Enhancing performance with product-market innovation: The influence of the top management team.

Powerful competitors and rapid technological change have made the quest for competitive advantage more difficult and its accomplishment less sustainable (D'Aveni, 1994). Corporate entrepreneurship in general and innovtion in particular are frequently regarded as important means of achieving superior performance in such competitive environments. Corporate entrepreneurship has been variously conceptualized as the strategic renewal of established corporations, and innovtion and venturing within established corporation (Guth and Ginsberg, 1990), and innovation within existing businesses (Sandberg, 1992). Lumpkin and Dess (1996) argue that innovation is a key element of a firm's entrepreneurial orientation, and Covin and Slevin (1991) note that innovation is an important dimension of a firm's repertoire of entrepreneurial behaviors. In fact, innovation is so important to corporate entrepreneurship that it may be considered the essence of such activity (Covin and Miles, 1999). Hence, the management of innovation ha s become a subject of significant research interest (e.g., Hitt et al., 1999).

The research question examined in this article asks that impact top management them (TMT) demography has on the effectiveness of firms' product-market innovations. As Lumpkin and Dess (1996) note, top management team characteristics are a key contingency factor influencing the relationship between firm-level innovation and firm performance. Contingency models advance our understanding of organizational phenomena because they move beyond bivariate relationships and explicitly recognize the need for increased model specification (Rosenberg, 1968). Hence, to enhance our understanding of how innovation may contribute to performance outcomes, we examine the impact of management team characteristics upon that relationship.

However, TMT demography is generally modeled as an independent or dependent construct rather than in a contingency model (Finkelstein and Hambrick, 1996). Briefly, upper-echelons research frequently posits that the decisions of top management are primary drivers of firm performance, and those decisions are influenced by the demographic makeup of the top management team. The upper-echelons literature has met with equivocal results (c.f., Finkelstein and Hambrick, 1996), particularly when attempting to link TMT demography directly to firm performance (e.g., Murray, 1989; West and Schwenk, 1996). We believe that a perspective that recognizes an interaction effect between strategy and the top management team may more accurately reflect the strategy formulation and implementation process. We discuss and test that perspective in this study.

The article is organized as follows. In the next section we provide the theoretical background and development for two hypotheses regarding 1) the direct effect of innovation on firm performance and 2) an interaction effect between innovation and top-management team characteristics on firm performance. Next, we discuss the sample, data and statistical procedures. The article concludes with a discussion of the results of our hypotheses testing, implications of this study for practitioners and scholars, limitations of the study, and avenues for future research.

CONCEPTUAL BACKGROUND AND HYPOTHESIS

Miller and Friesen (1978) cite product-market innovation, that is, innovation comprised of product design, market research, and other marketing-related activities, as an important element of a successful innovation strategy. Other authors (e.g., Maidique and Patch, 1982) discuss technological innovation--an emphasis on research and development, and technical expertise related to new or improved products and processes--as the driver of a successful innovation strategy. Lumpkin and Dess argue that while the distinction between product-market innovation and technological innovation may provide a useful means to conceptualize innovation, in practice the distinction between the two is frequently blurred, "... as in the case of technologically sophisticated new products designed to meet specific market demand" (1996: 143). Furthermore, making such a distinction unnecessarily fragments the classification of innovation (Van de Ven, 1986). Other authors have developed definitions that comprise both elements of innovat ion. For instance, Morris and Sexton's definition of innovativeness as "... the seeking of creative, unusual, or novel solutions to problems or needs" seems to encompass both technological and product-market innovation (1996: 6).

Nohria and Gulati (1996) note that prior research has not yet developed a definitive measure of innovation. Accordingly, these authors adopted a very broad definition of innovation that includes "any policy, structure, method or process, product or market opportunity ... perceived to be new" (Nohria and Gulati, 1996:1251, emphasis added). The Austrian perspective also emphasizes new actions carried out by firms in an effort to disrupt the competitive status quo, causing disequilibrium (status quo and equilibrium are defined here as ordinary competitive behavior). By contrast, Nelson and Winter argued that "non-new" or commonplace actions are "... regular and predictable business behavior plausibly subsumed under the heading 'routine,' especially if we understand that term to include the relatively constant disposition and strategic heuristics that shape the approach of the firm" (1982: 15). Our definition of product-market innovation is consistent with these definitions: the firm's realized product-market act ions that go beyond the status quo of the market process and are perceived to be new.

Innovation has been associated with improved firm performance in both theoretical and empirical research. For instance, Nelson and Winter (1982) posit that firms need not engage only in radical innovation but may also undertake many incremental innovative activities as a means to success. Caves and Ghemawat (1992) found a positive linkage between new products and new processes, and firm performance. Rapid and frequent new product introduction can significantly enhance organizational performance by facilitating the acquisiton of market share, providing pricing power, and permitting the company to establish industry standards (Zahra and Covin, 1993). Ravenscraft and Scherer (1982) and Smith et al. (1992) found that R&D efforts were more strongly associated with firm performance than were marketing efforts. Finally, Banbury and Mitchell (1995) linked the introduction of product innovations to market share acquisition.

In sum, despite some conflicting evidence (Nelson and Winter, 1982), theory and empirical research suggest a positive relationship between innovative activity and firm performance. Accordingly, we propose the following hypothesis:

H1: Product-market innovation will be positively associated with firm performance.

Top Management Teams and Decision Making

While we expect that innovation will be directly associated with firm performance, we also expect that the nature of the management team will influence the innovation-performance relationship. Contingency modeling such as that performed here allows a "... more precise and specific understanding" (Rosenberg, 1968: 100) of the relationship between product-market innovation and performance by increasing model specification. The mechanisms by which TMT demographic heterogeneity enhances the impact of product-market innovation on performance are discussed in the following paragraphs.

The nature of the top management team is central to the type and quality of firms' strategic choices (Andrews, 1971; Hambrick, 1989), including decisions regarding entrepreneurial posture (Khandwalla, 1987). Upperechelons theory posits that managers make strategic choices based upon their values, cognitions, and perspectives, and that organizational activities or outcomes reflect the collective cognitive biases and abilities of the TMT (Hambrick and Mason, 1984).

A significant body of research concerning innovation and organizational leadership has examined the link between the management team and innovative or creative behavior on the part of the management or the firm. For example, Bantel and Jackson (1989) found that demographically diverse management teams were associated with higher levels of creativity and innovation. Similarly, Wiersema and Bantel (1992) linked top-management team heterogeneity and propensity to engage in strategic change. Other researchers, such as Murray (1989), have attempted to directly link TMT characteristics to firm performance.

This study takes a different approach to the question of how leaders matter to firm innovation by incorporating firm performance into a model of TMT characteristics and firm-level innovation. Other authors have recently examined the link between TMT heterogeneity and performance (e.g., Hambrick et al., 1996). These authors examined the direct effects of TMT heterogeneity on various characteristics of firm competitive actions and rivals' responses, and the direct effect of TMT heterogeneity on firm performance. They sum up the relevance of the top management team to competitive activity by noting that ". .. undertaking competitive actions is foremost a function of being able to create, or generate, those actions" and call for research on the antecedents of competitive behavior ". . . to include the characteristics of the decision makers, in particular, the company's top management team" (1996: 665). Our study explores how the interaction between innovation and TMT heterogeneity influences the relationship betw een innovation and performance.