J PROD INNOV MANAG 2005;22:483–502

r 2005 Product Development & Management Association

Market Orientation and the New Product Paradox

William E. Baker and James M. Sinkula

The extant literature shows that the strength of the market orientation–perform-
ance relationship decays as the terminal measure of performance shifts from new
product success to profitability to market share. As Day (1999) concluded, a
broader nomological inquiry is needed to more fully understand the nature and
limits of market orientation’s effects. This suggests that a broader nomological
inquiry is needed to fully understand the nature and limits of market orientation’s
effects.
Utilizing a national sample of marketing executives, the present study’s purpose
is to build a fuller understanding of the effects of market orientation on firm per-
formance. Its structural equations model includes measures of new product success,
profitability, and market share.
The research reinforces a strong positive relationship between market orientation
and new product success. The expanded nomological network under study, however,
implies barriers to market orientation’s effectiveness. First, market-orientation-
inspired increases in the priority firms place on ‘‘breakthrough’’ learning without
commensurate increases in the priority placed on ‘‘breakthrough’’ innovation ca-
pabilities can boomerang and negatively impact new product success. Second, mar-
ket-orientation-inspired new product development programs that are unable to
increase market share can negatively impact profitability. These gatekeepers to the
success of market orientation underscore the need for firms to coordinate a strong
market orientation with resources and capabilities that increase the effectiveness of
the marketing function. Without such coordination, the positive effect of market
orientation on new product success may be limited to incremental innovations, and
the overall effect of successful new products on profitability may be limited.

Introduction Narver and Slater, 1990; Sinkula, Baker, and

Noordewier, 1997; Slater and Narver, 1994, 1995).

T
he central tenet of the marketing concept
is customer satisfaction (Drucker, 1954;
Shapiro, 1988). A firm’s market orientation
reflects its ability to internalize the marketing concept
as a primary organizing principle of the firm. A strong
market orientation manifests itself through customer-
focused market-oriented learning (Day, 1991, 1994;
Jaworski and Kohli, 1993; Kohli and Jaworski, 1990;
Address correspondence to: William E. Baker, San Diego State
University, 5500 Campanile Drive, San Diego, CA 92182. Tel: (619)
594-6426. Fax: (619) 594-3272. E-mail: william.baker@sdsu.edu.
Firms with strong market orientations prioritize
learning about (1) customers (e.g., likes and dislikes,
satisfaction, perceptions); (2) factors that influence
customers (e.g., competition, the economy, sociocul-
tural trends); and (3) factors that affect the ability of
the firm to influence and satisfy customers (e.g., tech-
nology, regulation). These firms possess the basis for
rapid adaptation to customers’ manifest and latent
needs, which may translate into superior new product
success, profitability, market share, and, perhaps, sus-
tainable competitive advantage.
484 J PROD INNOV MANAG
2005;22:483–502
More than 100 studies since 1990 have looked at
the market orientation–performance relationship (see
Dawes, 2000; Langerak, 2003 for partial lists). Per-
formance measures are typically one or more of the
following: (1) new product success; (2) profitability;
(3) market share; (4) an aggregate terminal perform-
ance measure (e.g., an average of profitability, sales,
sales growth, return on investment [ROI], new prod-
uct success, market share); and (5) an aggregate in-
termediate performance measure (an average of, for
example, customer satisfaction, employee satisfaction,
customer retention, customer service, product quality
perceptions).
In most empirical research, market orientation has
been related to dependent measures one at a time;
studies of nomological networks including market
orientation and multiple performance measures are
rare. There are two exceptions to this trend. First,
several studies have demonstrated that intermediate
performance measures tend to mediate the effect of
market orientation on terminal performance measures
(Homburg and Pflesser, 2000; Matear et al., 2002;
Pelham, 1997). Given the customer centrality of mar-
ket orientation, this finding is important but not sur-
prising. Second, some studies have identified a
mediating role of new product innovation on the mar-
ket orientation–performance relationship (Atuahene-
Gima, 1995; Baker and Sinkula, 1999a; Han, Kim,
and Srivastava, 1998). However, since aggregate
terminal performance measures were employed, the
specific nature of this mediation is unclear. For ex-
ample, does new product success mediate market
BIOGRAPHICAL SKETCHES
Dr. William E. Baker is associate professor of marketing at San
Diego State University. His research interests lie primarily in ad-
vertising effectiveness, new product success, organizational learn-
ing, and market orientation. He has published in leading scholarly
journals including the Journal of the Academy of Marketing Science,
Journal of Consumer Psychology, Journal of Advertising, Psychology
& Marketing, and Journal of Market Focused Management. Dr.
Baker has also served as the head of research in a major commu-
nications firm and is actively involved in consulting.
Dr. James M. Sinkula is John L. Beckley Professor of Marketing at
the University of Vermont’s School of Business Administration. His
research interests lie primarily in the areas of organizational learn-
ing, market orientation, product innovation, and organizational
performance. He has published in leading scholarly journals, in-
cluding the Journal of Marketing, Journal of the Academy of Mar-
keting Science, Journal of Business Research, Journal of Advertising
Research, Journal of Market Focused Management, Journal of Busi-
ness and Industrial Marketing, Journal of International Marketing,
and others.
W. E. BAKER AND J. M. SINKULA
orientation’s effect on both profitability and market
share?
The primary objective of this research is to begin to
more fully capture the interrelationship among mar-
ket orientation and three important terminal perform-
ance measures: new product success, profitability, and
market share. As a starting point, a search of relevant
empirical studies was conducted, limiting the search
to the following: (1) only articles published after 1990;
(2) only studies employing new product success, pro-
fitability, or market share as dependent measures (i.e.,
no composite measures of performance included); and
(3) the 55 marketing journals tracked by Theoharakis
and Hirst (2002) in their worldwide ranking.
The results of this search are presented in Table 1.
Sixteen of the 17 (94%) empirical studies examining
the effect of market orientation on new product suc-
cess reported a significant positive relationship. How-
ever, only 18 of the 27 (68%) studies investigating the
market orientation–profitability relationship reported
positive results, and just 4 of 12 (33%) projects that
assessed the market orientation–market share rela-
tionship reported positive results. This disparity
implies limits to the ability of market orientation to
directly impact profitability—and in particular mar-
ket share—and suggests that composite measures of
performance may conceal the complexity of the mar-
ket orientation–performance relationship.
Moorman and Rust (1999) made an important dis-
tinction between a strong market orientation and a
strong marketing function. They said that a market
orientation is a value-based strategic philosophy man-
ifesting itself in behaviors designed to keep the firm
close to the consumer. The marketing function, on the
other hand, is a collection of capabilities needed to
implement the output of a strong market orientation.
There are two most frequently administered market
orientation scales, both of which have three com-
ponents. The MARKOR scale (Kohli, Jaworski,
and Kumar, 1993) assesses the extent to which firms
acquire, disseminate and respond to customer and
market information. The Narver and Slater (1990)
scale assesses the extent to which firms are customer
oriented, competitor oriented, and interfunctionally
coordinated. The measures in both scales are broad in
scope and are designed to truly capture an ‘‘orienta-
tion’’ rather than specific processes, systems, and
procedures.
According to Moorman and Rust (1999) capabil-
ities relate to (1) the marketing–customer connection
(the ability to implement product, pricing, promotion,
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX J PROD INNOV MANAG 485
2005;22:483–502

Table 1. Empirical Studies Relating Marketing Orientation to New Product Success, Profitability, and Market Sharea
New Product
Performance Profitability Market Share

Studyb Tested Effect Tested Effect Tested Effect

Agarwal, Erramilli, and Dev (2003) Yes Yes No No

Sin et al. (2003) No Yes Yes Yes Noc
Singh (2003) No Yes Yes No
Matear et al. (2002)a Yes Yes Yes No No
Matsuno, Mentzer, and Ozsomer (2002) Yes Yes Yes Yes Yes Yes
Perry and Shao (2002) No Yes No No
Ramaseshan and Caruana (2002) Yes Yes No No
Rose and Shoham (2002) No Yes Yes No
Kahn (2001) Yes Nod No No
Lado and Maydeu-Olivares (2003) Yes Yes No No No
Shoham and Rose (2001) No Yes Yes Yes No
Subramanian and Gopalakrishna (2001) Yes Yes No No
Deshpande et al. (2000) No Yes No Yes No
Homburg and Pflesser (2000) No Yese No No
Hooley et al. (2003) No Yes Yes No
Lukas and Ferrell (2000) Yes Yes No No
Matsuno and Mentzer (2000) No Yes Yes Yes Nof
Sin and Tse (2000) No Yes No Yes No
Slater and Narver (2000) No Yes Yes No
Wren, Souder, Berkowitz (2000) Yes Yes No No
Baker and Sinkula (1999b) Yes Yes No Yes Yes
Gray et al. (1999) No Yes Yes Yes Yes
Moorman and Rust (1999) Yes Yes No No
Pelham (1999) Yes Yes Yes Yes No
Appiah-Adu and Singh (1998) Yes Yes Yes Yes No
Gray et al. (1998) No Yes No No
Han, Namwoon, and Srivastava (1998)a Yes Yes No No
Ngai and Ellis (1998) No Yes Yes No
Appiah-Adu (1997) Yes Yes Yes Yes No
Bhuian (1997) No Yes No No
Avlonitis and Gounaris (1997) No Yes Yes Yes Yes
Pelham (1997) No Yes No Yes No
Atuahene-Gima (1996) Yes Yes No No
Balakrishnan (1996) No Yes Yes No
Pelham and Wilson (1996) Yes Yes Yes Yes Yes No
Slater and Narver (1994) Yes Yes Yes Yes No
Jaworski and Kohli (1993) No No Yes No
Ruekert (1992) No Yes Yes No
Narver and Slater (1990) No Yes Yes No
a
As noted in text, studies employing composite measures of performance were not included in the table.
b
To avoid double counting, studies using the same data set as other published research were not included (e.g., Atuahene-Gima, 1995; Baker and
Sinkula, 1999a).
c
Significant effect in Hong Kong but not China.
d
Effect with marketing managers but not R&D managers.
e
Effect on return on sales mediated by measure of customer satisfaction and retention.
f
Effect on share positive for prospectors but not significant for analyzers and negative for defenders.

and distribution programs that fit customers’ latent
and manifest needs); (2) the marketing–finance con-
nection (the ability to achieve sufficient sales levels,
customer retention levels, and cost controls to meet
financial objectives); and (3) the marketing–R&D
connection (the ability to coordinate product concept
development, R&D, and manufacturing capabilities).
Their study empirically confirmed the distinction be-
tween a market orientation and a marketing function
and demonstrated that the strength of the marketing
function was significantly related to new product suc-
cess and profitability after effects of market orien-
tation were controlled. The distinction between
a market orientation and the marketing function
is highly consistent with the resource-based view
(RBV) of the firm, which construes the organization
486 J PROD INNOV MANAG
2005;22:483–502
as a collection of skills supported by organizational
assets (Barney, 1991; Wernerfelt, 1984). A resource-
based view distinguishes between resources and capa-
bilities. Resources are usually tacit, socially complex,
and nonsubstitutable. Market orientation is a re-
source (Hunt and Morgan, 1995). Capabilities are
bundles of more specific skills, procedures, and proc-
esses that can leverage resources into competitive
advantage. Resources alone are insufficient to create
competitive advantage. It is the combination of re-
sources and matching capabilities that leads to com-
petitive advantage.
Although clarified and elaborated by Moorman
and Rust (1999), the distinction between a market
orientation and more specific marketing-related ca-
pabilities has been alluded to by many other scholars
(e.g., Becker and Homburg, 1999; Day, 1994; Jawor-
ski and Kohli, 1993; Shapiro, 1988). Early on, Sha-
piro (1988) and Jaworski and Kohli (1993) recognized
that extant organizational structures and processes
can impede the implementation of a market orienta-
tion. Day (1994) asserted that an effective market ori-
entation requires a synergy between inside-out and
outside-in capabilities. In their discussion of market-
oriented management systems, Becker and Homburg
(1999) identified five categories of capabilities (organ-
izing, informing, planning, controlling, and staffing)
that must support a market orientation. Harris (2000)
identified three categories of organizational barriers
to implementing a strong market orientation: struc-
tural, strategic, and systemic.
Gaps between firms’ market orientations and the
capabilities required to optimize the effectiveness of a
strong market orientation are at least partly respon-
sible for the disparate findings regarding the mar-
ket orientation–new product success relationship,
market orientation–profitability relationship, and
the market orientation–market share performance
relationship reported in Table 1. An examination of
these relationships in a broader nomological network
may reveal barriers to realizing the full potential of a
strong market orientation.
The present research investigates relationships in a
nomological network that includes (1) market orien-
tation; (2) the three terminal constructs of interest—
new product success, profitability, and market share;
and (3) two constructs—generative learning priority
and radical innovation priority. All three are related
to market orientation’s espoused effect on the pro-
pensity of firms to engage in the type of higher order
learning activities that facilitate radical innovation
W. E. BAKER AND J. M. SINKULA
(Baker and Sinkula, 2002; Slater and Narver, 1995,
1998).
The present investigation focuses on three relation-
ships expected to be revealed as paradoxes involving
market orientation’s relationship with new product
success. A paradox is apparently, though not actually,
inconsistent with or opposed to the known facts. That
is, it is a seemingly contradictory statement that is
actually true. The complex nature of the three rela-
tionships that reflect paradoxes will be elaborated on
subsequently.
First, it is expected that empirical results will be
consistent with the weight of the evidence presented in
Table 1. The market orientation–new product success
relationship is expected to be stronger than the market
orientation–profitability relationship, which is expect-
ed to be stronger than the market orientation–market
share relationship. Given the propensity of empirical
studies to aggregate sales, profitability, market share,
and new product success into a composite measure of
performance, it is evident that distinctions in their
relationship with market orientation have not been
explicitly recognized. Many academic and applied
marketers may expect effects of market orientation
to be consistent across new product success, profita-
bility, and market share. Thus, the expectation in this
study of differential effects across these measures is
labeled a paradox because it challenges a presumed
lack of distinction among these effects.
New products can be successful in terms of con-
sumer acceptance without increasing firm profitability
or market share if (1) they are replacing obsolete
brand or product line members; (2) they are canni-
balizing other brand or product line members; or (3)
the cost of product development and production leads
to inefficient pricing or difficult break-even require-
ments. It follows that, in addition to the capabilities
required to launch successful new products, a firm’s
ability to increase profitability also requires capabil-
ities associated to a strong marketing–financial con-
nection—i.e., the ability to predict incremental sales,
control incremental costs, and make financially re-
sponsible distribution, promotion, and pricing deci-
sions. In addition to the capabilities required to
develop and launch products that increase firm prof-
itability, a firm’s ability to increase market share re-
quires that it also respond to market opportunities
more effectively or efficiently than competitors. It
must develop a bundle of capabilities (i.e., a core
competency) superior to its competitors (Hamel and
Prahalad, 1994). As RBV theory would predict, a
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX
resource such as market orientation should not be
expected to influence market share unless it is coupled
with complementary capabilities that create a core
competency.
A strong market orientation is expected to improve
profitability. The second element of the new product
paradox lies in the potential that a strong market ori-
entation may lead to aggressive new product devel-
opment (NPD) programs that actually depress
profitability. The increased costs associated with de-
veloping, manufacturing, and marketing new prod-
ucts may lower profitability unless market share gains
are realized. Figure 1 depicts a direct effect (MO !
profitability) and an indirect effect (MO ! new
product success ! market share ! profitability) of
market orientation on profitability. The direct effect
is supported empirically by the research in Table 1
and theoretically by the understanding that market
orientation creates superior value for customers,
which translates into higher profit margins (Slater
and Narver, 1994). The indirect effect on profitability
requires both an increase in firms’ new product suc-
cess and an increase in market share. If, per the ev-
idence in Table 1, market orientation cannot directly
influence market share, then it must be the case that
market orientation alone cannot facilitate the func-
tioning of the indirect route depicted in Figure 1. An
effect of new product success on market share requires
marketing–customer connection capabilities (e.g., dis-
tribution power, promotion power) that can expand
the customer base. In addition to strong market
orientations, the presence of these capabilities in dom-
inant firms has been shown to facilitate their ability to
more profitably launch new products than smaller
firms (Sorescu, Chandy, and Prabhu, 2003).
Market orientation is expected to enhance genera-
tive learning, which in turn is expected to lead to suc-
New
Product
Success
Market Market
Orientation Share
Profitability
Figure 1. The Direct and Indirect Effects of Market Orientation
on Profitability
J PROD INNOV MANAG 487
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Generative
Learning
Priority
Market Radical
Orientation Innovation
Priority
New Product
Success
Figure 2. The Direct and Indirect Effects of Market Orientation
on New Product Success
cessful NPD (Slater and Narver, 1995). The third
element of the new product paradox lies in potential
that market-orientation-inspired generative learning
may actually depress new product success. Market-
orientation-inspired generative learning may actually
inhibit the success of new product programs if R&D
and manufacturing are unable or unwilling to imple-
ment the output of generative learning efforts. The
third paradox recognizes the need for a strong market
orientation to be complemented by capabilities that
strengthen the marketing–R&D connection. The ab-
sence of such a connection would likely cripple the
ability of firms to successfully develop radical inno-
vations and thus would limit them to incremental
innovation. Figure 2 depicts a direct effect (MO !
new product success) and an indirect effect (MO
! generative learning ! radical innovation ! new
product success) of market orientation on new prod-
uct success. The indirect effect requires both an in-
crease in the priority firms place on generative
learning and an increase in the priority firms place
on radical innovation. Since market orientation is not
expected to directly influence the priority firms put on
radical innovation, it cannot alone facilitate the func-
tioning of the indirect route. The next section of this
article more fully develops the study’s hypotheses.
Hypotheses
This section describes and explains six hypotheses re-
lated to the three market orientation–new product
paradoxes introduced already. Recall that the first
paradox is reflected in this study’s assertion that the
effect of market orientation is stronger on new prod-
uct success than either profitability or change in mar-
ket share. H1, H2, and H3 relate to the first paradox.
The second paradox lies in the potential that a strong
488 J PROD INNOV MANAG
2005;22:483–502
effect of market orientation on new product success
may actually impede profitability if the firm is unable
to convert new product launches into increases in
market share. H4 relates most directly to the second
paradox. The third paradox rests in the potential that
a strong effect of market orientation on generative
learning may impede new product success if the firm
does not possess the capabilities to translate the im-
plications of generative learning into radical innova-
tions. H5 and H6 communicate the third paradox.
Firms with strong market orientations are more
likely to identify and to respond to new product op-
portunities than firms with weaker market orienta-
tions. They are more likely to be first to market with
new generations of existing products and services
(Day, 1994). And they are more likely to engage in
brand and line extensions to new target markets
(Gatignon and Xuereb, 1997).
As far back as Drucker (1954), marketing and in-
novation have been positioned as essential and inter-
related firm functions. Market orientation’s influence
on firms’ propensity to successfully innovate is tied to
the priority market-oriented firms place on satisfying
customers’ present (manifest) and future (latent)
needs (Day, 1994; Kohli and Jaworski, 1990; Slater
and Narver, 1998). Market-oriented firms’ market
information-processing capabilities permit them to
quickly identify and to respond to customer needs,
leading to timely new product introductions. Market-
oriented firms are more likely to develop new prod-
ucts that offer unique benefits and that are superior in
quality to alternatives (Jaworski and Kohli, 1993; Pel-
ham, 1997). Just as importantly, they are more likely
to develop products that can be understood and
adopted by customers without a significant learning
curve or high transition costs (Atuahene-Gima, 1996).
H1, identified by the thick bold line in Figure 2, is
both a replication and extension of prior theoretical
and empirical work on the market orientation–new
product success relationship. It is an extension be-
cause the relationship is being tested in a broader no-
mological network.
The present study’s conceptualization of new prod-
uct success is consistent with other recent concep-
tualizations (Atuahene-Gima, 1996; Han, Kim, and
Srivastava, 1998) and is most similar to Baker and
Sinkula (1999a, 1999b). New product success refers to
the rate of new product introductions relative to a
firm’s largest competitor, the perceived success of
these innovations relative to their largest competitor,
their cycle time relative to competitors, their degree of
W. E. BAKER AND J. M. SINKULA
differentiation, and their ability to be first to market
with new applications.
H1: There is a positive relationship between market
orientation and new product success.
The ability of firms to leverage new product intro-
ductions with their marketing mix capabilities and
production efficiencies is key to profitability (Cooper,
1994; Cooper and Kleinschmidt, 1987). Market-ori-
ented firms are more likely to create demand and cost
synergies in their product and service portfolios.
Products within their portfolios are more likely to
complement rather than to cannibalize one another,
and they are more likely to be built around core ca-
pabilities that create cost efficiencies in product de-
velopment (Atuahene-Gima, 1996; Chandy and Tellis,
1998; Day, 1994). They are also more likely to pro-
duce products and services that fit their expertise in
sales, promotion, customer service, distribution, and
marketing intelligence.
Firms with strong market orientations are more
likely to create a synergy among target market selec-
tion, product development, pricing strategy, distribu-
tion, and promotion. This synergy reflects a basic
competency of market-oriented firms: the ability to
add value by differentiating and targeting products to
specific customer niches. This competency translates
into improved product quality, customer satisfaction,
customer service quality, customer retention, and cus-
tomer trust, all enabling firms to charge higher prices
and to enjoy higher profit margins. Several empirical
studies have demonstrated the causal link among mar-
ket orientation, customer satisfaction, and superior
financial performance (Agarwal, Erramilli, and Dev,
2003; Homburg and Pflesser, 2000; Matear et al.,
2002). The fact that only 20 of the 29 market orien-
tation–profitability studies reported in Table 1
showed a significant positive relationship may reflect
the fact that, unlike the market orientation–new prod-
uct success relationship, this relationship requires
both marketing-customer connection support capa-
bilities and marketing–financial connection support
capabilities.
It may be argued that all of market orientation’s
effect on financial performance is mediated by inno-
vation (Gatignon and Xuereb, 1997; Han, Kim, and
Srivastava, 1998; Henard and Szymanski, 2001;
Matear et al., 2002). It is expected in this research to
find an independent effect of market orientation on
profitability because, as discussed already, the benefits
of a strong market orientation affect ongoing
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX
marketing mix decisions well beyond product devel-
opment and launch. Given its testing in a broader
nomological network, H2 (identified by the thick bold
line in Figure 1) is both a replication and extension of
prior theoretical and empirical work on the market
orientation–profitability relationship.
H2: There is a positive relationship between market
orientation and profitability.
Of the three terminal performance variables of in-
terest in this study, a change in market share is most
related to competitive advantage because it reflects
performance improvement or deterioration relative to
competitors. Hoffman (2000, p. 2) writes, ‘‘A com-
petitive advantage (hereafter CA) can result from
implementing a value-creating strategy not simulta-
neously being employed by current or prospective
competitors or through superior execution of the
same strategy as competitors (Bharadwaj, Varadara-
jan, and Fahy, 1993). The CA is sustained when other
firms are unable to duplicate the benefits of this strat-
egy (Barney, 1991).’’ In order for a firm resource to be
a source of competitive advantage, it must possess
four attributes: rareness, value, inability to be imitat-
ed, and inability to be substituted (Barney, 1991). Al-
though Hunt and Morgan (1995) asserted that market
orientation can be a source of competitive advantage,
Hamel and Prahalad (1994) and Day (1994) made it
clear that a sustainable competitive advantage results
from the consolidation of multiple resources and ca-
pabilities. So, although market orientation can be a
source of competitive advantage, it is only one com-
ponent. Since a core competency is a bundling of re-
sources and skills, one resource (a market orientation)
is not likely to be sufficient to create a competitive
advantage. This is likely to at least partially explain
why only about one-third of the studies in Table 1
reported a positive market orientation–market share
relationship.
Hoffman (2000) identified several relational and
intellectual outside-in resources and capabilities that
may combine with market orientation to create a sus-
tainable competitive advantage. These include the
ability to differentiate the brand and create brand eq-
uity through superior branding capabilities, the ability
to employ organizational learning capabilities to learn
faster than competitors, the ability to develop value-
added innovations consistent with the firm socially
and technologically, the ability to build customer trust
and commitment through relationship marketing, and
the ability to develop strong supply chain networks
J PROD INNOV MANAG 489
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that facilitate technology and information exchange
and build trust.
A direct market orientation–market share relation-
ship may be tenuous because it is matching one re-
source with one source of competitive advantage. An
indirect market orientation–market share relationship
mediated by new product success is likely to be robust
because it represents the bundling of market orienta-
tion and other marketing-related capabilities. H3 posits
an indirect effect of market orientation on market
share mediated by new product success. It is depicted
in Figure 1 by the thin solid line from market orienta-
tion to new product success, the thin solid line from
new product success to market share, and the broken
line from market orientation to market share. The bro-
ken line represents a non-significant relationship. As
discussed previously, prior research has established
new product success to be at least a partial mediator
of market orientation’s effect on composite measures
of performance but not specifically on market share
and not in a nomological network that includes other
terminal measures of performance (i.e., profitability).
H3: The effect of market orientation on market share is
mediated by new product success.
H4 exemplifies one element of the new product
paradox: increased profitability is not a natural out-
come of successful NPD. If true, market orientation’s
strong effect on new product success cannot be pre-
sumed to flow through to improvements in financial
performance. Other capabilities are required, notably
the ability to convert new product introductions into
market share gains.
Although there is a significant amount of empirical
research that examines factors influencing the success of
new products in the marketplace (e.g., Cooper, 1994;
Henard and Szymanski, 2001), little empirical attention
has been paid to the relationship between new product
success and profitability. Innovation is essential to the
long-term viability of firms. It is essential to the main-
tenance of firms’ competitive position and profitability.
It does not necessarily follow, however, that increases in
new product success increase profitability. Many new
products introductions are defensive moves to counter
competitive brand and line extension activity. Other
new product introductions are undertaken to fill chan-
nels and prevent competitive entry. Still others are
made to replace obsolete line members. Although nec-
essary, these types of new product activity can increase
costs and product line cannibalism, which are two sup-
pressors of profitability.
490 J PROD INNOV MANAG
2005;22:483–502
The ability to increase market share is a key con-
tributor to profitability (Venkatraman and Prescott,
1990). There is indirect evidence that the most prof-
itable new products increase market share. The finan-
cial value of new products seems to be a function of
the level of their innovativeness. Radical innovations
have greater value than incremental innovations; new
product concepts have greater value than line ex-
tensions (Chaney, Devinney, and Winer, 1991; Klein-
schmidt and Cooper, 1991); and technological
breakthroughs are more profitable than incremental
improvements (Sorescu, Chandy, and Prahbu, 2003).
Dominant firms achieve greater innovation success
because they have the promotional and distribution
power to increase new product adoption rates
(Chandy and Tellis, 2000).
H4 posits an indirect effect of new product success
on profitability mediated by market share. It is de-
picted in Figure 1 by the thin solid line from new
product success to market share, the thin solid line
from market share to profitability; and the broken
line from new product success to profitability. The
broken line represents a non-significant relationship.
H3 predicts no direct market orientation–market
share relationship. H4 predicts the importance of
market share gains to the new product success–prof-
itability relationship. Together they reveal a limit of
market orientation’s ability to impact profitability
through new product success: the market power to
increase market share. The relationship pattern pos-
ited in H3 and H4 has not been demonstrated in prior
research and, thus, represents an extension of the
literature.
H4: The effect of new product success on profitability is
mediated by market share.
The role of market orientation in how firms learn
and innovate is explicitly related to the concepts of
adaptive and generative learning. Learning that oc-
curs in the context of an entrenched belief system
(e.g., entrenched mental models) is said to be adaptive
(Argyris and Schön, 1978). For example, assume that
a firm experiences a decline in brand sales. If that firm
is unwilling to change its belief that benefit X is more
important than benefit Y, then interactions with the
marketing environment will be tailored to accommo-
date that belief. Learning that involves a change in
mental models is said to be generative (Bateson, 1972;
Sinkula, 1994). Using the same example, if the firm
approaches the problem of declining sales with a will-
ingness to question the veracity of their belief that
W. E. BAKER AND J. M. SINKULA
benefit X is more important than benefit Y, the scope
of research and the range of solutions expand signif-
icantly.
Some scholars suggest that market-oriented firms
may focus too strongly on the expressed needs of cus-
tomers (Christensen and Bower, 1996; Hamel and
Prahalad, 1994). Such a focus would limit the effec-
tiveness of a market orientation by prioritizing adap-
tive learning at the expense of generative learning
(Baker and Sinkula, 1999b; Slater and Narver, 1995).
The prevailing view, however, is that a strong mar-
ket orientation enables firms to balance customer-
led adaptive learning, which focuses on satisfying
manifest customer needs, with lead-the-customer gen-
erative learning, which focuses on satisfying latent
customer needs (Day, 1994, 1999; Jaworski and
Kohli, 1993; Jaworski, Kohli, and Sahay, 2000;
Slater and Narver, 1995, 1998). A limitation of firms
with weak market orientations is an inability to
complement adaptive learning with generative learn-
ing.
Radical innovation is predicated on a shift in the
technical or conceptual paradigm guiding a firm’s
NPD (Chandy and Tellis, 1998; McKee, 1992). This
shift requires generative learning (Hamel and Prahlad,
1994; Slater and Narver, 1999). Slater and Narver
(1999, p. 1166) write that ‘‘. . . adaptive learning is not
sufficient for breakthrough innovation. The ability to
learn generatively is more likely to be the catalyst for
breakthrough innovations than any other factor in-
cluding technology-push or serendipity. . . . Businesses
do not choose to be generative learners at the expense
of an adaptive learning capability. However, business-
es that do not develop the market learning skills that
can lead to generative learning experiences are unlike-
ly to achieve a position of advantage in competitive
markets.’’
Theoretically, market orientation is not directly re-
lated to firms’ propensity to engage in radical inno-
vation; its effect on the priority firms place on radical
innovation is mediated by the priority firms place on
generative learning (Baker and Sinkula, 2002). H5 is
depicted in Figure 2 by the thin solid line from market
orientation to generative learning priority, the thin
solid line from generative learning priority to radical
innovation priority, and the broken line from market
orientation to radical innovation priority. The broken
line represents a non-significant relationship. Since
the relationship portrayed in H5 has yet to be empir-
ically tested, it is an extension of the market orienta-
tion literature.
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX
H5: The effect of market orientation on radical innova-
tion priority is mediated by generative learning priority.
The final study hypothesis clarifies another element
of the new product paradox, which asserts that market-
oriented-inspired generative learning is not a sufficient
requirement for new product success—radical innova-
tion also is required. To realize new product success,
generative learning must be accompanied by commen-
surate capabilities in R&D and production and by the
cooperation to merge these skills (Atuahene-Gima,
1996; Day, 1994; Moorman and Rust, 1999). Genera-
tive learning without radical innovation capabilities
may negatively impact new product success by limiting
firms to incremental type innovations and by creating
disharmony among the marketing, R&D, and manu-
facturing functions (Baker and Sinkula, 1999b; Dough-
erty, 1992; Slater and Narver, 1995).
Radical innovation carries significantly higher risks
than incremental innovation (Sorescu, Chandy, and
Prabhu, 2003). In the development stage, uncertainty
exists as to whether breakthrough concepts can be
successfully converted into ready-for-market prod-
ucts. In the introductory stage, it is uncertain wheth-
er the new products will be adopted by consumers.
With these risks, however, come rewards. Radical in-
novations have been shown to have greater financial
value to the firm than incremental innovations (Sores-
cu, Chandy, and Prabhu, 2003); new product concepts
have greater value than line extensions (Chaney,
Devinney, and Winer, 1991; Kleinschmidt and Coop-
er, 1991). In a meta-analysis of the antecedents of new
product success Henard and Szymanski (2001) report-
ed that product advantage and product innovative-
ness—two strong correlates of radical innovation—
were strongly related to new product success.
H6 posits an indirect effect of generative learning
priority on new product success mediated by radical
innovation priority. It is depicted in Figure 2 by the
thin solid line between generative learning priority
and radical innovation priority, the thin solid line
from radical innovation priority to new product suc-
cess, and the broken line from generative learning
priority to new product success. The broken line rep-
resents a non-significant relationship. H5 predicts no
direct market orientation–radical innovation priority
relationship. H6 predicts the importance of radical
innovation priority to the generative learning priori-
ty–new product success relationship. Together, they
reveal a limit of market orientation’s ability to influ-
ence new product success through its influence on
J PROD INNOV MANAG 491
2005;22:483–502
generative learning priority and enforce the need for
strong radical innovation capabilities. These relation-
ships have not been demonstrated in prior research
and, thus, represent an extension of the market ori-
entation literature.
H6: The effect of generative learning priority on new
product success is mediated by radical innovation
priority.
In this study, H1, H2, and H3 are tied to the first
paradox, which asserts that market orientation’s ef-
fects cannot be expected to be consistent across new
product success, profitability, and market share. H4 is
tied to the second paradox, which relates to the po-
tential that a strong effect of market orientation on
new product success may actually impede profitability
if the firm is unable to convert new product launches
into increases in market share. H5 and H6 relate to
the third paradox, which lies in the potential that a
strong effect of market orientation on generative
learning may impede new product success if the firm
does not possess the capabilities to translate the im-
plications of generative learning into successful radi-
cal innovations.
Method
Sample and Data Collection
Data were collected from a commercially acquired
(Dun & Bradstreet) sample of marketing executives
with at least a vice-presidential level of responsibility
(Moorman, 1995). To facilitate external validity, the
sample randomly cut across industries with stipula-
tions of an equal mix of original equipment manu-
facturer (OEMs) and consumer product companies
and an equal mix of firms with above and below $500
million in sales.
Over a period of several months in spring and sum-
mer 2001, a direct mail questionnaire was sent to the
sample of 2,000 companies in three waves. In each
wave a new questionnaire and revised cover letter
were sent. No explicit incentive was provided. Twenty
percent of the mailings did not reach the intended
party and were cut from the sample. The resulting
pool of 243 completed questionnaires yielded an ef-
fective response rate of 15.1%. Tests of bias due to
non-response were conducted using a comparison of
early to late respondents (Armstrong and Overton,
1977). No evidence of bias was found. Given the lack
492 J PROD INNOV MANAG
2005;22:483–502
of bias, the rank of the respondent, the length of the
questionnaire, the difficulty of the questionnaire (e.g.,
a series of scenario-based questions to measure learn-
ing and innovation style priorities), and comparable
response rates in similar studies (e.g., Gatignon and
Xuereb, 1997), the sample was judged to be adequate.
Measures
As in most related studies, practical consideration ne-
cessitated the employment of subjective measures of
performance from a single respondent in each partic-
ipating firm.1 Appendix A contains the construct
measures not listed here.
Market orientation. A subset of the measures in the
MARKOR scale (Kohli, Jaworski, and Kumar, 1993)
was used to measure market orientation. Practical con-
siderations—most notably the length and complexity of
the questionnaire—led to the decision not to administer
the entire scale. The results of a prior study employing
the entire MARKOR scale were used to select six meas-
ures. These measures correlated .84 with the full scale.
Two measures from each of MARKOR’s three com-
ponents were chosen. Information acquisition was rep-
resented by the following statements: ‘‘We are slow to
detect changes in our customers’ product preferences’’;
and ‘‘We frequently review the likely effect of changes
in our business environment on customers.’’ Informa-
tion dissemination was represented by the following
statements: ‘‘When something important happens to a
major customer or market, the whole business unit is
informed about it within a short period’’; and ‘‘When
one department finds out something important about
competitors, it is slow to alert other departments.’’ Re-
sponsiveness was represented by the following state-
ments: ‘‘For one reason or another, we tend to react
1
Although this was not ideal, related research demonstrates that
subjective perceptions are highly correlated with objective measures
such as ROI and sales growth (Dess and Robinson, 1984; Han, Kim,
and Srivastava, 1998). Similarly, the study employed single respond-
ents with similar positions of responsibility from each surveyed firm,
which was also less than ideal. However, a recent replication study by
Slater and Narver (2000) utilizing multiple, diverse respondents from
surveyed firms reported almost identical results to Narver and Slater
(1990), which used single respondents with homogenous backgrounds.
Also, market orientation research has demonstrated consistent results
across a range of methodologies. A recent meta-analysis by Henard
and Szymanski (2001) demonstrated consistent findings regarding mar-
ket orientation and new product performance using senior or middle
management, diverse measures of performance, subjective versus ob-
jective measures of performance, and short versus long term perform-
ance timelines. Based on this, the present sampling and surveying
approach was judged to be adequate.
W. E. BAKER AND J. M. SINKULA
slowly to changes in our customers’ product or service
needs’’ and ‘‘Several departments get together periodi-
cally to plan a response to changes taking place in our
business environment.’’
Performance measures. New product success con-
sisted of items on a seven point scale anchored by low–
high. Borrowed from Baker and Sinkula (1999b), these
measures were (1) new product introduction rate rela-
tive to largest competitor, (2) new product success rate
relative to largest competitor, (3) degree of product dif-
ferentiation, (4) competitors’ ability to copy new prod-
ucts, and (5) new product cycle time relative to
competitors. Market share and profitability each con-
sisted of items on a seven-point scale anchored by sig-
nificant decrease–significant increase. Change in market
share was measured by change in market share relative
to largest competitor, change in market share, and
change in sales relative to largest competitor. Profita-
bility was measured by change in profit, change in prof-
it margins, and change in return on assets.
Generative learning priority and radical innovation
priority. In order to tease out the extent to which
firms prioritize generative learning, an approach was
developed to measure the relative priority firms put on
modeling and generative and adaptive learning. Like-
wise, to tease out the extent to which firms rely on
radical innovation, an approach was developed to
measure the relative priority that firms place on rad-
ical innovation, market-driven incremental innova-
tion, and manager-driven innovation (for a similar
approach in the context of assessing culture types, see
Deshpande, Farley, and Webster, 1993).
Modeling and manager-driven innovation were de-
signed to capture decision-making and innovation be-
havior that do not require deliberate interaction with
the external marketing environment. Neither requires
new learning. Instead, the prevailing theory-in-use of
one employee or group of employees is simply trans-
ferred to other employees, or the fruits of competitor
learning are imitated.
Respondents read descriptions and examples of
modeling and generative and adaptive learning (see
Appendix A). After reading the descriptions, constant
sum scales were used to rate the extent to which each
type of learning was ‘‘endorsed by management,’’
‘‘expected in my unit,’’ and ‘‘the norm in my unit.’’
Participants assigned 100 points across the three
learning approaches for each question. A similar
measurement approach was taken to operationalize
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX J PROD INNOV MANAG 493
2005;22:483–502

innovation style. Subjects were presented with de-
scriptions of three innovation processes and were
asked to assign 100 points across the three. Again,
there were three items querying which innovation
approach was ‘‘endorsed by management,’’ ‘‘expect-
ed in my unit,’’ and ‘‘the norm in my unit.’’
Results
Structural equation analysis (Jöreskog, 1993) was em-
ployed to establish the validity of the measurement
model and to test the experimental hypotheses. The
primary measurement model with its tested measure-
ment relations and structural paths is depicted in Fig-
ure 3. Prior to testing this model, tests performed are
discussed to establish the convergent and discriminant
validity of the measures.
Measurement Model
The full structural equation model (SEM) is portrayed
in Figure 3. Given the well-established validity of
MARKOR scale measures, market orientation was
treated as a first-order factor reflecting three indica-
tors: information acquisition, information dissemina-
tion, and responsiveness (Homburg and Pflesser,
2000; Matsuno and Mentzer, 2000).
Each model construct was evaluated for unidim-
ensionality and convergent and discriminant validity.
In support of unidimensionality, per Table 2, coeffi-
cient alphas for profitability (a 5 .93), market share
(a 5 .90), new product success (a 5 .85), market ori-
entation (a 5 .78), generative learning priority
(a 5 .87), and radical innovation priority (a 5 .92)
were all well within the acceptable range. In support
of convergent validity, the average variance extracted
(AVE) from the indicators of each construct all ex-
ceeded .6, which was also well within the acceptable
range. Also, as reported in Table 3, each construct
indicant loading was highly significant; all loadings
exceeded .55, and 16 of 20 exceeded .70. In support of
discriminant validity, each potential pair of latent
constructs was compared to one another in a series
of confirmatory factor models in which their correla-
tions were constrained or not constrained to 1. In each

ε16

ε15 GE1 GE3 ε17 RA1 ε18

GE2
RA2 ε19
λ16 λ17 λ18
λ15 λ19
RA3 ε20

GEN β4 RAD λ20

η4 η5 ε4
ε5
PD1
β6
ε1 MO1 γ4 β5 λ4 PD2
λ1 λ5 PD3 ε6
γ5

λ2 γ1 PROD λ7 PD4 ε7
ε2 MO
MO2 η1
ξ1
λ8 PD5 ε8
λ3
γ3
γ2 β1
ε3 MO3
β3
β2 MSHAR λ14
PROF η2 MS3
λ9 η3

ε9 λ13
PR2 λ 11 λ12
λ 10 MS1 ε14
PR1
ε10 PR3 ε12 MS2
ε11
ε13

Figure 3. Structural Model

494 J PROD INNOV MANAG W. E. BAKER AND J. M. SINKULA
2005;22:483–502

Table 2. SEM Model Construct Summarya

Correlation Matrix

Mean Standard Deviation AVE 1 2 3 4 5 6

Primary Model
1. Profitability 4.58 1.32 .87 .93 .47 .06b .15 .07b .12b
2. Market Share 4.67 1.05 .84 — .90 .20 .16 .06 .12b
3. New Product Success 4.56 1.25 .63 — — .85 .44 .20 .33
4. Market Orientation 4.92 .93 .69 — — — .78 .32 .16
5. Generative Learning Priority 37.86 25.99 .79 — — — — .87 .49
6. Radical Innovation Priority 36.17 25.88 .83 — — — — — .92
a
The alpha coefficient for each construct is indicated in bold along the diagonal.
b
Not significant at the .05 alpha level.

Table 3. Parameter Estimates for Measurement Rela- comparison, the unconstrained model was a signifi-
tions and Causal Paths and Goodness of Fit Indicators cantly better fit than the constrained model ( po.01),
an indication of discriminant validity (Anderson,
Standardized Parameter Estimates (t-value)
1987; Bagozzi and Phillips, 1982). The AVEs also
Parameters Structural Model were compared with the squared correlations for all
pairs of constructs (Fornell and Larcker, 1981). In
l1 .62
l2 .86 (8.76)
each case the AVE exceeded the squared correlation,
l3 .73 (8.50) an indication of discriminant validity.
l4 .86
l5 .71 (11.80)
l6 .66 (10.86)
l7 .58 (9.24) SEM Model Evaluation
l8 .84 (14.81)
l9 .89 The fit indices for the primary SEM are reported at
l10 .92 (20.73) the bottom of Table 3. All fit indicators were well
l11 .89 (19.42)
l12 .81 within the acceptable range. The chi-square of the
l13 .88 (15.86) model was significant (X2 5 233.88, df 5 155,
l14 .94 (16.71) po.001), but the chi-square divided by the degrees
l15 .92
l16 .82 (14.41)
of freedom (1.51) was well within the acceptable
l17 .73 (11.80) range. Other key measures of fit for the model were
l18 .94 very satisfactory. The value of the Tucker-Lewis In-
l19 .90 (19.18)
dex (Marsh, Balla, and McDonald, 1988) exceeded
l20 .75 (13.79)
.990, and values of the root mean square error of
g1 .47 (5.23)
g2 .19 (2.13) approximation (RMSEA) were below .05 (Hu and
g3 .09 (.931) Bentler, 1999). It was concluded that the model was
g4 .40 (4.74) an adequate representation of the data.
g5 .01 (.160)
b1 .17 (1.92)
b2 .52 (7.43)
b3
.16 (
2.03) Hypotheses Tests
b4 .50 (6.22)
b5 .33 (4.07) H1 and H2 assert significant market orientation–new
b6
.18 (
1.98)
Goodness of Fit Indicators
product success and market orientation-profitability
relationships, respectively. The effect of market ori-
X2 233.88 entation on new product success was highly signifi-
po .001 cant (t 5 5.23, po.0001), as was the effect of market
X2 /df 1.51
NFI .981 orientation on profitability (t 5 2.13, po.033).
CFI .994 The market orientation–market share relationship
TLI .991 (t 5 .931, po.352, g3 5 .09) was not significant. The
RMSEA .046
standardized regression coefficient describing market
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX J PROD INNOV MANAG 495
2005;22:483–502

Full Mediation

Full Mediation
orientation’s relationship with new product success

Description

Suppression

Suppression
(g1 5 .47) was two and one-half time stronger than the

Effect
standardized coefficient representing market orienta-
tion’s relationship with profitability (g2 5 .19), which
in turn was twice as strong as the market orientation-
market share coefficient (g3 5 .09). This result is high-

Z 5 2.15, po.016

Z 5 2.28, po.011

Z 5 3.81, po.001

Z 5 2.81, po.002
ly consistent with the aggregate findings of research

Path Significan
A!B!C
reported in Table 1, which reports nearly a 100%
success rate in establishing a market orientation–new
product success relationship but only about a two-
thirds success rate for finding a market orientation–
profitability relationship and a one-third success rate
for the market orientation–market share relationship.

t 5
2.03, po.042

t 5
1.98, po.048
t 5
.16, po.873
H1 and H2 replicate prior research and also extend it

t 5 .931, po.352
Direct Effect
by establishing predicted relationships in a broader

A!C
with B
nomological network. They also support the first el-
ement of a new product paradox, which suggests
qualitatively different (and weaker) effects of market
orientation on market share and profitability than on
new product success.

t 5
.211, po.833

t 5
.23, po.981
H3, which predicts an indirect effect of market ori-

t 5 2.24, po.025

t 5 2.30, po.022
Direct Effect
without Ba
entation on market share mediated by new product

A!C
success, was supported. There was a positive market
orientation–new product success relationship (per
H1), a positive new product success–market share re-
lationship (t 5 1.92, po.05, b1 5 .17), but no market
orientation-market share relationship (t 5 .931,

! New Product Success

po.352, g3 5 .09). H4, which predicts an indirect ef-

! Radical Innovation
fect of new product success on profitability mediated ! Market Share

by market share, also was supported. There was a ! Profitability

positive new product success–market share relation-
C

ship (per H3), a positive market share–profitability

relationship (t 5 7.43, po.001, b2 5 .52), but no pos-
itive new product success–profitability relationship
Separate SEM analysis without B in the nomological network.
(t 5 –2.03, po.042). The observed negative new prod-
uct success–profitability relationship strengthens the
! New Product Success

! Generative Learning

! Radical Innovation

notion of a new product paradox by implying that

successful new product programs that do not increase
Table 4. Follow-Up Analyses on H3–H6

! Market Share

Three-variable path significance (Sobel, 1982).

market share actually suppress profitability, at least in

B

the short term. To confirm this result, a more sophis-

ticated follow-up analysis was conducted.
Using procedures recommended by Iacobucci and
Duhachek (2003), Table 4 reports the results of fol-
low-up tests on the relationships posited in H3 and
H4. H3 portrays a classic full mediation process; the
New Product Success

Generative Learning
Market Orientation

Market Orientation

effect of market orientation on market share is pre-

Causal Sequence

dicted to be fully mediated by new product success.

The analyses in Table 4 support full mediation (Baron
and Kenny, 1986). The analysis reported in column 3
of the table tests the statistical significance of the full
H3

H4

H5

H6
A

three variable mediation sequence (Sobel, 1982).

b
a
496 J PROD INNOV MANAG
2005;22:483–502
H4 portrays a suppression effect. A suppression
effect is present when the direct and mediated effects
of an independent variable on a dependent variable
have opposite signs. They are not statistical artifacts
(Mackinnon, Krull, and Lockwood, 2000; Shrout and
Bolger, 2002). In a suppression effect, the direct rela-
tionship between the independent and dependent var-
iable is generally not significant before the mediating
variable is introduced. For example, the direct rela-
tionship between worker intelligence and assembly
line error rates is not significant. However, when a
third variable, boredom, is introduced, a suppression
effect occurs. A positive effect of worker intelligence
on error rates mediated by boredom and a direct
negative effect of worker intelligence on error rates
emerge (McKinnon, Krull, and Lockwood, 2000). As
Table 4 reports, the relationship among new product
success, market share, and profitability reflects a sup-
pression effect. Prior to the introduction of market
share, the new product success–profitability relation-
ship is insignificant. After its introduction, a positive
indirect effect of new product success on profitability
mediated by market share and a direct negative new
product success–profitability effect emerge.
Taken together, H3 and H4 extend our knowledge
of the role of market orientation in a broader nomo-
logical network and support the second element of a
new product paradox. At least in the short run, they
suggest that market-orientation-inspired new product
success may actually suppress firm profitability if new
product launches are not accompanied by the capa-
bilities required to leverage the launches into market
share gains.
H5 and H6 pertain to the interrelationship of mar-
ket orientation, new product success, generative learn-
ing priority, and radical innovation priority. These
relationships have not been previously examined. H5,
which predicts that the effect of market orientation on
radical innovation priority is mediated by generative
learning priority, was supported. The market orien-
tation–generative learning priority relationship
(t 5 4.74, po.0001, g4 5 .40) and generative learning
priority–radical innovation priority relationship
(t 5 6.22, po.0001, b4 5 .50) were both significant.
The market orientation–radical innovation relation-
ship (t 5 .16, po.873, g5 5 .01) was not significant.
H6 predicts that the effect of generative learning on
new product success is mediated by radical innova-
tion. This too was supported. There was a positive
generative learning priority–radical innovation prior-
ity relationship (per H5), a positive radical innovation
W. E. BAKER AND J. M. SINKULA
priority–new product success relationship (t 5 4.07,
po.001, b5 5 .33), but no positive generative learn-
ing–new product success relationship (t 5 –1.98,
po.048, b6 5
.18). The observed negative gen-
erative learning priority–new product success rela-
tionship implies that market-orientation-inspired
generative learning that does not lead to radical in-
novations can suppress new product success. As re-
ported in Table 4, the follow-up analyses reinforce the
conclusion that firm’s generative learning priority ful-
ly mediates the effect of market orientation on radical
innovation priority and that radical innovation pri-
ority suppresses the generative learning priority–new
product success relationship.
Taken together, H5 and H6 further extend our
knowledge of the role of market orientation on
organizational performance and support the second
element of a new product paradox. They suggest that
market-orientation-inspired generative learning may
actually decrease firms’ new product success if gener-
ative learning is not accompanied by the supporting
capabilities that can leverage learning into radical in-
novations. The inability to convert generative learning
into radical innovations can waste firms’ generative
learning efforts.
Discussion
The inclusion of market orientation, new product
success, profitability, market share, generative learn-
ing priority, and radical innovation priority into a
broader nomological network provides a more com-
plete understanding of market orientation’s impact on
organizational performance and its limitations.
Market orientation’s direct effects on new product
success and profitability may be attributed to the pri-
ority that firms place on applying timely market in-
telligence to decision-making processes. A strong
market orientation can directly influence NPD by cre-
ating a better fit between the benefits consumers seek
and the benefits a firm provides its customers. A
strong market orientation can directly influence prof-
itability by adding value to the brand and by building
long-term customer relationships through superior
customer service, customer retention management,
cross-selling efficiency, and promotional programs,
all of which lead to higher profit margins.
In addition to directly influencing profitability—
ostensibly through profit margins—market orienta-
tion also can indirectly influence profitably if its effect
MARKET ORIENTATION AND THE NEW PRODUCT PARADOX
on firms’ new product success can be successfully con-
verted into market share gains. Likewise, market ori-
entation can indirectly influence new product success
if its effect on generative learning priority can be suc-
cessfully converted into radical innovations.
There are limitations of a market orientation, how-
ever. This and other research suggests that market
orientation effects on terminal performance variables
are not equal. Its effect declines as one moves from
new product success to profitability and, ultimately,
to market share. The difference in the strength of
these relationships is likely to reflect the difference in
the difficulty among meeting customer needs, meeting
customer needs profitably, and meeting customer
needs better than the competition.
Market orientation’s limitations are illustrated by
the barriers to its positive indirect effects on profita-
bility and new product success. Its indirect effect on
profitably requires the market power to realize market
share gains. Its indirect effect on new product success
requires the R&D and manufacturing capabilities to
convert generative learning into actualized radical in-
novations.
Firms with strong market orientations may develop
successful new products, but there is an inherent risk
if the firm lacks the expertise to fully leverage new
product sales because of a lack of market power, sup-
portive channels, or effective promotion. Firms must
be able to screen new product programs not only on
the basis of their likely acceptance by their targets but
also on their ability to convert new product and line
extension sales into market share gains (and avoid
cannibalism).
The ability to leverage generative learning into new
product success is a complex task (Tripsas and Gave-
tti, 2000). Firms with strong market orientations but
with flawed or inhibited procedures and practices for
translating the implications of generative learning into
radical innovation are likely to be unable to capitalize
on their learning. This inability can reflect a lack of
coordination among firms’ functional units, particu-
larly R&D, marketing, and production. It also can
reflect leadership that blocks the conversion of radical
new product concepts into actual products (Tripsas
and Gavetti, 2000).
The success of the NPD depends on the concepts of
effectiveness and efficiency (Ravindranath and Grov-
er, 1998). A strong market orientation directly influ-
ences the former but not the latter. Effectiveness refers
to the ability of firms to conceptualize products that
better meet the needs of customers. The inability of
J PROD INNOV MANAG 497
2005;22:483–502
NPD programs to deliver unique benefits is an un-
derlying reason for new product failure (Henard and
Szymanski, 2001). Efficiency refers to the ability of
firms to cost-effectively produce new product con-
cepts, and it is difficult to achieve. Gatignon and
Xuereb (2001) reported a negative relationship be-
tween innovation cost and innovation performance.
Sethi (2000) discovered significant efficiency issues in
highly innovative firms. In a study of 141 project
managers, firms’ innovativeness was the strongest pre-
dictor of product quality. Its effect, however, was
negative. He speculated that the changes in technol-
ogy and manufacturing implemented by highly inno-
vative products can interrupt the synergy among the
product, technology, and manufacturing to the point
where disruptions in quality surface. The capabilities
required to efficiently translate market-orientation-in-
spired generative learning resources into radical inno-
vations are often only present in dominant firms
(Chandy and Tellis, 2000).
Managerial Implications
Shapiro (1988, p. 119) reported the president of a cli-
ent company commenting, ‘‘We’re in deep trouble,
with both domestic and foreign competition preempt-
ing us at every turn. The only way for us to get out of
this mess is for us to become customer driven or mar-
ket oriented. I’m not sure what that means, but I’m
damn sure that we want to be there.’’ Shapiro pro-
ceeded to identify market orientation as a philosophy
and a culture that must permeate an organization. He
outlined the key components of market orientation,
which were later captured in the MARKOR scale
(Jaworski and Kohli, 1993): commitment to customer
information generation, to customer information dis-
semination, and to customer information responsive-
ness. Over the past 15 years, these principles have
become well known by both academics and practi-
tioners. This level of understanding may represent a
‘‘phase one’’ of our understanding of market orienta-
tion. The problem inherent in this phase may be a
‘‘one size fits all’’ mentality regarding how a market
orientation should be applied.
Now, perhaps it is time to move on to a ‘‘phase
two.’’ Essential to this is the realization that market
orientation as a philosophy or a culture can be tooth-
less unless top-management arms firms with the capa-
bilities to realize the insights that a strong market
orientation can produce. This requires more than
498 J PROD INNOV MANAG
2005;22:483–502
communication and coordination; it requires the ap-
propriate support capabilities. Two key broad catego-
ries of capabilities discussed in this study are the
marketing–R&D interface and the marketing–custom-
er interface. The former relates to the capability of firms
to cost-effectively produce what they envision (e.g.,
technical expertise, production expertise, cost control).
The latter relates to the capability of firms to success-
fully launch what they envision (e.g., distributor power,
supplier power, promotion power). Evolving from
phase one to phase two requires firms not only to iden-
tify new opportunities with customers; it requires them
also to match identified opportunities with capabilities.
In order for a market orientation to be optimally
effective, firms must fit their market-oriented learning
activities to their business strategy (Matsuno and
Mentzer, 2000). Slater and Olson (2001) found that
superior performance was achieved among those com-
panies that successfully matched their marketing strat-
egy with their overall business strategy. The authors
discuss three business strategies: prospectors, anal-
yzers, and low-cost defenders, each of which requires
different types of market-oriented activities. Market-
oriented activities for prospectors should focus on de-
veloping breakthrough product concepts (tapping la-
tent customer needs) and must be accompanied by
R&D excellence and promotion and sales excellence
(pull capabilities). Market-oriented activities for anal-
yzers should focus on incremental innovations in the
form of brand and line extensions in established mar-
kets (tapping manifest needs) and should be accompa-
nied by large-scale manufacturing competencies and an
intensive distribution (push capabilities). Market-ori-
ented activities for low-cost defenders should be fo-
cused on identifying and developing high demand
generic product opportunities and should be accom-
panied by strong capabilities in supply chain manage-
ment, reverse engineering, and cost control.
Research Limitations and Future Priorities
As discussed earlier, this research is subject to the
limitations created by cross-sectional research and by
employing single respondent sources from participat-
ing firms. Also, since the present study was designed
to provide a snapshot across company sizes and
industry types, these results cannot be generalized to
specific business segments or to firms employing cer-
tain marketing or business strategies. These observa-
tions also are limited to U.S. business practices.
W. E. BAKER AND J. M. SINKULA
Most measures employed in this research have been
used in full or in part in related research. These meas-
ures of generative learning priority and radical inno-
vation priority, however, are new. While this initial
operationalization is pleasing, the measures can un-
doubtedly be improved. It is important that future
research incorporate and refine measures of genera-
tive and adaptive learning, incremental innovation,
and radical innovation—important concepts that
have received much theoretical, but little empirical,
attention.
Market orientation increases the propensity of
firms to participate in generative learning and radical
innovation, but these are not the dominant learning
and innovation styles of any organization (Slater and
Narver, 1998). Adaptive learning and incremental in-
novation occur more frequently. Generative learning
and radical innovation are relatively rare but are key
capabilities in the pursuit of competitive advantage.
Another priority of future research should be to de-
termine the appropriate mix of learning and innova-
tion styles across marketing and business strategies.
More specifically, it is important to assess optimal
levels of modeling and generative and adaptive learn-
ing as well as optimal levels of radical innovation,
incremental innovation, and manager-driven innova-
tion for prospectors, analyzers, and low-cost defend-
ers (Slater and Olson, 2001).
As has been discussed, the benefits of a strong
market orientation are likely to be suppressed in
firms whose capabilities inhibit them from translat-
ing generative learning into radical innovations or
have difficulty realizing market-share gains from new
product development programs. It is important to
study the resources, practices, and business strategies
that moderate the conversion rate of new product
success into market share gains and generative learn-
ing into actualized radical innovations. These factors,
once identified, are important partners to market ori-
entation that should be integrated into more com-
plete models of new product development and
profitability.
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Appendix A
Measures of Generative Learning and Radical Innovation

Below are three approaches that a firm may use to understand why an undesirable marketing outcome may
have occurred. Please evaluate the extent to which each learning approach is practiced in your organization.

Learning Approach 1: Modeling

The firm conducts no systematic research effort to address the undesirable outcome. As examples, (1) in the past,
managers have attributed slow initial sales of new automobile models to inadequate dealer incentives; they
presume this to be the case again, or (2) in the past, managers have attributed weak advertising performance to
insufficient media; they presume this to be the case again.

Learning Approach 2: Adaptive Learning

The firm engages in a systematic research effort, but within the context of past assumptions about the mar-
ketplace. As examples, (1) managers search for a solution to slow automobile sales under the assumption that
they need to focus their efforts on styling issues, or (2) managers search for a solution to poor advertising
performance under the assumption that brand credibility can best be established through the use of a well-
known spokesperson.

Learning Approach 3: Generative Learning

The firm engages in a systematic research effort and is prepared to challenge all marketplace assumptions, if
necessary. As examples, (1) managers embrace the potential that styling may no longer be the number one
priority in the automobile R&D process, or (2) managers embrace the potential that a spokesperson endorse-
ment may not be the best way to build brand credibility.

We would like to understand the extent to which each learning approach is encouraged in your firm. For each
statement, assign 100 points across the three learning approaches to indicate the relative preference towards
each approach.
502 J PROD INNOV MANAG W. E. BAKER AND J. M. SINKULA
2005;22:483–502

Appendix A (Cont’d.)

Learning Learning Learning

Approach Approach Approach
1 2 3
1. This is the approach to learning that is endorsed by management. —— þ —— þ —— 5 100
2. This is the approach to learning that is expected in my unit. —— þ —— þ —— 5 100
3. This is the approach to learning that is the norm in my unit. —— þ —— þ —— 5 100

Below are three types of innovation processes that a firm may employ. Please evaluate the extent to which
each process is practiced in your organization.

Innovation Style 1: Manager-Driven Innovation

The firm prefers to follow the lead of its direct competitors by copying or closely approximating the innovations
that they make. As examples, (1) a firm seeks to copy or closely approximate the most successful sport utility
styles developed by their competitors, or (2) a firm selects spokespeople that have successfully endorsed other
products.

Innovation Style 2: Market-Driven Incremental Innovation

The firm doesn’t prefer to simply follow the lead of its competitors; however it does prefer to innovate within
well-established paradigms. As examples, (2) a firm is constantly searching for unique ways to improve its sport
utility vehicle, but does not want to stray far from the prototypical sport utility design utilized by most man-
ufacturers, or (2) a firm is willing to use spokespeople that have not been used by other advertisers, but does not
want to depart from well-accepted methods to evaluate spokesperson potential.

Innovation Style 3: Radical Innovation

The firm doesn’t prefer to follow the lead of its competitors. It strives to innovate by developing new paradigms
to satisfy customer needs. As examples, (1) a firm is not only willing to introduce a radically new design to the
sport utility vehicle category, it searches for ways to create a totally unique category that has the potential to
replace the SUV market like the minivan replaced the station wagon, or (2) a firm is willing to risk spokespeople
that do not conform to the accepted norms for judging spokesperson potential, or completely scrap the plan to
use a spokesperson to build brand credibility.

We would like to know which of the three innovation processes is most and least encouraged in your firm. For
each statement, assign 100 points across the three innovation processes to indicate the relative preferences
toward each.

Innovation Innovation Innovation

Style Style Style
1 2 3
1. This is the approach to innovation that is endorsed by —— þ —— þ —— 5 100
management.
2. This is the approach to innovation that is expected in my unit. —— þ —— þ —— 5 100
3. This is the approach to innovation that is the norm in my unit. —— þ —— þ —— 5 100