Is Market Orientation a Driver for 'Radical Innovation'? An Insight from the Pharmaceutical Industry

Abstract

This study investigates market orientation's dimensions (i.e., customer orientation, competitor orientation and technological orientation) as antecedents to radical innovation in an application to the pharmaceutical industry. Numerous researchers in strategic orientation literature have identified the importance of those orientations on the bottom line of companies across industries. While main findings have validated the positive significant relationship between strategic orientations and (1) firm's ability to innovate and (2) innovation success, one research question didn't receive much attention: Would market orientation lead to higher introduction of radical innovations? While we discuss the previous contradictory findings in that area, we investigate the pharmaceutical industry using the ‘big pharma’ sample in order to control for one of the most eminent limitation of innovation measurement across industries, which is retrospective and self biased report (Price and Mueller, 1986). In attempt to prove the positive relationship between market orientation and radical innovation, we use a panel data for the period 2005-2011 (start and end year included), and classify the innovations of the big pharma companies as per Sorescu, Chandy and Prabhu (2003) framework that segments pharmaceutical innovation into four different categories: incremental innovation, market breakthrough, technological innovation, and radical innovation. We code market orientation's dimensions of our sample using the methodology of Noble, Sinha and Kumar (2002) in coding letters to shareholders. We introduced two variables, R&D efficiency and R&D and marketing cooperation using Data Envelopment Analysis and showed their moderating effects on the relationship between market orientation and radical innovation. We ensured that our sample of pharmaceutical firms is homogeneous and that some environmental conditions specific of the pharmaceutical industry are controlled for. After running a panel data regression with random effect we find no significant relationship between market orientation and the first two levels of innovation (i.e., incremental innovation and market breakthrough). Instead, we find a positive and significant relationship between technological orientation and the third level of innovation (i.e., technological breakthrough, p < .05) and a positive and significant effect of customer orientation and technological orientation on the fourth level of innovation, which is radical innovation (p < .05 and p < 0.01 respectively). Competitor orientation has not significant effect on any level of innovation. We discuss our findings and conclude with the importance of market orientation in the pharmaceutical industry which innovations are vital for societal and human welfare. We develop a final chapter of managerial implications through concretized advices for managers and decision makers, while mentioning the limitations of our work that are present mainly in the generalizability of our findings on both intra and across industry levels.