42 / Journal of Marketing, April 2005 Journal of Marketing Vol. 69 (April 2005), 42���60 Kevin Zheng Zhou, Chi Kin (Bennett) Yim, & David K. Tse The Effects of Strategic Orientations on Technology- and Market-Based Breakthrough Innovations Does market orientation impede breakthrough innovation? To date, researchers have presented opposing argu- ments with respect to this important issue. To address this controversy, the authors conceptualize and empirically test a model that links different types of strategic orientations and market forces, through organizational learning, to breakthrough innovations and firm performance. The results show that a market orientation facilitates innova- tions that use advanced technology and offer greater benefits to mainstream customers (i.e., technology-based innovations) but inhibits innovations that target emerging market segments (i.e., market-based innovations). A technology orientation is beneficial to technology-based innovations but has no impact on market-based innova- tions, and an entrepreneurial orientation facilitates both types of breakthroughs. Different market forces (demand uncertainty, technology turbulence, and competitive intensity) exert significant influence on technology- and market-based innovations, and these two types of innovations affect firm performance differently. The results have significant implications for firm strategies to facilitate product innovations and achieve competitive advantages. Kevin Zheng Zhou is Assistant Professor of Marketing (e-mail: kevinzhou@business.hku.hk), Chi Kin (Bennett) Yim is Associate Profes- sor of Marketing and Associate Director of Chinese Management Centre (e-mail: yim@business.hku.hk), and David K. Tse is Chair Professor of International Marketing and Director of Chinese Management Centre (e-mail: davidtse@business.hku.hk), School of Business, The University of Hong Kong. The study was supported by research grants from the Research Grant Council, Hong Kong SAR Government, and the Chinese Management Centre, The University of Hong Kong.The authors thank the anonymous JM reviewers for their insightful and constructive comments. They also thank Kimmy Chan and Xiaoyun Chen for their help in data collection. to serve customers��� existing needs (Hamel and Prahalad 1994). Moreover, customers do not necessarily know what they really want, because they are not completely knowl- edgeable about the latest market trends or technologies (MacDonald 1995 Von Hippel 1988). Thus, being market oriented may not provide a firm with true insight into prod- uct innovation (Frosch 1996 Leonard-Barton and Doyle 1996 Workman 1993). Therefore, firms should ���ignore your customers��� or ���don���t listen to your customers��� while pursuing breakthrough innovations (Martin 1995, p. 123 Meredith 2002 p. 59). Whereas early evidence against market orientation was largely anecdotal and drew its implications from selected case studies, Christensen and Bower (1996) add to the criti- cism with a historical analysis of the computer disk-drive industry. They find that financially strong, rationally man- aged, and well-established leading firms may fail to embrace breakthrough innovations and may be surpassed by competitors because they are too customer oriented. Recent studies in Journal of Marketing also provide evi- dence that indirectly bears on this concern. For example, Voss and Voss (2000) find that a customer orientation has a negative impact on firm performance in professional the- aters, possibly because of the lack of breakthrough innova- tion. Grewal and Tansuhaj (2001) find that a market orienta- tion is detrimental to firm performance after an economic crisis, which they attribute to the lack of foresight of market-oriented firms. The findings have provoked a series of debates. Com- menting on Christensen and Bower���s (1996) work, Slater and Narver (1998, p. 1001) distinguish customer-led strate- gies from market-oriented ones: The former focuses on sat- isfying customers��� expressed needs, whereas the latter ���goes beyond satisfying expressed needs to understanding and satisfying customers��� latent needs.��� Conner (1999) Aand market orientation endorses the classic marketing tenet that urges firms to stay close to their customers put their customers at the top of the organiza- tional chart. Various studies have provided empirical sup- port for the positive link between market orientation and firm performance (e.g., Jaworski and Kohli 1993 Matsuno, Mentzer, and ��zsomer 2002 Narver and Slater 1990 Slater and Narver 1994). Recent research has further emphasized the role of innovation in facilitating the market orientation��� performance relationship (e.g., Han, Kim, and Srivastava 1998 Hurley and Hult 1998). With such strong conceptual and empirical support, market orientation has become a piv- otal construct that affects a firm���s strategy and operation. However, some researchers have raised doubts about the unquestioning focus that firms may place on their markets (e.g., Bennett and Cooper 1979 Christensen and Bower 1996 Frosch 1996 Meredith 2002). They caution that an overemphasis on customers could lead to trivial innovations and myopic research and development (R&D), which might lower the firm���s innovative competence. Because customers are inherently shortsighted, market-oriented firms may risk losing the foresight of innovating creatively in their attempt

Effects of Strategic Orientations / 43 argues that Slater and Narver���s distinction may be too sim- plistic, and he suggests that to be successful, a firm should balance satisfying its customers��� current, expressed needs (i.e., customer-led) with satisfying their future, potential needs (i.e., market-oriented). In response, Slater and Narver (1999) argue that a market orientation considers both expressed and latent needs and thus is more than simply being customer led. Hult and Ketchen (2001) show that as a component of positional advantage, market orientation pos- itively affects firm performance, but they note that the potential value of market orientation should be considered together with other important firm capabilities, such as entrepreneurship and organizational learning. Matsuno, Mentzer, and ��zsomer (2002) also find that entrepreneur- ship in combination with market orientation positively affects firm performance. They encourage additional research to inquire into the process by which firms imple- ment strategic orientations, such as through organizational learning. Most recently, Im and Workman (2004) find that a customer orientation is the driving force of new product success, despite its negative effect on new product novelty. They recommend further studies to examine innovation and its performance implications directly and together with other intangible assets, such as entrepreneurship. Despite growing interest in this debate, the central issue of whether market orientation facilitates or impedes break- through innovation remains unanswered. In this study, we present a model that links strategic orientation, market force, organizational learning, breakthrough innovation, and firm performance in an attempt to contribute to the litera- ture in four ways. First, we differentiate between two types of breakthrough innovations (i.e., technology versus market based) and argue that market orientation may have both positive and negative effects, depending on the type of inno- vation. In this way, we provide some insights that may resolve the ongoing debate. Second, we examine two important yet less-researched types of strategic orientations, technology and entrepreneurial, and assess how they affect breakthrough innovations through organizational learning. Third, we investigate the effects of different market forces on breakthrough innovations. Fourth, we explore the differ- ential impacts of technology- and market-based innovations on performance. To our knowledge, this study represents the first attempt to distinguish empirically between technology- and market-based innovations and to assess their performance impacts. Breakthrough Innovation Innovation is the generation and/or acceptance of ideas, processes, products, or services that the relevant adopting unit perceives as new (Garcia and Calantone 2002). It can be new to either the firm or the firm���s customers. Depend- ing on their ���newness,��� innovations can be incremental (continuous) or breakthrough (discontinuous). Incremental innovations refer to minor changes in technology, simple product improvements, or line extensions that minimally improve the existing performance. In contrast, breakthrough innovations are novel, unique, or state-of-the-art technolog- ical advances in a product category that significantly alter the consumption patterns of a market (Wind and Mahajan 1997). Recent studies further differentiate two types of break- through innovations on the basis of their (1) advances of existing technology and (2) departure from the existing market segment (Benner and Tushman 2003). The first type, which we define as ���technology-based innovations��� (here- inafter, tech-based innovations), adopts new and advanced technologies and improves customer benefits relative to existing products for customers in existing markets. The second type, which we define as ���market-based innova- tions,��� departs from serving existing, mainstream markets. Market-based innovations involve new and different tech- nologies and create a set of fringe, and usually new, cus- tomer values for emerging markets (Benner and Tushman 2003 Christensen and Bower 1996). Tech- and market-based innovations differ in both the technology and the market dimensions. On the technology side, though both employ new technologies, the former usu- ally represent state-of-the-art technological advances (Ben- ner and Tushman 2003 Chandy and Tellis 1998). In con- trast, the latter are not necessarily technologically advanced instead, market-based innovations often use sim- pler new technology (e.g., off-road versus over-the-road motorcycles, personal computers [PCs] versus minicomput- ers) and sometimes can be new ideas about business opera- tions (e.g., discount retailing such as Wal-Mart versus tradi- tional retailing such as Sears, health maintenance versus conventional health insurance) (Benner and Tushman 2003 Christensen 1997). On the market side, tech-based innova- tions address the needs of existing markets and provide greater customer benefits than do existing products (Chandy and Tellis 1998). In contrast, market-based innova- tions are designed for new or emerging markets and offer benefits that the new segments value, and their performance along traditional dimensions often may be worse than that of existing products (Christensen 1997). In other words, they disrupt the existing customer-preference structure by introducing new benefit dimensions. Therefore, market- based innovations are often perceived as highly different, and they require current mainstream customers to undergo major changes in thinking and behavior (Benner and Tush- man 2003). Mainstream customers may not easily recog- nize or appreciate the new benefits, and market-based inno- vations may be initially difficult for mainstream customers to adopt or use (Adner 2002). Tech-based innovations that fundamentally change the technological trajectory and improve customer benefits are called ���radical innovations��� (e.g., color versus black-and- white television, diesel versus steam locomotive, jets versus turbojets) (Benner and Tushman 2003 Chandy and Tellis 1998 Tushman and Anderson 1986). Market-based innova- tions that improve performance through subsequent devel- opment to a level superior to existing products and that eventually overtake existing products in mainstream mar- kets are called ���disruptive innovations��� (Christensen 1997). The introduction of PCs serves as an example. Personal computers were designed to meet the needs of customers, such as small businesses and individual cus- tomers, who were not served by minicomputers. Main-

44 / Journal of Marketing, April 2005 stream customers of minicomputers were large businesses and organizations that mostly used minicomputers for sci- entific computation. When PCs were introduced, minicom- puter users showed little interest, because PCs performed much worse than minicomputers along traditionally valued dimensions, such as scientific computation. At that time, PCs were a market-based innovation. However, PC technol- ogy developed much faster than that of minicomputers. Over time, PCs overtook minicomputers, even in the latter���s mainstream market. As a result, PCs became a disruptive innovation (Christensen 1997 Schnaars 1994). Both tech- and market-based innovations are highly risky to pursue. A tech-based innovation is technologically risky because developing state-of-the-art technology is extremely expensive and requires substantial investment (Sorescu, Chandy, and Prabhu 2003 Wind and Mahajan 1997). However, because it addresses the well-understood needs of mainstream customers, the perceived market risk is low. In contrast, a market-based innovation may be techno- logically straightforward, but it is extremely risky on the market side because the customers do not yet exist (Chris- tensen and Bower 1996). Therefore, companies often are reluctant to invest in either type of innovation. In turn, it is important to understand what drives a firm���s willingness to undertake risky activities and to introduce breakthroughs to achieve a sustainable competitive advantage. To answer this question, we refer to the competitive force perspective and the resource-based view (RBV), two major theories about how competitive advantage is achieved. The former represents an ���outside-in��� perspective and argues that external market forces, such as demand uncertainty, technological turbulence, and competitive intensity, primarily drive competitive advantage (Porter 1980, 1985). In contrast, the RBV reflects an ���inside-out��� approach and suggests that a firm���s competitive advantage stems from its unique assets and distinctive capabilities (Barney 1991 Wernerfelt 1984). Although the two views diverge, both are influential in the explanation of a firm���s competitive advantage. Thus, recent studies have encour- aged researchers to consider their complementary nature (e.g., Spanos and Lioukas 2001). Building on the two views, we present a framework that links a firm���s strategic orientations (from the RBV) and market forces (from the competitive force perspective), through organizational learning, to breakthrough innovations and firm performance (see Figure 1). Hypotheses Development Strategic Orientation and Breakthrough Innovation The RBV focuses on resource heterogeneity and immobility as potential sources of competitive advantage (Barney 1991). Firm resources can be classified as assets and capa- bilities (Day 1994 Hunt and Morgan 1995). Assets are the more tangible resources that the organization has accumu- lated, such as an economy of scale, reputation, spatial pre- emption, and brand equity. Capabilities are the glue that brings these assets together and enables a firm to deploy them advantageously, such as the skills underlying the inno- vativeness and the superior quality of a firm���s offerings. Capabilities differ from assets in that they are difficult to quantify monetarily, and they encompass skills that are embedded deeply in organizational routines and practices (Barney 1991 Day 1994). An important firm capability is its strategic orientation. Strategic orientation reflects the firm���s philosophy of how to conduct business through a deeply rooted set of values and beliefs that guides the firm���s attempt to achieve supe- Strategic Orientation ���Market orientation ���Technology orientation ���Entrepreneurial orientation Market Force ���Demand uncertainty ���Technological turbulence ���Competitive intensity Breakthrough Innovation Performance ���Firm performance ���Product performance Organizational Learning H5 ~ H7 H1 ~ H3 H4 H8 ���Technology- based innovation ���Market-based innovation FIGURE 1 The Conceptual Model