matched. An important
finding is the positive total effect of these market orientation constructs on market-based
innovations. The first mediation was full (i.e., the direct effect was nonsignificant) while the
second mediation was partial (i.e., both direct and indirect effects were significant). In other
words, our results indicate that both customer and competitor orientations enhanced market-
based innovations indirectly, but only competitor orientation affected market-based innovations
directly. These mediation findings also mean that the relationships of both customer and
competitor knowledge competence to market-based innovation were positive.
In addition, although not hypothesized, we found that customer orientation was positively
related to competitor knowledge competence and that competitor orientation was positively
related to customer knowledge competence. Here, orientation and competence were not domain-
matched. Thus both customer and competitor orientations were positively related to both
customer and competitor knowledge competencies; however orientation-competence pairs that
were domain-matched had greater betas than pairs that were not domain-matched. Competitor
information gathered as a result of competitor orientation is utilized to generate knowledge about
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competitors’ products and strategies and about customers; similarly, customer information
gathered as a result of customer orientation is utilized to generate knowledge about customers
and about competitors. Focusing on competitors may include focusing on competitors’
customers, and focusing on customers may include focusing on the competing products that
those customers consume or desire. It is important to note that domain-matching, such as was
done in this study and (for example) Gotteland and Boule (2006), versus not matching domains
may account for some of the differences in past literature results.
Our findings about the mediation effects of market knowledge competence explains why
market oriented firms are better at creating market-based innovations. Market orientation focuses
on and encourages the gathering of information about customer and competitors. However, it is
market knowledge competence that transforms that information focus into knowledge that can be
used to create innovations. This is important because there is a gap between knowing what
customers want or what competitors are doing and actually creating an innovation. Our study
fills this gap by explaining how this knowledge transformation occurs and we provide empirical
evidence for the relationships between market orientation and market knowledge competence
constructs (Li and Calantone 1998). In summary, there are five routes to enhanced market-based
innovation: (1) through customer orientation and customer knowledge competence; (2) through
customer orientation and competitor knowledge competence; (3) through competitor orientation
and competitor knowledge competence; (4) through competitor orientation and customer
knowledge competence; and (5) directly from competitor orientation to market-based innovation.
6.2 Mediation Effects of Market-based Innovations
The second set of findings concern market-based innovations mediating the relationships
between market knowledge competence and firm performance. We found (as hypothesized) that
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market-based innovations mediated the relationship between (a) customer knowledge
competence and firm performance; and (b) competitor knowledge competence and firm
performance. The total effects of these market knowledge competence constructs on firm
performance were positive. The first mediation was partial, while the second mediation was full.
In other words, our results indicate that both customer and competitor knowledge competencies
enhanced firm performance indirectly through market-based innovations, but only customer
knowledge competence affected firm performance directly. The relationship of market-based
innovation to firm performance was positive.
Our findings reveal that a firm’s ability to generate and use knowledge about its
customers and competitors increase firm performance through the development of market-based
innovations. This emphasizes the important role of market-based innovations in transforming
product-related customer and competitor knowledge into firm performance. Our study confirms
previous findings (e.g., Atuahene-Gima and Wei 2011; Johnson et al. 2009) that indicate a direct
effect of market knowledge competence (or components thereof) on performance, and extends
the literature by demonstrating the indirect effects through market-based innovations. Our study
also confirms the findings of Zhou et al. (2005) that indicate a positive relationship between
market-based innovations and firm performance.
6.3 Comparing Model Relationships Across the U.S. and China
The third set of findings concern differences in effect sizes (i.e., betas) of model
relationships across the U.S. and China. Overall, firms in the U.S. were better able to leverage
market orientation as compared to firms in China (i.e., the betas were greater in the U.S., as
discussed below), but almost all key relationships were significant and positive in both U.S. and
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China samples. This indicates that our theoretical model holds well in two different countries at
different stages of development.
The strengths of these relationships (i.e., the betas) reveal interesting differences
however. The cross-country comparison indicates that customer (/competitor) orientation
enhances customer (/competitor) knowledge competence and market-based innovations more in
the U.S. compared to China. This means that firms in the U.S. leverage market orientation better
than firms in China to attain important outcomes such as market knowledge competence and
market-based innovations. In other words, U.S. firms are more capable of transforming customer
and competitor information into customer and competitor knowledge and subsequently into
innovations. Our findings support the argument of Sin et al. (2005) that market orientation has
stronger effects in countries with higher economic freedom. Cross-country comparisons of
market orientation are mostly focused on the direct effect of market orientation on performance
(e.g., Peng and Luo 2000; Sin et al. 2003;2005; Theoharakis and Hooley 2008). However our
findings show that market orientation’s indirect effects on firm performance through market
knowledge competence and market-based innovations also differ across countries.
Using an alternate model that omitted the mediation of knowledge competence, we found
that customer orientation doesn’t have a significant effect on market-based innovations in China
while it does in the U.S.; i.e., focusing on customers in China doesn’t lead to market-based
innovations as it does in the U.S. One reason could be the relatively lower experience of Chinese
firms on gathering and disseminating customer information. The second reason could be that the
driving force behind creating innovations in Chinese firms is competitor orientation. It may
indicate that Chinese firms focus more on what their competitors are doing, rather than what
their customers are demanding. This result is contrary to the findings of Frambach et al. (2003)
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that indicate a negative relationship between competitor orientation and new product
development and a positive impact of customer orientation. These authors argue that when firms
are focused on imitation or me-too strategy, they are mostly focused on their competitors rather
than customers. This argument is supported by our finding (not hypothesized) that customer
orientation has a stronger effect on competitor knowledge competence in China compared to
U.S. This implies that Chinese companies are using customer related information to engender
knowledge about their competitor’s products and strategies to a much greater extent than U.S.
firms. Our findings are indicative of the competitor-focused nature of Chinese firms.
7. Limitations
There are several limitations of this study. First, causality cannot be determined from cross-
sectional data (as was collected in this research); this would require longitudinal data. Even
though we tested several alternative models and our theoretical model was the best fitting one,
cross-sectional data doesn’t guarantee causality.
Second, we did not study possible industry effects. During the data collection process, we
included several additional screening questions which enabled us to collect data from very
specific types of companies. We also asked the market research company to collect the data from
very similar industries in the U.S. and China. Thus we believe our data compares similar
companies and industries across countries (and hence similar product classes). However, due to
confidentiality issues, we do not have access to company specific information including the
industry that firms belong to. Thus we cannot test full equivalence on an industry-by-industry
basis across the U.S. and China. Future studies can focus on companies from very different
industries to explore the possible moderation effects of industry on the relationships studied.
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Third, the generalizability of the results is limited to firms in the U.S. or China (the two
countries studied) or to firms in very similar countries. China and the U.S. have significant
macro-economic differences, and there were differences between U.S. and Chinese samples in
some hypothesis testing results. The connection between economic differences and market
orientation utilization (for example) or market knowledge competence has not been studied in
detail. In summary, testing model relationships in different countries, industries, and with
different product or service types may be fruitful avenues for future research.
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TABLE 1: CORRELATIONS U.S. (BELOW DIAGONAL), CHINA (ABOVE DIAGONAL)
Variable 1 2 3 4 5 6 1 Customer Orientation 1 .529 .583 .558 .337 .323 2 Competitor Orientation .549 1 .495 .655 .472 .314 3 Customer Knowledge Competence .726 .579 1 .755 .492 .379 4 Competitor Knowledge Competence .548 .776 .730 1 .551 .390 5 Market-Based Innovation .495 .712 .607 .692 1 .334 6 Firm Performance .419 .427 .508 .479 .505 1
All correlations are significant at p < .01 two-tailed.
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TABLE 2: MEASUREMENT MODEL-U.S.
Construct Name Item Loading t-Value Cronbach’s α
Internal Composite Reliability
AVE
Customer Orientation
CustO1 .87 18.6
.93 .93 .82 CustO2 .90 19.4
CustO3 .93 20.6
Competitor Orientation
CompO1 .73 14.1
.87 .88 .71 CompO2 .88 18.6
CompO3 .90 19.0
Customer Knowledge Competence
CustKnow1 .86 17.9
.86 .88 .71 CustKnow2 .92 20.0
CustKnow3 .73 14.1
Competitor Knowledge Competence
CompKnow1 .89 19.0
.92 .92 .80 CompKnow2 .90 19.5
CompKnow3 .89 19.1
Market-Based Innovation
MarketIn1 .80 16.1
.90 .90 75 MarketIn2 .87 18.1
MarketIn3 .93 20.3
Firm Performance
FirmPerf1 .90 19.7
.95 .95 .87 FirmPerf2 .96 21.8
FirmPerf3 .94 21.2
χ (120)= 236.6; p-value=.00; CFI= .976; RMSEA=.058; GFI=916; IFI=.977.
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TABLE 3: MEASUREMENT MODEL-CHINA
Construct Name Item Loading t-Value Cronbach’s α
Internal Composite Reliability
AVE
Customer Orientation
CustO1 .84 19.8
.89 .89 .73 CustO2 .90 21.8
CustO3 .83 19.3
Competitor Orientation
CompO1 .71 15.0
.81 .81 .59 CompO2 .75 16.1
CompO3 .84 19.1
Customer Knowledge Competence
CustKnow1 .81 18.9
.89 .89 .73 CustKnow2 .90 22.2
CustKnow3 .85 20.3
Competitor Knowledge Competence
CompKnow1 .87 21.1
.87 .87 .69 CompKnow2 .84 19.9
CompKnow3 .78 17.8
Market-Based Innovation
MarketIn1 .82 18.8
.89 .89 .73 MarketIn2 .86 20.1
MarketIn3 .88 21.1
Firm Performance
FirmPerf1 .83 19.6
.92 .92 .79 FirmPerf2 .96 24.9
FirmPerf3 .88 21.3
χ (120)= 225.6; P-value=.00; CFI= .979; RMSEA=.048; GFI=939; IFI=.979.
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TABLE 4: PARAMETER ESTIMATES AND SIGNIFICANCE LEVELS (U.S.)
Effect Std. β P
Customer Orientation → Customer Knowledge Competence .59 ***
Customer Orientation → Competitor Knowledge Competence .18 ***
Customer Orientation → Market-Based Innovation -.01 (ns) Competitor Orientation → Competitor Knowledge Competence .68 *** Competitor Orientation → Customer Knowledge Competence .26 *** Competitor Orientation → Market-Based Innovation .44 *** Customer Knowledge Competence → Market-Based Innovation .22 ** Customer Knowledge Competence → Firm Performance .28 *** Competitor Knowledge Competence → Market-Based Innovation .20 ** Competitor Knowledge Competence → Firm Performance .08 (ns) Market-Based Innovation → Firm Performance .28 *** R Customer Knowledge Competence
.57
R Competitor Knowledge Competence .62 R Market-Based Innovation .58 R Firm Performance .27 χ (4) = 5.57; p=.234; CFI=.999; RMSEA=.024; IFI=.999; GFI=.997. * p < .05, ** p < .01, *** p < .001, ns= nonsignificant (2-tailed).
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TABLE 5: MEDIATION EFFECTS (U.S.)
H: Relationship Total effect
Direct effect
Indirect effect [confidence interval 95%] Mediation type
H1a CustO → CustKnow → MktIn .15 ** -.01 (ns) .13 [.05 .21] Full (Indirect-Only) H1b CompO → CompKnow → MktIn .63 *** .44 *** .14 [.04 .24] Partial (Complementary) H2a CustKnow → MktIn → FirmPerf .34 *** .28 *** .06 [.03 .10] Partial (Complementary) H2b CompKnow → MktIn → FirmPerf .23 ** .08 (ns) .15 [.08 .22] Full (Indirect-Only)
Note: * p < .05, ** p < .01, *** p < .001, ns= nonsignificant (2-tailed).
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TABLE 6: COUNTRY DIFFERENCES (U.S. Versus China)
Effect Country Std. β χ²
Customer Orientation → Customer Knowledge Competence U.S. .59 *** 10.63 *** H3a China .45 ***
Customer Orientation → Market-Based Innovation1 U.S. .09 * 7.32 ** H3b China -.06 (ns)
Competitor Orientation → Competitor Knowledge Competence U.S. .68 *** 8.69 ** H3c China .50 ***
Competitor Orientation → Market-Based Innovation U.S. .42 *** 11.36 *** H3d China .22 ***
Customer Orientation → Competitor Knowledge Competence U.S. .18 *** 4.16 * China .29 ***
Competitor Orientation → Customer Knowledge Competence U.S. .26 *** .00 (ns) China .26 ***
Customer Knowledge Competence → Market-Based Innovation U.S. .21 *** .01 (ns) China .21 ***
Competitor Knowledge Competence → Market-Based Innovation U.S. .25 *** .60 (ns) China .25 ***
Customer Knowledge Competence → Firm Performance U.S. .23 *** 2.63 (ns) China .23 ***
Competitor Knowledge Competence → Firm Performance U.S. .14 * .96 (ns) China .14 *
Market-Based Innovation → Firm Performance U.S. .21 *** 3.58 (ns)
China .21 ***
R Customer Knowledge Competence U.S. .57 China .39
R Competitor Knowledge Competence U.S. .62 China .49
R Market-Based Innovation U.S. .58 China .33
R Firm Performance U.S. .27
China .22 Note: * p < .05, ** p < .01, *** p < .001, ns= nonsignificant (2-tailed). Model fit statistics: RMSEA=.008; CFI= .999; GFI=.994; χ (11) = 11.5; p=.406.
1 This parameter was tested without the “Customer Knowledge Competence → Market-Based Innovation” because its full mediation was masking the “Customer Orientation → Market-Based Innovation” relationship (RMSEA=.66; CFI= .979; GFI=.973; χ (15) = 58.5, p=.00).
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FIGURE 1: CONCEPTUAL FRAMEWORK: KNOWLEDGE COMPETENCE AND MARKET-BASED INNOVATION AS MEDIATORS OF
ORIENTATION-PERFORMANCE RELATIONSHIPS
Market-Based Innovation
Customer Orientation
Firm Performance
Competitor Orientation
Customer Knowledge Competence
Competitor Knowledge Competence
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APPENDIX: MEASUREMENT
x Customer Orientation (Narver and Slater 1990) 1. Our firm has a strong focus on customer commitment. 2. Our firm has a strong focus on creating customer value. 3. Our firm has a strong focus on understanding customer needs.
x Competitor Orientation (Narver and Slater 1990)
1. In our firm, sales people have a strong focus on sharing competitor information. 2. Our firm has a strong focus on rapidly responding to competitor's actions. 3. Top managers in our firm are strongly focused on discussing competitor's strategies.
x Customer Knowledge Competence (Li and Calantone 1998) 1. We have the ability to learn the current and potential needs about new products. 2. We have the ability to integrate customer information into new products. 3. We are capable of using customers to test and evaluate new products.
x Competitor Knowledge Competence (Li and Calantone 1998)
1. We have the ability to search and collect information about our competitors’ products and strategies.
2. We have the ability to integrate the information about competitors' products in our product design.
3. We are capable of understanding competitors’ strategies.
x Market-based Innovation (Benner and Tushman 2003; Christensen and Bower 1996; Zhou, Yim, and Tse 2005)
1. Our product concept is targeted to new and/or emerging markets. 2. Our product is designed for new customer sets that are different from our existing
customers. 3. Our product is designed for addressing an opportunity in a market that is different from
our current market.
x Firm Performance (Compared to competitors) 1. Sales growth in the past two years 2. Return on investment 3. Profit level
Note: For the firm performance items, respondents evaluated their firm’s performance compared to their competitors’ performance on 7-point scales ranging from 1=Much Worse (than competitors), to 7=Much Better (than competitors). All of the other measurement items had 7-point scales ranging from 1=Not at all, to 7=To a great extent.
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HIGHLIGHTS
x We test the market orientation=> market knowledge competence => market-based innovation
=> firm performance framework with both U.S. and Chinese managers
We found that
x Market knowledge competence mediates the relationship between market orientation and
market-based innovations
x Market-Based innovations mediate the relationship between market knowledge competence
and firm performance
x U.S. firms utilize customer (competitor) orientation, that enhances both customer (competitor)
knowledge competence and market-based innovations, better than Chinese firms
Highlights (for review)
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