The Influence of a Company's Digital Orientation on its Innovation Commitment. A Moderating Model of Industry Growth and Environmental Dynamism


Term Paper, 2022

42 Pages, Grade: 1,3

Anonymous


Excerpt

Table of Contents

List of Abbreviations

List of Figures

1. Introduction

2. Theoretical Background
2.1. Digital orientation
2.2. Innovation commitment
2.3. Industry growth
2.4. Environmental dynamism

3. Hypotheses

4. Method

5. Discussion and Concluding Remarks
5.1. Theoretical and managerial contributions
5.2. Limitations and future research
5.3. Conclusion

REFERENCES

Abstract

Companies are striving to digitize, innovate and improve their competitive advantage. This in turn heavily depends on the company's environment, especially the growth of the industry in which the company is located, as well as the environmental dynamism. Therefore, the question of how a company's digital orientation influences the company's commitment to innovation is addressed in this paper. In addition, industry growth and environmental dynamics may moderate the effect. To investigate the relationships, we looked at the 500 largest listed companies in the United States and use computer aided text analysis (CATA) as well as quantitative methodologies, such as multiple regression analysis, to investigate our research construct. We aim to show that digital orientation is positively related to innovation commitment of firms and expect industry growth as well as environmental dynamism to intensify this connection. With our findings, we aim to advance knowledge on competitive advantage in the digital transformation and specifically on the new construct of digital orientation. The results of this research construct are crucial for both research and practice and lead to many new research opportunities.

List of Abbreviations

GDP Real gross domestic product

SAM Strategic alignment model

CATA Computer-aided text analysis

NAICS North American Industry Classification Code

R&D Research and development

List of Figures

Figure 1: Our conceptual model

1. Introduction

Organizations nowadays operate in an increasingly dynamic environment (Verhoef et al., 2021) This confrontation with high market dynamics is caused, among other things, by destabilizing forces such as globalized competition, frequent changes in customer demand and short product life cycles (Eisenhardt, Furr, & Bingham, 2010; Kumar & Bhatia, 2021). Additionally, the ongoing digitalization and digital transformation requires firms to frequently adapt to new external contingencies not only in terms of technology but also digital business strategy (Kindermann et al., 2021; Kumar & Bhatia, 2021). This statement is underlined by the fact that just a decade ago, only one of the five most valuable companies in the S&P 500 index was truly digital. By 2018, in contrast, all five of the most valuable companies in the S&P 500 index were already digital (Verhoef et al., 2021). It is therefore not surprising that in recent years organizational adaptation to the changing environment has become a central theme in management and strategy research (Stieglitz, Knudsen, & Becker, 2016; Verhoef et al., 2021). In this respect, the new and highly relevant construct of digital orientation has gained attention, especially with the emergence of new and powerful digital technologies (Ardito, Raby, Albino, & Bertoldi, 2021; Kindermann et al., 2021; Quinton, Canhoto, Molinillo, Pera, & Budhathoki, 2018). This strategic orientation is about the deliberate strategic positioning of a company to take advantage of the opportunities offered by digital technologies (Quinton et al., 2018). Digital orientation provides companies with strategic guidance for maintaining and implementing specific digitization strategies and selecting appropriate digitization initiatives. According (Kindermann et al., 2021: 645), digital orientation „provides organizations with strategic directions for nurturing and implementing specific digitization strategies and selecting appropriate digitization initiatives“. However, in order to survive, develop and grow in the fast-changing environment, companies need to continuously apply different strategies at different levels (Tsai & Yen, 2020). Therefore, in addition to digital orientation, it is also crucial for a company to be innovative in order to survive and gain competitive advantage in a complex and changing environment (Jayaram, Oke, & Prajogo, 2014). Since the key to innovation excellence lies in the willingness and performance of a company's employees to innovate (Tsai & Yen, 2020), we focus on a company's innovation commitment in this study.

Despite their crucial importance for companies, the topics of innovation commitment and digital orientation have received limited attention in the literature to date. To close this gap and advance knowledge about both research streams, our work aims to contribute to the understanding of the relationship between the two constructs in the context of industry growth and environmental dynamics. In doing so, we investigate a hitherto unknown linkage of variables and introduce digital orientation as a variable that influences innovation commitment and subsequently connects digitalization research with innovation research. Furthermore, we also consider industry growth and environmental dynamics as two key influencing factors. The decision to choose this context for the investigation was due to the fact that companies take initiatives, processes and new strategies in response to external factors (Kumar & Bhatia, 2021). To address our research aim, we examine the aforementioned variables by investigating a sample of the 500 largest listed companies in the United States. Hence, we use computer aided text analysis (CATA) and quantitative methods, such as multiple regression analysis, to examine our research construct mentioned above. Our study provides important theoretical and managerial implications and raises the awareness about digital orientation as a new and relevant strategic orientation.

2. Theoretical Background

2.1. Digital orientation

The concept of digital orientation, as a strategic approach to tackle the changing competition logic triggered by the digitalization and digital transformation, is relatively new. Since the first explicit conceptualization of digital orientation was introduced by (Quinton et al., 2018) in 2018 research on the topic is still scarce. Based on the resource-based view of the firm (Barney, 1991; Wernerfelt, 1984), choices about strategic orientations such as digital orientation represent valuable intangible capabilities that are difficult to imitate by others (Schweiger, Stettler, Baldauf, & Zamudio, 2019) and sensibly intertwined with the organization’s resources (Gatignon & Xuereb, 1997; Renko, Carsrud, & Brännback, 2009). Thus, an organization can achieve a competitive advantage and superior performance by organizing its resources that are valuable, rare, inimitable and non-substitutable (Barney, 1991; Wernerfelt, 1984). Following the premise that digital technologies differ fundamentally from non-digital technologies (Kallinikos, Aaltonen, & Marton, 2013), Quinton et al. (2018) propose a concept of digital orientation reflecting a combination of market orientation, entrepreneurial orientation and learning orientation. They introduce the term of digital orientation and define it as “the deliberate strategic positioning of an SME to take advantage of the opportunities presented by digital technologies” (Quinton et al., 2018). The approach of Kindermann et ) builds upon the concept of Quinton et al. (2018) but caters to overcome focal deficits since potential benefits from combining complementary orientations are not constrained to the digitalization context (Kindermann et al., 2021; Schweiger et al., 2019). Moreover, although a combination of existing strategic orientations offers advantages in dynamic environments, they argue that the persuasiveness of digital technologies is eroding the competitive advantage resulting from these existing strategic orientations. Thus, their novel construct integrates Nambisan, Wright, & Feldman's (2019) three key themes capturing the implications of digital technologies - affordances, openness and generativity - and the strategic alignment model (SAM) of (Henderson & Venkatraman, 1999). Their conceptualization goes beyond combining extant strategies but rather refers to a novel form of an “organization’s guiding principle aiming to pursue digital technology-enabled opportunities to achieve competitive advantage” (Kindermann et al., 2021. Combining both frameworks, Kindermann et al. (2021) identify four interrelated dimensions, namely digital technology scope, digital capabilities, digital ecosystem coordination and digital architecture configuration. The first dimension, digital technology scope, represents the external-technological domain of the SAM and depicts not only the technology itself but also individuals and the organization using the technology. It refers to the degree to which an organization makes use of digital technologies to offer digital or digitally enhanced products and services and creates value for its customers. The ability to offer and use discrete or complementary features, competencies and functionalities in form of the technology leverages and enables the organization to realize strategic growth. The more distinctive the digital technology scope, the more of the technology’s potential is used by the firm. Besides the technological aspect of the affordances perspective, there is the human and organizational aspect represented by the second dimension, digital capabilities. This dimension reflects the internal-organizational domain of the SAM covering employee-related capabilities. These capabilities are on the one hand directly influenced by the individuals’ level of proficiency, technological skill and know-how but also supported by the establishment of routines and internal structures on the other hand. A culture that leverages the human capital and knowledge assets of the firm with respect to the organizations set of technology may lead to competitive advantages. Thus, high digital capabilities result in strong competencies to utilize the firm’s technologies efficiently and the urge to continuously improve one’s competencies to create value. The third dimension, representing the external-organizational domain of the SAM, highlights the role of the ecosystem of heterogenous actors the organization is embedded in. In those ecosystems, the orchestration of members and shaping of governance structures play an important role since innovation, value creation and value capture are conducted collaboratively (Kindermann et al., 2021; Yoo, Boland, Lyytinen, & Majchrzak, 2012). These efforts to actively shape the ecosystem and remove restraining bottlenecks in the value creation processes of partners (Kapoor, 2018) are crucial for successful digitalization and might result in competitive advantages (Wareham, Fox, & Cano Giner, 2014). The last and fourth dimension of Kindermann et al.’s (2021) conceptualization of digital orientation refers to the remaining internal-technological domain named digital architecture configuration. It represents the challenge of balancing control over innovations and their generativity, meaning the capacity to trigger uncontrolled change mechanisms (Zittrain, 2009). The utilization and repurposing of external technological components relevant for value creation and capture does therefore not only have positive effects but also might involve importing undesired features (Nambisan et al., 2017). Consequently, systems, internal technological architectures and organizational structures need to be aligned to cater technological change and digitize processes to enhance value generation (El Sawy, Amsinck, Kraemmergaard, & Lerbech Vinther, 2016; Kindermann et al., 2021; Kohli, Grover, Clemson University, USA, & Clemson University, USA, 2008). Summing up, digital orientation is manifested by the four interrelated dimensions and puts emphasize on the alignment of these dimensions with internal/external and organizational/technological elements (Kindermann et al., 2021).

2.2. Innovation commitment

The subject of innovation commitment was chosen for this study because innovation is critical to the growth and success of a company in today's rapidly changing society and has been recognized as a pivotal source of competitive advantage for organizations (e.g. Cho & Pucik, 2005; Jayaram et al., 2014; Schiehll, Lewellyn, & Muller-Kahle, 2018; Tsai & Yen, 2020). Accordingly, engaging in activities that are likely to result in innovative outcomes have become a key imperative for many firms (Jayaram et al., 2014). Since the key to innovation excellence lies in the willingness and performance of a company's employees to innovate (Tsai & Yen, 2020), innovation commitment is a relevant topic that has received little attention in research to date. To understand innovation commitment, it is essential to first define the term innovation. The field of innovation is very broad, and the definition of the term varies considerably in the literature. For our study, we consider the term innovation in a general sense, because a breakdown of the term into different types of innovation would go beyond the scope of this paper. One definition of innovation derives from who states that innovation is the introduction of an internally developed or acquired system, process, device, policy, product, program or service that is new to the introducing organization. Nord & Tucker (1987) cited by Klein & Sorra (1996), also state that an innovation is a practice or technology that, whether or not other organizations have used it before, is used for the first time by members of an organization. Paladino (2008) states that in response to and in anticipation of changing environmental conditions, innovation is a continuous process that must constantly change (Paladino, 2008). Building on this, Hitt, Hoskisson, & Ireland (1990: 29) define commitment to innovation as „managerial willingness to allocate resources and champion activities that lead to the development of new products, technologies, and processes consistent with marketplace opportunities”. Tsai & Yen (2020) state that it is about employees helping the company to be more innovative and achieve a competitive advantage by investing more time and effort. In this context, the technological skills and competences of employees, among others, are important resources required for the innovation process (Renko et al., 2009). It is crucial to understand that employees are often the source of initiative and new ideas, as noted by Tsai & Yen (2020). Therefore, the innovation commitment of a company depends significantly on the willingness of employees to innovate, because company-wide innovation activity can only increase if employees are committed to innovation (Tsai & Yen, 2020). In summary, the commitment to innovation is about the company providing resources so that the company's employees invest more time and effort to help the company be more innovative.

2.3. Industry growth

It is important to address the subject of industry growth, as growing industries offer promising opportunities as well as greater market opportunities for companies (Klein & Sorra, 1996). In order to approach the subject of industry growth, it is first necessary to understand growth in general. The question of what growth actually is, is more difficult to answer than it seems at first sight. The subject of growth has a long history in economic literature and goes back to the 18th century to the "Father of Economics", Adam Smith. Nevertheless, in order to approach the topic, growth is first considered at the national level. At this level, growth is defined as an increase in real gross domestic product (GDP) over time using any year as a reference, so that usually growth is expressed as a percental change over time (Bharadwaj, 2005). The Global Competitiveness Report further identifies technology, public institutions and the macroeconomic environment as the three main pillars of economic growth (van Stel, Carree, & Thurik, 2005). With this knowledge, the topic of industry growth can now be addressed, as most industries grow at approximately close to the overall rate of GDP growth (Hudson, 2020). However, we assume that industries can over- or underperform average growth rates, as different industries may be subject to structural changes in the external environment, different internal contingencies or a varying influence of digitalization. According to Biemann, Fasang, & Grunow (2011) industry growth represents the change in size or output of all organizations within an industry combined over a given period of time. An industry with an increasing growth rate is characterized by an increasing absolute number of companies and/or an increase in the size of individual companies (Biemann et al., 2011).

2.4. Environmental dynamism

Environmental dynamism is a construct that was originally developed in the strategic management literature as a contextual variable moderating the relationship between firm characteristics and firm performance (Dess & Beard, 1984; Lawrence & Lorsch, 1967). However, moderating effects have also been found on other firm-level constructs such as organizational structure (Burns & Stalker, 1961), business level strategy (Miller, 1988), strategic decision making (Mitchell, Shepherd, & Sharfman, 2011) and dynamic capabilities (Drnevich & Kriauciunas, 2011). While some authors define environmental dynamism as a unidimensional construct aiming for clarity in theory building (e.g. Azadegan, Patel, Zangoueinezhad, & Linderman, 2013) others characterize it as a multifaceted construct in order to bring richness to the analysis (Eroglu & Hofer, 2014). We follow the latter and consider environmental dynamism as a multi-dimensional construct. Environmental dynamism refers to the degree of unpredictability and instability of change within a firm’s environment (Aldrich, 1979; Dess & Beard, 1984). The firm’s environment is conceptualized as the “changes in technologies, variations in customer preferences, and fluctuation in product demand or supply of materials” (Jansen, Van Den Bosch, & Volberda, 2006:1664). In general, environments are perceived as dynamic when the sector is characterized by short product life cycles and when competition requires frequent launching of new product or technologies in short time periods (Zmud, 1984). Moreover, when environments are dynamic, unpredictable, expanding and fluctuating (Khandwalla, 1977) they lead to necessity for making key decisions on the basis contradictory or incomplete information (Aldrich, 1999; Miller, 2007; Pérez-Luño, Wiklund, & Cabrera, 2011). In this situation, firms must upgrade their resources to develop more effective dynamic capabilities. In contrast to high dynamism environments, firms develop core competencies in more stable and predictable environments (Wang & Ahmed, 2007). Although the fundamental understanding of environmental dynamism is nearly identical among researchers, there are different approaches decomposing environmental dynamism into its underlying dimensions. Earlier studies considered dimensions such as velocity, ambiguity, unpredictability and complexity (Burns & Stalker, 1961; D’Aveni, 1994; Davis, Eisenhardt, & Bingham, 2009; Eisenhardt & Tabrizi, 1995; Lawrence & Lorsch, 1967) dynamism, complexity, diversity and hostility (Mintzberg, 1979) as most important. In contrast to that, more recent studies put emphasize on technological innovation and therefore have focused on decomposing the construct into dimensions such as product and technology market domains (Abernathy & Clark, 1985; Anderson & Tushman, 2001). According to (Wang & Chen, 2010), product market dynamism, or volatility in customer demand (Lin & Chang, 2015), refers to the need for frequent development of new products and for frequent technological advances that enable new products. Accordingly, technology market dynamism is related to the unpredictability in technology outcomes in an industry (Lin & Chang, 2015; Wang & Chen, 2010). (Eroglu & Hofer, 2014) expand this two-dimensional construct by a third dimension being competitive intensity. In this study, we follow the more recent understanding of environmental dynamism emphasizing the relevance of the technological component and its implications.

3. Hypotheses

The influence of digital orientation on innovation commitment. We posit that digital orientation is positively related to firms’ innovation commitment. However, since there is only little literature investigating digital orientation as one combined phenomenon, we derive our first hypothesis based on relevant literature of each of the four subordinate domains. Starting with the external-organizational domain, or the digital technology scope, (Kindermann et al., 2021) argues that a firm with higher digital orientation leverages technology to offer a greater portfolio of products and services, which are enabled or at least enhanced by digitalization. As this set of technology allows the firm to realize strategic growth by seizing opportunities (Kindermann et al., 2021; Nambisan et al., 2019), we expect innovation commitment to increase as well. In order to create more value, generate additional cash flows and satisfy customer needs better, the firm is reliant on using technology to its full capacity (Kindermann et al., 2021). Specifically, reaching this maximum capacity not only includes the development of new technologies or the alignment of such to the existing technological architecture of the firm, but also striving for possible combinations of technologies as well as the implementation of new technologies in extant products (Bharadwaj et al., 2013; Drnevich & Croson, 2013; Nambisan et al., 2019). However, exploiting the opportunities of the digital environment is heavily reliant of the firm’s innovation commitment which allows for technological progress by providing the resources necessary. As the firm gets more digitally oriented, we assume that its ability to sense technological possibilities and developments increases (Teece, 2007). Moreover, we expect the firm’s ability to seize opportunities increase as well (Teece, 2007) by deliberately implementing technological innovations such as 5G, blockchain or internet-of things (Frank, Dalenogare, & Ayala, 2019). (Xu, Xu, & Li, 2018). Therefore, we see a positive relationship between a higher degree of digital orientation and higher innovation commit9ent in form of R&D expenditures regarding digital technology scope. The second dimension, digital capabilities, is tightly connected to the first one, as it reflects the corresponding human and organizational aspects to the firm’s set of digital technologies, or the internal-organizational domain of the SAM (Kindermann et al., 2021). Distinguishing between system-use competencies and internal management skills to execute strategies (Henderson & Venkatraman, 1999), we see several aspects influencing the relationship between digital orientation and innovation commitment positively. First, we argue that the employees’ technological skills and capabilities are pivotal for a firm’s effective use of its digital technologies and the transformation of such into competitive advantages (Park, Bae, & Hong, 2019). While these employee-level competencies not only secure to exhaust the potential of the technologies to their maximum, they are also crucial for the development and adaption of new processes or technologies (e.g. Leiponen, 2005). Both aspects, in turn, help in reconfiguration and exploitation of resources and ultimately enhance efficiency (Salerno, de Vasconcelos, da Silva, Bagno & Freitas, 2015) Thus, strategic human resource development is one important aspect when being confronted with increasingly dynamic and digital environments (Chen & Huang, 2009; Subramaniam & Youndt, 2005). Accordingly, we argue that higher digital orientation leads to stronger innovation commitment due to a higher awareness of the importance of highly skilled employees and subsequent investments in human resource development. Moreover, as the number of employees with distinct proficiency in digital technologies such as big data analytics, machine- and deep-learning, artificial experience or high-performance computing increase (Bharadwaj et al., 2013; McAfee & Brynjolfsson, 2017), the organization might pursue more ambitious and larger innovation projects. Accordingly, we posit that higher digital orientation leads to stronger innovation commitment due to the increased availability of skilled employees needed for innovation projects. Investigating digital capabilities on the organizational level, internal management skills are another impactful force. Implementing an appropriate leadership style emphasizing transformational thinking (Kumar & Bhatia, 2021; Shao, Feng, & Hu, 2017) and enforcing suitable organizational routines leverages the human capital and knowledge (Kindermann et al., 2021). Subsequently, internal management skills enhance the impact of employee-related capabilities even further. The third dimension, digital ecosystem coordination, refers to coordinative efforts in the ecosystem of the firm to achieve competitive advantages (Kindermann et al., 2021). As firms seek to actively shape their surrounding in terms of membership, value creation and value capture (Kindermann et al., 2021), they pursue collaborative approaches to innovation (Yoo et al., 2012). Dependent on their position within the ecosystem, firms either contribute to the focal value proposition directly or indirectly (Jacobides, Cennamo, & Gawer, 2018). Providing or using application programming interfaces or platforms for example are typical practices in this regard (Kindermann et al., 2021). Therefore, digital orientation leads to recognizing the importance of interacting with the external environment, as new value creation and value capture opportunities accrue. Moreover, digital orientation emphasizes pursuing collaborative efforts with strategic partners, instead of considering ecosystem partners solely as competitors. In this vein, (Pennings & Harianto, 1992) demonstrate that firms are more likely to implement innovations with partners when they are networking extensively. Accordingly, we assume that digitally oriented firms expand their collaboration and innovation efforts in order to benefit from the resulting multiplicity of possibilities in interacting with ecosystem partners. In consequence, firms with a higher digital orientation have a higher innovation commitment. Digital architecture configuration refers to the internal-technological domain and reflects technological mechanisms as well as organizational structures and responsibilities that enable technological change and the digitalization of internal processes (Kindermann et al., 2021). As digitally oriented organizations include third-party technological assets to their value proposition, they introduce mechanisms to minimize risks triggered by these external assets (Kindermann et al., 2021). These can either be of technological nature such as spaces for constrained serendipy (Austin, Devin, & Sullivan, 2012) or of organizational nature such as project and contract management (Yoo et al., 2012). We assume that a higher digital orientation leads to a more professional handling of third-party assets which not only minimizes risks but also reduces restraints of pursuing trial and error strategies. Subsequently, we expect higher innovation commitment because of overall higher trust in explorative activities with unknown results. Further, we assume that digital orientation also has an impact on the firm-intern organizational structures. The introduction of dynamic administrative structures (Nambisan et al., 2019) or the establishment of dedicated top-management roles such as chief information officer (CIO) or chief digitalization officer (CDO) increase the alignment towards new digital assets (El Sawy et al., 2016; Sanchez & Mahoney, 1996; Singh & Hess, 2017). As teamwork plays an important role in the Industry-4.0-era (Kumar & Bhatia, 2021), the establishment of organizational units, which are vertically and horizontally integrated also foster learning effects (Kang, Morris, & Snell, 2007; Sanchez & Mahoney, 1996). Thus, we argue that firms with a higher digital orientation exhibit more innovation-friendly structures as they are more responsive to changes. In turn, we expect the technological architecture and organizational structures of digitally oriented firms to have a positive impact on innovation commitment. To sum up, digital orientation mainly influences the establishment of innovation-friendly organizational structures and technological architectures as well as the openness towards third-party technologies and collaboration with strategic partners. As the effects of the individual dimensions are correlated with each other (Kindermann et al., 2021), and firms pursue holistic digitalization strategies (Bharadwaj, 2000), we argue that an overall higher degree of digital orientation will result in higher innovation commitment. We hypothesize:

H1: A company's digital orientation is positively related to its commitment to innovation.

[...]

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Details

Title
The Influence of a Company's Digital Orientation on its Innovation Commitment. A Moderating Model of Industry Growth and Environmental Dynamism
College
Johannes Gutenberg University Mainz
Grade
1,3
Year
2022
Pages
42
Catalog Number
V1276316
ISBN (Book)
9783346732842
Language
English
Keywords
digital orientation, innovation commitment, Moderator, industry growth, environmental dynamism, digital transformation, digital strategy
Quote paper
Anonymous, 2022, The Influence of a Company's Digital Orientation on its Innovation Commitment. A Moderating Model of Industry Growth and Environmental Dynamism, Munich, GRIN Verlag, https://www.grin.com/document/1276316

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