Moderation-mediation effect of market demand and organization culture on innovation and performance relationship

Purpose The purpose of this paper is to examine the effect of market demand on innovation-firm performance relationship in service firms. The paper further analyzes the extent to which market demand influences the effect of product innovation on firm performance and how such effect could be managed by a specific type of cultural orientation that is critical to strategic management. Design/methodology/approach Data were collected from different service sub-sectors of an emerging economy with a fast-growing services sector. Causal modeling methods through different model comparisons are used in analyzing the relationship between innovation and service firm performance and environmental mediating and moderating effects. Findings The findings suggest that though product innovation has a positive effect on firm performance, high market demand dampens and negate this effect. However, a service firm’s ability to build an innovative culture, that supports strategy implementation, assuages this negative effect and restores the positive relationship between product innovation and firm performance, even in the face of environmental coercion. Originality/value This paper shows that market demand will dampen the effect of product innovation on performance and as such must be managed in a way that mitigates this negative effect. The building of an organizational culture that is innovative is therefore recommended to mitigate this negative effect to render product innovation still relevant even in periods where market conditions prevent favorable performance effects.