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IMDS
112,1
42
Received 8 March 2011
Revised 25 July 2011
Accepted 25 July 2011
Industrial Management & Data
Systems
Vol. 112 No. 1, 2012
pp. 42-63
q Emerald Group Publishing Limited
0263-5577
DOI 10.1108/02635571211193635
Turning knowledge management
into innovation in the high-tech
industry
Ru-Jen Lin
Graduate School of Business and Management,
Lunghwa University of Science and Technology, Taoyuan,
Taiwan, Republic of China
Rong-Huei Che
Department of Business Administration,
Lunghwa University of Science and Technology, Taoyuan,
Taiwan, Republic of China, and
Chiu-Yao Ting
Graduate School of Business and Management,
Lunghwa University of Science and Technology, Taoyuan,
Taiwan, Republic of China
Abstract
Purpose Organizations are facing a rapidly changing environment and there is a greater need to
understand customers demands and competitors strategies for the development of product
innovation. The purpose of this paper is to explore the effects of market orientation, market knowledge
and customer knowledge management on product innovation performance from the perspective of
dynamic capability.
Design/methodology/approach The data were collected from high-tech firms in Taiwan. This
study employs the structural equation model (SEM) to examine the relationships between market
orientation, market knowledge, customer knowledge management and product innovation
performance.
Findings The findings of this study suggest market orientation has no significant impact on
product innovation performance, and market knowledge and customer knowledge management
mediate the relationship between market orientation and product innovation performance.
Research limitations/implications This paper suggests the consideration of various types of
mediators or moderators in order to acquire more information for future study; the framework can be
expanded to other industries due to this studys limited focus on the high-tech industry.
Practical implications This paper implies that besides utilizing market orientation for innovative
practices, the high-tech industry should focus more on market knowledge and customer knowledge
management. In high-tech industries, the process of knowledge management, which transfers
customer knowledge to product innovation, can effectively seize market information.
Originality/value This study examines the mediating effects of market knowledge and customer
knowledge management and clarifies the relational inconsistencies between market orientation and
product innovation performance from knowledge management viewpoints.
Keywords Taiwan, Product innovation, Market orientation, Market knowledge,
Customer knowledge management
Paper type Research paper
Introduction Innovation
In this dynamic market environment, a firms competitive advantages rely on its in high-tech
capabilities to effectively deliver a constant stream of innovative products to customers
(Teece et al., 1997). However, consumers preferences continuously change due to rapidly industry
evolving technologies and short product life cycles. Therefore, firms are expected to explore
information regarding customer demands and competitors strategies in order to create
valuable and innovative products (Henard and Szymanski, 2001). Simultaneously, firms 43
need to integrate internal and external information from employees, customers, and
competitors to enhance knowledge application and product innovation (Morgan and Hunt,
1999). This demonstrates that it is important for firms to thoroughly comprehend the
relationship between market orientation and product innovation performance.
The classic perspective indicates that satisfying customers needs is the basic path
to successful business performance. Market orientation plays a significant role in
enabling firms to sufficiently understand customers and competitors and to develop
appropriate strategies for superior products (Liu et al., 2002). Hence, industries should
promote product innovation performance by possessing high sensitivity and
adaptation to the customer characteristics by establishing close connections, as well
as gaining superior market demands capability towards competitors and advantage
over their rival products (Henard and Szymanski, 2001).
However, the link between market orientation and product innovation performance
remains ambiguous (Slater and Narver, 2000). Although the positive impact of market
orientation on innovation performance has been systematically examined (Baker and
Sinkula, 1999), no significant link was found by Langerak et al. (2004).
These contradictory findings result in the need for further investigations on other
moderators or mediators of the relationship (Baker and Sinkula, 1999). In fact, market
knowledge, in terms of breadth and depth, is found to have a positive influence on
innovation performance (De Luca and Atuahene-Gima, 2007; Miller, 2004). Moreover,
customer knowledge is proven to play an important role in enhancing product innovation
(Cooper, 1992). Without customer knowledge management, firms cannot effectively offer
greater value products or service to customers. Furthermore, businesses also cannot
obtain sufficient information about current and latent customers desires in order to
develop appropriate products. Hence, customer knowledge management plays a
significant role within product innovation.
Owing to the neglect of mediating effects of other elements in previous studies,
what is required for a clear clarification of this relationship is not fully understood.
Therefore, this paper aims to investigate the mediating effects of market knowledge
(breadth and depth) and customer knowledge management (acquisition, sharing, and
application) on the relationship between market orientation (customer, competitor, and
inter-functional coordination) and product innovation performance.

Literature review
Market orientation
Market orientation focuses on identifying, analyzing, understanding, and answering
customers needs and creating products that meet their expectations (Powpaka, 2006).
It efficiently commits organizations to collect as much information about various
customers demands in order to create ascendant customer values (Narver and Slater,
1990) and to make new product-market adjustments (Henard and Szymanski, 2001).
IMDS It is also the extent to which organizations act in a coordinated, customer- and
112,1 competitor-oriented fashion (Harris, 2002). Therefore, market orientation is the primary
strategy for enhancing firms knowledge of the market environment and ability to
create products that meet customer needs (Liu et al., 2002). As a result, it is of great
importance for businesses to focus on customer demands for the sake of providing new
products that satisfy those requirements (Zelbst et al., 2010).
44 Market orientation includes three main elements; namely customer orientation,
competitor orientation, and inter-functional coordination (ODwyer and Ledwith, 2009),
which are described in details as follows.
Customer orientation. Customer orientation is considered a fundamental element of
market orientation (Han et al., 1998). Strong customer-oriented firms can obtain
sufficient information about current and latent customers needs, desires, and feedback,
which in turn facilitates the development of products that satisfy those expectations
(Powpaka, 2006); enhances firms performance, responsiveness, and competitiveness
(Stock and Hoyer, 2005), and facilitates new product development and introduction
activities (Panigyrakis and Theodoridis, 2007).
Competitor orientation. Competitor orientation means businesses can analyze
short-term strengths and weaknesses as well as the long-term capabilities and strategies
of current and potential competitors (Narver and Slater, 1990; Mueller and Gemunden,
2009). Competitor-oriented firms use their rivals as a frame of reference to respond to
competitors moves, to identify their own advantages and disadvantages, and then
generate greater and superior value against competitors, thus achieving better product
innovation ( Johnson and Sohi, 2003). Therefore, firms flexibly answer to the competitive
environments by developing effective competitor-oriented strategies to improve product
innovation performance.
Inter-functional coordination. Inter-functional coordination is described as the
promotion and coordination of organizational resources and customer-related activities
throughout the entire organization to create superior value for target and potential
customers (Kohli and Jaworski, 1990; Narver and Slater, 1990). Through fostering
communication, collaboration, trust, and commitment among different departments,
inter-functional coordination is claimed to enhance product innovation performance
(Zhao and Cavusgil, 2006).
To summarize the present literature, this study suggests that market orientation is
an organizational culture and strategic support that primarily focuses on customer
needs, competitors strategies and inter-functional information to create distinguished
organizational performance. This study adopts Narver and Slaters (1990) perspectives
of market orientation, which are customer orientation, competitor orientation,
and inter-functional coordination to explore this issue.

Product innovation performance

Innovation involves the production, service, and technology of a new product or
management mechanism (Damanpour et al., 1989). Afuah (1998) argues that innovation is
the application of new knowledge based on customers needs and competitors ability to
create new products. Atuahene-Gima (1995) addresses two criteria of product innovation
performance, which are market performance (including the market share growth, sales
growth, and growth in profit of new products in recent five years) and project performance
(including cost benefit, patent, sales growth, and the development of new market).
 To summarize the present literature, this research argues that product innovation Innovation
requires modification and R&D in new products and new processes. Through customer in high-tech
information collection, industries provide products and services for customers. This
study adopts Atuahene-Gima (1995) and De Luca and Atuahene-Gimas (2007) industry
definition of product innovation performance for the analysis and measurements.

Market knowledge 45
De Luca and Atuahene-Gima (2007) define market knowledge as a firms possession of a
great deal of information about market as well as customers and competitors
conditions. This source of market information provides employees with a better
understanding of the market environments, which in turn contributes to the firms ability
to create customer value, outperform the competition and achieve superior market
outcomes. Particularly, market knowledge helps firms respond to customers needs
better than their rivals and adapt to environmental trends more quickly (Kirca et al.,
2005). This, in turn, leads to improved innovation outcomes (Grinstein, 2008). De Luca
and Atuahene-Gima (2007) measures market knowledge using two elements as follows.
Breadth. Market knowledge breadth is the range of information that businesses
acquire from a variety of current and potential customer and competitors (De Luca and
Atuahene-Gima, 2007). This diverse information is proven to be of great use in decision
making during new product development processes (Katila and Ahuja, 2002).
Depth. Market knowledge depth is the level of sophistication and complexity of a
firms knowledge of its customers and competitors (De Luca and Atuahene-Gima, 2007).
To summarize the present literature, this study defines market knowledge as
organized and structured information about customers and competitors that leads to
the development business strategies. This study adopts De Luca and Atuahene-Gima
(2007)s concept of overall market environment to explore market knowledge and to
extract two elements of breadth and depth.

Customer knowledge management

Garcia-Murillo and Annabi (2002) define customer knowledge management as the
acquisition of customer knowledge to improve firms products, thereby creating
exceptional value for customers through the sharing of customer knowledge. Customer
knowledge management facilitates knowledge sharing between customers and
organizations in innovating new products and enhancing competitive advantages
(Dimitrova et al., 2009). Moreover, customer knowledge management provides insight,
profiles, habits, and contact preferences for firms to enhance close connections
with customers (Xu and Walton, 2005). The knowledge that firms gather becomes the
key value-added resource to be shared, expanded, and leveraged among employees and
between companies (Davenport and Prusak, 1998). It becomes a crucial factor for
explaining how customers desires and knowledge-accessed behaviors effect
the management of the customer knowledge in the company (Rupak et al., 2008).
Knowledge acquisition. Firms may obtain knowledge either indirectly from
third-party market research agencies or directly from customers. Previous literature
has shown that there is a positive link between customer knowledge acquisition and
application and product innovation performance (Narver and Slater, 1990;
Atuahene-Gima, 2005). Moreover, the more information acquired results in the
higher usage of information (Veldhuizen et al., 2006).
IMDS Knowledge sharing. Information sharing means exchanging information with a
112,1 partner on products, customers needs, and strategies (Selnes and Sallis, 2003). The
close and frequent interactions reduce the differences in partners cognitive frames and
enhance creativity and innovativeness regarding new product ideas (Aldrich, 1979).
Moreover, knowledge sharing is found to be of great importance due to the fact that
information gathering increases uncertainty in decision making and causes difficulties
46 in absorbing new knowledge if firms do not have appropriate information elaboration
mechanisms (Ellis and Shpielberg, 2003).
Knowledge application. Knowledge application helps cultivate customer values,
improve relationships with customers, and create new products that meet customers
demands (Atuahene-Gima, 2005).
To summarize the current literature, this study defines customer knowledge
management as the knowledge management mechanism concerning customer
preferences and characteristics. Businesses can improve their performance through
the acquisition, sharing, and application of customer knowledge. This study adopts
Wayland and Coles (1997) definition and extracts three elements of customer knowledge
in terms of knowledge acquisition, sharing, and application.

Research hypotheses
Based on the literature, the research framework is developed and shown in Figure 1.

Market orientation and product innovation performance

Kohli and Jaworski (1990) indicate that the main aim of market orientation is to acquire
information about customers and competitors in the target market to create new
products that can satisfy customers needs and to enhance organizational performance.
Specifically, Alper and Kamins (1995) propose that as businesses design
multi-functional products in accordance with market information, customers will
willingly pay more for new products; thus, product sales will be simulated remarkably.
Recent studies have addressed that inter-functional coordination has a positive impact
on product innovation performance (Luo et al., 2006). Inter-functional coordination can

Market Knowledge
Breadth
Depth H4
H2

Market Orientation
Customer Orientation Product
H1
Competitor Orientation Innovation
Inter-functional Performance
Coordination

Customer Knowledge H5
H3 Management
Acquisition
Figure 1. Sharing
The research framework Application
combine marketing, technology, and other departmental professions to develop products Innovation
that customers expect, improve knowledge application, and promote new product in high-tech
processing (Madhavan and Grover, 1998). Therefore, inter-departmental cooperation is a
key factor for the success of new product development (Atuahene-Gima, 1995). industry
Regardless of environmental changes, sufficient understanding of market
orientation in terms of customer demands, consumer behaviors, market potential,
and competitiveness can successfully and effectively help businesses enhance their 47
innovation abilities. This in turn will positively affect product innovation performance
(Li and Calantone, 1998; Hernandez-Espallardo and Delgado-Ballester, 2009). Based on
this notion, this study constructs the following hypothesis:
H1. Market orientation has a positive influence on product innovation
performance.

Market orientation and market knowledge

Market knowledge plays a critical role in collecting broad and deep information about
customers and competitors; then transforming to firms own knowledge (Drucker, 1985).
Narver and Slater (1990) mention that industries should have insight into customer
demands, flexibly recognize competitors market advantages and disadvantages as well
as knowledge capability of future developmental strategies to adapt to dramatically
changing markets. Kohli and Jaworski (1990) propose that industries without market
orientation cannot effectively respond to dynamic market changes, nor please customer
demands. Based on the discussions above, we present the following hypothesis:
H2. Market orientation has a positive influence on market knowledge).

Market orientation and customer knowledge management

Slater and Narver (1994) demonstrate that market orientation focuses on the interaction
between customers and organizations to enhance knowledge sharing. Therefore, market
orientation encourages communicating information from customers, competitors,
and others to create new products and services. Knowledge creation refers to the
capability of industries to generate new knowledge. Employees absorb, share, and apply
this knowledge to activities and services. In order to maintain profits, market-oriented
industries should pay more attention to market information sharing and application and
concurrently focus on knowledge acquisition and exchange (Day, 1994).
Wayland and Cole (1997) state that customer knowledge management includes
customer experience acquisition, transformation, implementation, and maintenance;
therefore, it can provide more market information for industries. The higher level of
market orientation will facilitate knowledge acquisition, sharing, and application
between customers and industries. Based on these discussions, we construct the
following proposition:
H3. Market orientation has a positive influence on customer knowledge
management.

Market knowledge and product innovation performance

Recent literature proposes that market knowledge is a basic driver of product
innovation (Atuahene-Gima, 2005). Li and Calantone (1998) believe that broader and
deeper market knowledge among organizations would promote industry performance.
IMDS Market knowledge breadth enables firms to set up connections among disparate
112,1 market information, ideas, and concepts to gain broader and more insightful
perspectives to engender product innovation performance (Reed and Defillippi, 1990).
An industry that possesses broad and sufficient understanding and information of
customers and competitors can successfully implement this knowledge in product
innovation and problem-solving ability (Kogut and Zander, 1992).
48 Market knowledge depth allows firms to observe and understand the whole set of
distinct and interdependent knowledge elements (Reed and Defillippi, 1990).
Additionally, market knowledge depth can reflect the complex relationship between
customers requirements and competitors capabilities; thus, it can provide industries
with unique perspectives that help produce superior products (Galunic and Rodan,
1998). Based on these discussions, this study constructs the following hypothesis:
H4. Market knowledge has a positive influence on product innovation
performance.

Customer knowledge management and product innovation performance

Moorman (1995) advocates higher market knowledge acquisition and dissemination to
encourage advancement in the process of new product development. Demarest (1997)
states that customer knowledge cannot be generated automatically, nor create an
immediate change in performance. Therefore, mutual interactions between organizations
and customers require management mechanisms and also should include employees in
knowledge creation, transfer, and sharing to enhance R&D performance.
Li and Calantone (1998) state that knowledge creation and application promotes
product innovation. In addition, the industries that can combine all kinds of resources
through knowledge sharing can shorten the time of R&D and manufacturing
processes while promoting product quality (Nonaka and Takeuchi, 1995). Cohen
and Levinthal (1990) believe that external information acquisition and absorption are
beneficial for innovative capabilities. Based on these ideas, this study constructs the
following hypothesis:
H5. Customer knowledge management has a positive influence on product
innovation performance.

Research methods
Research instrument and data collection
This study focuses on the high-tech industry based on two particular reasons. First,
Taiwan high-tech industry ranks fourth after the USA, Japan, and Korea regarding the
manufacture of high-tech components and products; thus it plays an extremely critical
role in Taiwans economic development (Sher and Yang, 2005). Second, due to shorter
product life cycle caused by rapidly changing technologies, the high-tech industry is
viewed as a proactive and modern technology industry which is closely related to
innovative dynamism (McCann and Arita, 2006).
Based on the interview with high-tech industry experts (including two
semi-conductor and three electronics industrys top managers), this study found that
in order to satisfy the quickly changing demands of markets and customers, most of the
manufacturers in Taiwan have proactively built up not only the networks for capturing
market information but also the effective interactions and models of knowledge sharing
with the downstream customers through the information systems of ERP, CRM, KM, Innovation
and SCM. Integrating and applying the market and customer knowledge under the in high-tech
process of knowledge management mechanism will provide important information for
product development. industry
The questionnaire used for this study is adapted from previous literatures. The items
were modified based on pre-test interviews with the five high-tech industry experts
mentioned. Following the procedure recommended by Churchill (1979), the pre-test 49
interviews indicated that the questionnaire was appropriate to investigate the mediating
effects of market knowledge and customer knowledge management on the relationship
between market orientation and product innovation performance. The questionnaire was
measured by a seven-point Likert scale, ranging from strongly disagree (1) to strongly
agree (7). Finally, the data were analyzed using structural equation model (SEM).
The scale for market orientation assesses the level of understanding and
commitment regarding customer satisfaction, competition, and the alignment of
organizational coordination. Based on the studies from Powpaka (2006), Narver and
Slater (1990), Mueller and Gemunden (2009), Narver and Slater (1990) and Kayhan et al.
(2006), 15 items are selected for this measure. Respondents were asked to rate
themselves as compared to their major industry competitors. The market knowledge
scale measures both the breadth and depth of knowledge a firm possesses about
customers and competitors (De Luca and Atuahene-Gima, 2007; Zahra et al., 2000).
Customer knowledge management is assessed from three aspects: acquisition, sharing,
and application of customer knowledge (Selnes and Sallis, 2003; Wayland and Cole,
1997; Nahapiet and Ghoshal, 1998). Finally, several indicators including market share,
sales, growth rate, and market opportunity were selected to assess the scale of
production innovation performance (De Luca and Atuahene-Gima, 2007; Cooper, 1984;
Griffin and Page, 1993).
Using the convenience sampling method, the questionnaire was sent to a sample of
686 firms in the high-tech industry listed in the Largest 1000 Corporations in the
ranking of Common Wealth. Targeted survey respondents were managers of firms in
high-tech industry. To encourage participation, follow-up phone calls were conducted
along with the questionnaire. As a result, 173 questionnaires were returned with
a response rate of 25.22 percent, and 155 were valid for statistical analysis with a
response rate of 22.60 percent.

Non-response bias
Regarding non-response bias, this study followed the Swink (1999) method, which
divides all respondents into two groups: earlier respondents who returned their surveys
prior to the follow-up phone calls and, in contrast, latter respondents. After that, a t-test
was conducted to examine differences between earlier and latter respondents
(Armstrong and Overton, 1977). The results showed no significant difference
( p , 0.05). In other words, this study does not discern a threat of non-response bias
in the data (Table I).

Common method variance bias

Owing to some method effects result in the fact that the respondent providing the
measure of the predictor and criterion variable is the same person. This type of
self-report bias may be said to result from any artifactual covariance between
IMDS the predictor and criterion variable produced by the fact that the respondent providing
112,1 the measure of these variables is the same. In addition, Likert scales were conducted to
measure variables as the respondents personal tendency and subject judgment would
affect the result and cause bias and partiality. Therefore, it was necessary to examine
the problem of common method variance biases (Podsakoff and Organ, 1986).
According to Harman (1976), single-factor test employs confirmatory factor
50 analysis (CFA) to test the hypothesis in which a single factor accounts for all of the
variance in the data. This study extracts two factors, eigenvalues of which were larger
than 1. The first factor explained variance 37.079 percent (less than 50 percent) and
accumulated explained variance 59.774 percent indicate there is no single factor and
unexplained variance. In addition, Sanchez et al. (1994) suggest using SEM to examine
and compare goodness of fit of single dimension with four dimensions (market
orientation, market knowledge, customer knowledge management, and product
innovation performance). The result shows that degree of freedom of single dimension
is 44, x 2 375.61 and the degree of freedom of other 11 dimensions is 38, x 2 75.61.
In comparison, it demonstrates that x 2 300 (the degree of freedom is 6) is larger than
x20:95;6 1:635. However, statistical analysis shows a significant difference. As a result,
four dimensions are proven to have a good fit than single dimension and there is no
significant common method variance bias.

Result and discussion

This study employs the SEM to explore the causal relationship between market
orientation, market knowledge, customer knowledge management and product
innovation performance. Joreskog and Sorbom (1996) state that the SEM consists of
two parts: the measurement model and the structural model. While the measurement
model shows reliability and validity of the observed variables, the structural model
specifies the causal relationships among the latent variables and the effects.
The data are analyzed using the two-step approach LISREL analysis suggested by
Anderson and Gerbing (1988). First, CFA is conducted to check the reliability and validity
of the measurement model. Second, structural models are used to analyze and verify all
hypotheses testing. In addition, for examining the mediated effects of market knowledge
and customer knowledge management on market orientation and product innovation
performance, this study adopts rival models to proceed to comparative analysis.

Evaluation of measurement model

The use of x 2 has examined goodness of fit index (GFI). However, x 2 is easily affected
by sample size; therefore this study adopts the Bagozzi and Yi (1988) suggestion

Early
respondents Late respondents
(n 99) (n 56)
Measurements Mean SD Mean SD t-value p-value

Market orientation 5.5879 0.8043 5.4417 0.6987 1.139 0.257

Market knowledge 5.2482 0.9121 5.2832 0.6478 2 0.253 0.801
Table I. Customer knowledge management 5.1253 0.9768 4.9845 0.7633 0.929 0.354
Non-response bias test Product innovation performance 4.8430 1.3222 5.0779 0.6742 2 1.463 0.145
to compare a value of x 2 with degrees of freedom corresponding to the data with the Innovation
limiting value as less than 3 (Chin and Todd, 1995). Maximum likelihood estimation
(MLE) is based on the assumptions of multivariate normality and large sample sizes,
in high-tech
which require adequately estimated samples as small as 100-150 recommended by industry
Ding et al. (1995). The sample size of 155 in this study is consistent with established
recommendations.
Psychometric properties. For each latent construct, reliability and validity were 51
assessed based on a three-step procedure with confirmation factor analysis (CFA).
Analysis was performed using the LISREL software through the maximum likelihood
method. In the first step, each latent construct was tested for internal consistency using
Cronbachs a and construct reliability (CR). Table II presents the results of reliability
analysis. Cronbach a coefficients ranged from 0.811 to 0.960 and are greater than the
benchmark of 0.70 suggested by Nunnally (1978). The CR of each latent construct for
both sample groups was above the benchmark of 0.60 suggested by Bagozzi and Yi
(1988). In summary, the results suggest a high internal consistency of survey measures,
and hence the reliability of each construct was ensured.
Convergent validity and discriminant validity were also assessed. Convergent
validity is supported if the standardized factor loadings of the observed items on latent
constructs are above 0.50 (Bagozzi and Yi, 1988). In Table II, the standardized factor
loadings ranged from 0.67 to 0.93 and were statistically significant at p , 0.05. Therefore,
convergent validity of the measurement indicators was supported. The discriminant
validity test was performed by two approaches to establish the distinction among the
constructs used in this study. First, if the average variance extracted (AVE) of the latent

Fit of internal structure of

Fit standard model
Dimensions Variables Factor loading Mean SD t-value CR AVE

Market orientation Customer orientation 0.71 5.8624 0.8552 9.50 0.7741 0.5340
Competitor
orientation 0.9 5.4366 0.9659 9.19
Inter-functional
coordination 0.79 5.2129 1.0014 10.89
Market knowledge Breadth 0.85 5.1011 0.9435 NA 0.8417 0.7311
Depth 0.86 5.1342 0.9673 11.45
Customer knowledge Knowledge
management acquisition 0.88 5.1011 1.1741 NA 0.9081 0.7676
Knowledge sharing 0.93 4.8860 1.2229 15.58
Knowledge
application 0.82 4.8516 1.3340 13.06
Product innovation
performance Product advantage 0.82 5.12 1.136 NA 0.9068 0.5829
Market share 0.81 5.41 1.357 11.45
Profit 0.79 5.40 1.346 11.09
Sales 0.81 5.21 1.323 11.51
Profit of modifying
product 0.70 5.14 1.102 9.43
Growth goal 0.67 5.25 1.067 8.97 Table II.
Development of new Composite reliability
market 0.73 5.30 1.058 10.02 and AVE of measures
IMDS construct is higher than the squared correlation of this latent construct and other latent
112,1 constructs, then the discriminant validity is supported (Fornell and Larcker, 1981).
Additionally, the AVE values of all latent constructs were higher than the squared
correlation between latent constructs (Table III). Additionally, this study followed the
method suggested by Hair et al. (2006) of pairing two latent constructs and subjecting
them to two models of CFA (i.e. unconstrained model and constrained model). The results
52 indicate that all the x 2 difference values were statistically significant at p , 0.05. Overall,
the results indicate that the discriminant validity was supported.
Model fitness. Based on Table IV, a x 2/df (1.81) below 3 shows the existence of fit
between models; the other indicators such as GFI (0.92), NFI (0.95), NNFI (0.97),
IFI (0.98) and CFI (0.98) are all above 0.9. The RMSEA (0.073) is below 0.08. Overall,
the measurement model is proven to excellently fit the data (Marsh et al., 1988).

Evaluation of rival models

Through testing the appropriateness of models, this research recognizes the correlation
between market orientation, market knowledge, customer knowledge management,
and product innovation performance. Bentler and Bonett (1980) propose that SEM
facilitates significance testing of comparisons between alternative nested models for
the data which can comprehend the comparative advantages and disadvantages
among models. Before data analysis and hypothesis testing, nested-model approach is
used to verify the optimal model, and then perform individual path coefficient test to
confirm hypotheses. This research finds that it is insufficient to explain product
innovation performance from the aspect of market orientation, suggesting that other
mediating variables should be taken into consideration. From previous literature,

Market Market Customer knowledge Product innovation

orientation knowledge management performance

Market orientation 0.731

Market knowledge 0.630 0.855
Customer knowledge 0.523 0.619 0.876
Table III. management
Correlations of Product innovation 0.318 0.347 0.354 0.763
latent variables performance

Covariance
Fit indices of structural model Limiting value structure model

A low and non-

x2 significant value is better 39
x 2/df ,3 1.81
Degree of fit (GFI) .0.9 0.92
Normed fit index (NFI) .0.9 0.95
Non-normed fit index (NNFI) .0.9 0.97
Table IV. Incremental fit index (IFI) .0.9 0.98
Model goodness-of-fit Comparative fit index (CFI) .0.9 0.98
statistics Root mean square error of approximation (RMSEA) ,0.08 0.073
this study designs four rival models and utilizes two mediators of market knowledge Innovation
and customer knowledge management to explore the effect of market orientation on
product innovation performance (Figure 2).
in high-tech
In model 1, the direct impact of market orientation, market knowledge, and customer industry
knowledge management on product innovation performance is mentioned whereas all
indirect impact on path is ignored. Model 2 is partially mediated model which explores
the impact of market orientation and customer knowledge management on product 53
innovation performance; meanwhile, the path related to market knowledge is ignored.
The partial mediation model 3 examines the impact of market orientation and market
knowledge on product innovation performance while the path related to customer
knowledge management is not mentioned. Model 4, the completely mediated model,
explores the mediating impact of market knowledge and customer knowledge
management on the relationship between market orientation and product innovation
performance while ignoring the direct impact of market orientation on product
innovation performance. Hypothetical model is a partially mediated model which
investigates the indirect impact of market orientation on product innovation performance
through the mediators of market knowledge and customer knowledge management and
the direct impact of market orientation on product innovation performance.
Table V shows the fit statistics of x 2, x 2/df, RMSEA, and CFI. Through empirical
study, the partially mediated models 2 and 3 show no significant mediating impact
in between market orientation and product innovation performance. Thus,
the above-presented models are in vain. Model 4, which ignores the direct impact of
market orientation on product innovation performance, shows no significant impact
of market knowledge on product innovation performance. The result of hypothetical

Model 1 Model 2
Market
Knowledge Market
Knowledge

Market Product innovation

Orientation Performance Market Product innovation
Orientation Performance

Customer
Knowledge Customer
Management Knowledge
Management

Model 3 Model 4

Market
Knowledge Market
Knowledge

Market Product innovation

Market Product innovation Orientation Performance
Orientation Performance

Customer
Customer Knowledge
Knowledge Management Figure 2.
Management Rival models
IMDS model shows the partially mediating impact of market knowledge and customer
112,1 knowledge management on the relationship between market orientation and product
innovation performance. Moreover, after the comparison between the path analysis of
models 1-4 and the hypothetical model finds that the hypothetical model fits well;
indicating that market knowledge and customer knowledge management should be
added in between market orientation and production performance.
54 Therefore, after testing four rival models, no better model was found. Given the low
sacrifice in fit indices and predictive power but a better parsimony and predicted path
significance, the initial hypothetical model was more acceptable and was used for the
following analyses.

Empirical result of hypothesized structural model

The MLE method is applied to calculate the g and b value to examine whether
hypotheses reach a significant level. Figure 3 shows that market orientation has a
significant impact on market knowledge (g11 0.88, t 10.06, p(0.01); market
orientation has positive influence on customer knowledge management (g31 0.61,
t 7.03, p(0.01); market knowledge positively effects product innovation performance
(b31 0.67, t 2.07, p(0.05); customer knowledge management is a significant
determinant of product innovation performance (b31 0.32, t 2.68, p(0.05). However,
market orientation has no significant impact on product innovation performance
(g31 2 0.68, t 2 1.94, p . 0.05).
Previous literature examines the impact of market orientation on product innovation
performance and the correlations among market knowledge, customer knowledge
management and product innovation performance. There has been a lack of exploration

Fit indicators x 2 (df) x 2/df p GFI RMSEA NFI CFI Orders

Rival model 1 69.85 (38) 1.84 0.00 0.92 0.074 0.95 0.98 2
Rival model 2 76.26 (40) 1.90 0.00 0.92 0.079 0.95 0.97 4
Rival model 3 83.14 (40) 1.95 0.00 0.92 0.078 0.95 0.97 5
Table V. Rival model 4 75.43 (40) 1.89 0.00 0.92 0.078 0.95 0.98 3
Rival model comparison Hypothetical model 70.66 (39) 1.81 0.00 0.92 0.073 0.95 0.98 1

0.88 (10.06) ** Market 0.67 (2.07)*

Knowledge

Market 0.68 (1.94) Product

Orientation Innovation
Performance

Costumer
0.61 (7.03)**
Knowledge 0.32 (2.68)*
Figure 3. Market
Hypothetical
structural model
Note: *p < 0.05, **p < 0.01
of the mediating impact among the dimensions, which is the interest of this study. The Innovation
statistical results of all structural paths strongly support our hypotheses. in high-tech
First, H1, stating that market orientation has a positive influence on product
innovation performance, is not supported. Practitioners and experts suggest that other industry
mediators and moderators, i.e. supplier and distributor collaboration, organizational
learning, organizational commitment, etc. should be taken into consideration. Once
firms effectively extract and integrate knowledge from internal and external sources, 55
they can promote product innovation performance.
H2 is strongly supported, demonstrating that market orientation is a significant
determinant of market knowledge. Market-oriented businesses can combine
inter-departmental and external information to gain a thorough understanding of
market environments and process obtained information to enhance market knowledge
in a broader and deeper way, thus developing more distinguished strategies.
This study supports H3, which states that market orientation has a positive
impact on customer knowledge management. With knowledge obtained from internal
information exchange and external information absorption, market-oriented
businesses can conduct effective management through knowledge sharing with
employees and knowledge application. Therefore, customer knowledge management
would be constantly enhanced.
The findings support H4 that market knowledge has a positive influence on product
innovation performance. Industries that gather plentiful knowledge are able to perceive
more opportunities to create products that meet customer demands and promote
innovation performance. Market knowledge acts as a valuable source for industries to
create their own unique strategies and to promote product innovation performance.
H5, which states that customer knowledge management is a significant determinant
of product innovation performance, is supported. Businesses with high levels of customer
knowledge management can reduce time and costs for new product development and
manufacturing, as well as enhance the capabilities of customer knowledge sharing and
integration. As a result, firms have better product innovation performance (Table VI).

Conclusions and implications

The primary aim of the current study is to examine the mediating effect of market
knowledge and customer knowledge management on the relationship between
market orientation and product innovation performance. The findings indicate that
effective market orientation leads to successful market knowledge and customer

Path
Hypotheses coefficient t-value p-value Results

H1. Market orientation ! product innovation performance 20.68 21.94 0.060 Rejected
H2. Market orientation ! market knowledge 0.88 10.06 0.000 Supported
H3. Market orientation ! customer knowledge management 0.61 7.03 0.000 Supported
H4. Market knowledge ! product innovation performance 0.67 2.07 0.045 Supported
H5. Customer knowledge management ! product innovation 0.32 2.68 0.011 Supported
performance Table VI.
Summary of the empirical
Note: Significant at: *p , 0.05 and * *p , 0.01 results of hypotheses
IMDS knowledge management. Moreover, higher degrees of market knowledge and customer
112,1 knowledge management stimulate better product innovation performance.
These findings are in line with previous studies (Lee and Tsai, 2005) suggesting that
firms with more effective acquisition, sharing, and utilization of knowledge about
market can better understand market dynamism and create innovative products to
satisfy customer and market demands. This is due to the fact that the obtained
56 knowledge can efficiently assist firms in capturing changing customer preferences and
product technologies. In addition, better focus on customers and competitors allows
firms to gain sufficient information about market demands as well as rivals strategies
in order to develop innovative products. Moreover, through offering broader and
deeper knowledge about different market conditions, market knowledge successfully
assists firms in proactively forecasting real market trends, hence strongly motivating
firms to innovate satisfactorily unique products with high differentiation advantages
that successfully respond to market demands (Hult et al., 2004).
Furthermore, in terms of customer knowledge management, the better sharing
of obtained information effectively reduces misunderstanding and barriers to
communication within a firm. This in turn can result in innovation and the
acceptance and support of new ideas, collaboration and risk-taking among employees in
improving new products, and better use of information, which further improves
productivity and speed of new product development (Hurley and Hult, 1998).
In contrast, this study finds out that market orientation has no directly significant
influence on product innovation performance, which is consistent with previous
findings (Langerak et al., 2004). This happens due to the fact that without the ability to
properly carry out new product development plans based on obtained knowledge of
market and customers, market orientation would not necessarily lead to new product
innovation development (Slater and Narver, 1994). Hence, market orientation itself is
not sufficient to guarantee success (Lee and Tsai, 2005).
In addition, the aspects of market orientation may act as constraints for product
innovation performance (Im and Workman, 2004). Specifically, customer orientation
may limit firms ideas in searching for new products due to customer preference inertia,
customers credibility as a source of new market trend, and the stability of customer
populations. Close customer ties prohibit firms product innovation or even lead to more
uncompetitive new products by creating routinized traps that harm new product
creativity. Similarly, competitors orientation may also constrain firms product
innovation vision by increasing imitative learning and the introduction of me-too
products while reducing the launching of new-to-the-world products (Lukas and Ferrell,
2000). Consequently, firms gain nothing but repeat the rivals competitive advantage,
which in turn leads to a loss in market share and profit. Finally, inter-functional
coordination may constrain product innovation by fostering conformity, groupthink,
and internal orientation, thus disabling firms from satisfying diverse market demands.
The above results can be drawn into three managerial implications. First, market
knowledge and customer knowledge management significantly mediate the
relationship between market orientation and product innovation performance.
Therefore, the high-tech industry needs to pay more attention to the activities
related to market knowledge and customer knowledge management. In a dynamic
market environment, especially in Taiwans high-tech industry, the possession of
sufficient information about market demands and competitors strategies can
effectively assist organizations in achieving stable development through improving Innovation
innovation performance and creating competitive advantages. Specifically, while the in high-tech
high-tech industry is experiencing shorter product life cycles and a higher degree of
competition than ever before, market-oriented firms should integrate customers industry
opinions to create products that meet customers demands.
Second, because this study shows the potential constraints of market orientation on
product innovation performance, the high-tech industry should focus on how to resolve 57
these limitations. In terms of customer orientation, firms should focus not only on
creating new products just to satisfy current customers but also on expanding
to different potential customers, while simultaneously invite feedback from current
unsatisfied customers to adjust new products. It is suggested that an entrepreneurial
culture may help (Langerak et al., 2004), particularly by motivating firms to search for
a wide array of customer feedback and to target new and diverse customers. Besides,
highly entrepreneurial-oriented firms, with their proactive characteristics, can enhance
inter-functional coordination by implementing methods to deal with potential
coordination challenges to avoid conflicts among departments.
Third, the high-tech industry should consider the cultivation of knowledge
management capability as one of the critical strategic goals. In addition to possessing
technological capability, firms should be pressured to capture market chance in order to
enhance product innovation capability. Knowledge management capability currently
acts as a key resource capability. Only in an environment where customers are willing to
share information can high-tech firms achieve stable and valuable customer-related
knowledge while meeting customer demands more easily. High-tech industries should
realize the importance of customer interaction in promoting innovative product images
in customers minds, thus enhancing and taking advantage of customer knowledge
management. Customer knowledge management is a critically strategic capability to the
accumulation of this competitive capital.
Although the research results are interesting, this study possesses several
limitations. These limitations suggest areas and directs for future research. First, this
study identifies ample opportunities for academics that other mediators and moderators
should be taken into consideration for further multi-angle exploration such as market
turbulence, creativity, and reward system. Additionally, the data used in this study were
collected from high-tech industries in Taiwan. It is not known how the selection of
industries and geographical areas would affect this studys findings. Since the nature of
product life cycle, competitive environment and industry structure are different from
industry to industry and from country to country, future research should investigate the
applicability of our findings to other industries and in other geographical areas.

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Appendix. Questionnaire items

Market orientation (Likert seven-point scale)
(1) Customer orientation:
CU1. Customers commitment.
IMDS CU2. Create customer values by continually providing products/services.
112,1 CU3. Create competitive advantage based on customer demands.
CU4. Satisfy customers as the main goal.
CU5. Customer satisfaction evaluation system.
CU6. Continual after-sale services.
62 (2) Competitor orientation:
CO1. Collect and share competitors information with co-workers.
CO2. Response to threatening activities from competitors.
CO3. Top managers periodically discuss competitors advantages and disadvantages.
CO4. Create customer values and competitive advantages than competitors.
(3) Inter-functional coordination:
IF1. Top managers periodically visit current customers.
IF2. Exchange customer-related information among departments.
IF3. Integrate different departments to meet the market demands.
IF4. Top managers understand customers demands through the information provided
by employees.
IF5. Information shared among departments.

Product innovation performance (Likert seven-point scale)

P1. Create competitive advantage.
P2. Achieve more market share.
P3. Achieve higher profit.
P4. Achieve higher sales.
P5. Help other products with obtaining profit capability.
P6. Achieve faster growing rate.
P7. Achieve market expansion and create new opportunities.

Market knowledge (comparing with main competitors) (Likert seven-point scale)

(1) Breadth:
B1. Possess more extensive customers knowledge.
B2. Possess more sufficient customers knowledge.
B3. Capture more extensive competitors strategies.
B4. Capture more sufficient competitors strategies.
B5. Possess more extensive inter-functional information.
B6. Possess more sufficient inter-functional information.
(2) Depth:
D1. Possess more professional customers knowledge.
D2. Possess more advanced customers knowledge.
D3. Possess more precise customers knowledge.
D4. Capture more professional competitors strategies.
 D5. Capture more advanced competitors strategies. Innovation
D6. Capture more precise competitors strategies. in high-tech
D7. Possess more professional inter-functional information.
industry
D8. Possess more advanced inter-functional information.
D9. Possess more precise inter-functional information.
63
Customer knowledge management (comparing with main competitors) (Likert seven-point scale)
(1) Acquisition:
AC1. Build up multiple channels to obtain customers knowledge.
AC2. Collect customer-related information to excavate potential markets.
AC3. Establish records to seize sufficient customers knowledge.
AC4. Build up network system with dealers/customers to obtain customer-related
knowledge.
(2) Sharing:
S1. Support departmental decision-making by sharing customer knowledge.
S2. Integrate customer knowledge effectively to analyze customer purchasing behavior.
S3. Share information freely among departments.
(3) Application:
AP1. Apply knowledge and experiences proactively provided by customers.
AP2. Apply information technology system to manage customer knowledge.
AP3. Possess more integrated customer knowledge database.
AP4. Apply customer knowledge on new product exploitation.

Corresponding author
Ru-Jen Lin can be contacted at: rjlin@mail.lhu.edu.tw

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