Impact of Managerial & Adaptive Capabilities on SME Innovation (2017) PDF

sustainability Article The Impact of Managerial and Adaptive Capabilities to Stimulate Organizational Innovation in SMEs: A Complementary PLS–SEM Approach Zulfiqar Ali 1, * ID , Hongyi Sun 1 and Murad Ali 2 1 Department of Systems Engineering and Engineering Managem...

sustainability Article The Impact of Managerial and Adaptive Capabilities to Stimulate Organizational Innovation in SMEs: A Complementary PLS–SEM Approach Zulfiqar Ali 1, * ID , Hongyi Sun 1 and Murad Ali 2 1 Department of Systems Engineering and Engineering Management (SEEM), City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong, China; [email protected] 2 Department of HRM, Faculty of Economics and Administration, King Abdulaziz University, Jeddah 21589, Saudi Arabia; [email protected] * Correspondence: [email protected]; Tel.: +852-5719-2384 Received: 16 October 2017; Accepted: 19 November 2017; Published: 23 November 2017 Abstract: The aim of this study is to empirically explore and propose a rigorous model for the positive impact of managerial capability (in terms of decision-making, management style, people development, and succession planning) and adaptive capability (in terms of horizon scanning, change management, and resilience) on organizational innovation in the context of small and medium-sized enterprises (SMEs). The study uses partial least squares structural equation modeling (PLS–SEM) to test the model hypotheses, and importance-performance matrix analysis (IPMA) to provide information regarding the significance and relevance of the dimensions of managerial and adaptive capability in explaining organizational innovation in the proposed model. The empirical data is gathered through questionnaires from 210 SMEs. The results show a strong and significant relationship between managerial capability, adaptive capability, and organizational innovation. This study found that all of the dimensions of managerial capability and adaptive capability help to develop and improve the performance of organizational innovation in SMEs. The study concludes with a comprehensive discussion of the research limitations, and provides suggestions for future research. Keywords: managerial capability; adaptive capability; organizational innovation; small and medium-sized enterprises (SMEs); partial least squares structural equation modeling (PLS-SEM) 1. Introduction Innovation drivers of small and medium-sized enterprises (SMEs) originate from a spectrum of scattered factors, including severe competition from globalization, which exposes SMEs to new competitors, new market niches, rapid technological progress, and customers’ demands for new high-quality products and services at a low price. To sustain increased competitive pressure, SMEs are continuously forced to rethink, reshape, and synchronize their existing competitive sources and capabilities. Innovation studies, especially on SMEs, have sought to explain and explore how to create an innovation-friendly environment, and highlight the key determinants of organizational innovation. However, how innovation occurs, the capabilities within a firm that stimulate organizational innovation, and the relationship between the two still remain challenging areas. Although there is a wide range of organizational capabilities and related variables, many studies have failed to integrate all of the relevant capabilities comprehensively. An integrated and comprehensive framework is thus needed to transform the SMEs. These new circumstances are compelling SMEs to analyze, integrate, build, and reconfigure their resources and organizational capabilities in order to achieve and sustain a competitive advantage in the form of organizational innovation. Organizational capabilities are now being considered a vital Sustainability 2017, 9, 2157; doi:10.3390/su9122157 www.mdpi.com/journal/sustainability Sustainability 2017, 9, 2157 2 of 23 ingredient for competitiveness. Therefore, building organizational capabilities is the key success factor to stimulate organizational innovation in SMEs. However, past research has offered moderately little in terms of comprehensive explanations concerning organizational capabilities and how they can stimulate organizational innovation, particularly in SMEs [2–8]. Indeed, innovation capability is considered the most valuable and inevitable source of growth, competitiveness, and long-term sustainability. Researchers and practitioners have shown that innovation is not merely dependent on research and development (R&D), but also on having an enabling environment within a firm. Seamless and continuous innovation is the only way to sustain competitive performance, which is among the most important factors that provide unique competitive advantages. Therefore, the ability to innovate not simply at times, but rather frequently, rapidly, and with a firm success rate is one of the most profound variables affecting a firm’s ability to compete. Day proposes that organizations can become more market-oriented by recognizing and developing special capabilities. The research defined the term “capabilities” in a rational manner as: an aggregate learning and complex group of skills achieved via organizational processes that guarantee the predominant coordination of functional activities. The resource-based view (RBV) theory and dynamic capabilities (DC) perspective have also highlighted the vital role of capabilities development for sustainable competitive advantage. However, most of the literature on dynamic and organizational capabilities consists of descriptive studies rather than empirical findings [4,6,14–18]. The majority of empirical studies are case studies [15,19,20]. Empirical studies that feature more quantitative approaches are still needed to provide more academic rigor to this concept, especially in developing countries. Integrative capability as highlighted by Jian Yu is a kind of systematic capability to collect, configure, and reconfigure all of the resources that can provide competitive advantages, and can be divided into four capabilities: (1) scanning capability; (2) gathering capability; (3) organization capability; and (4) innovation capability. Therefore, integrative capability is a prerequisite for sustainable organizational innovation, which enables the firm to identify and absorb knowledge from both internal and external sources in order to compete in the ever-changing market. Integrative capability is the vital determinant of a firm’s growth as it integrates different tangible and intangible resources. Adaptive capability can guide the way a firm interacts with external entities such as market scanning [14,23], customers, competitors, and technology scanning [14,24,25], and also help manage and reshape internal entities such as change management and resilience [26–28]. Furthermore, the reconfiguration of resources is focused through adaptive capabilities, which in turn enable processes to respond to peripheral changes. Under this perspective, dynamic managerial capability plays a vital role, as the management seeks to reconfigure and modify existing organizational capabilities in an environment where limited and time-bound information is available both on the firm’s capabilities and on the nature of environmental change. Therefore, the development of a firm relies on the existing experience and learning of the managers, since they are the enablers of organizational capability. Managerial capability relies on more than just cognition; it also requires the understanding of human emotions, and non-cognitive processes that develop and enable strategic adaption behaviors (adaptive capability) in volatile environments [32,33]. Against this background, the prime concern of this study is to explore the relationship between organizational capabilities—specifically managerial capability and adaptive capability—and the related key elements that are essential to stimulate organizational innovation in SMEs. A rigorous capability model is also proposed and validated using structural equation modeling. This study makes three contributions. First, this study sheds light on the conceptualization of managerial capabilities as the consideration of four dimensions, i.e., decision making, management style, people development, and succession planning. Second, adaptive capability is conceptualized as the consideration of three dimensions, i.e., horizon scanning, change management, and resilience. Third, the objective of this study is to investigate the relationship between organizational capabilities and the related key elements that are essential to stimulating organizational innovation in SMEs. In particular, the purposes of this Sustainability 2017, 9, 2157 3 of 23 study are: (1) to examine the relationship between managerial capability (in terms of decision-making, management style, people development, and succession planning) and adaptive capability (in terms of horizon scanning, change management, and resilience); (2) to examine the relationship between adaptive capability and organizational innovation; and finally, (3) to examine the relationship between managerial capability and organizational innovation. Essentially, this study aims to integrate two vital aspects related to firms, which provide the theoretical framework and the research model for this study. The work presented here examines the antecedent part of a resource-based view (in this case, managerial and adaptive capabilities) in the development of dynamic capabilities, and its effect on achieving capabilities-based resources (in this case, organizational innovation) using a theoretical capabilities-based view as a theoretical framework. Finally, this study sheds light on business sustainability in relation to ever-changing competitive forces by providing a robust and holistic capability-based view framework to diagnose weak capabilities and ineffective resources. Business sustainability is not just about environmental, social, and economic needs; it also guarantees the responsible, ethical, and continuing success of the business. Innovation is also considered to be vital for securing long-term sustainable development. Business sustainability is also a holistic approach, as it is linked with three strategies: (1) to maximize profit through achieving competitive advantage; (2) to develop employees (people); and (3) to preserve the environment by recycling/reusing natural resources. Embracing sustainable principles can boost workforce morale and innovation. Sustainability can be the driver for innovation. The proposed framework help SMEs’ management work on these approaches by developing people and other key capabilities that will enable the achievement of a sustainable competitive advantage and overall organizational innovation. The study proceeds as follows. Section 2 provides an overview of the development of the conceptual model and research variables. Section 3 presents the development of the hypotheses. Section 4 comprises a description of the research methodology. Section 5 presents the analysis and the results from the empirical data. Finally, Sections 6 and 7 bring together the discussion, conclusion, and implications. 2. Conceptual Model Development and Research Variables The intersection of the resource-based view (RBV), dynamic capability, and the organizational capability perspectives of a firm provides the theoretical foundation for this study. RBV has the capacity to convey a more precise way to deal with firm-level investigation by portraying the firm as an accumulation of resources and capabilities [2,36], but does not contain the particular resources required for transformation. The dynamic capability point of view conquers that downside by characterizing the firm as the collection of aggregated tangible and intangible resource stocks [12,37], which can be converted to capabilities. To achieve this viewpoint, firms must recognize, adjust, participate, and reorder their resources on a frequent basis, in order to adapt and respond to the varying market trends. SMEs can identify the potential to change, but most of the time, the management does not know how to react to that change. Instead, they fail to build the organizational capability, which is the firm’s ability to deploy or reconfigure its tangible and intangible resources in order to improve performance [13,38,39]. The most recent study by Inan and Bititci that focused on SMEs further divided organizational capabilities into two categories: dynamic and operational. 2.1. Managerial Capability Adner and Helfat described managerial capabilities as the abilities of management to integrate and reconfigure organizational resources and competencies. In this study, managerial capability refers to the strengths of managers to generate a healthy and friendly workplace that not only attracts employees, but also facilitates and motivates them. Furthermore, it also encourages employees towards personal growth, which in turn enhances business performance and helps in achieving targeted goals. Sustainability 2017, 9, 2157 4 of 23 Managerial capability is conceptualized as the consideration of four dimensions: decision-making, management style, people development, and succession planning. Decision-making is the process of making a decision that is aligned with the firm’s vision and strategy. Effective and collaborative decision-making is an integral element of managerial capability. Kunc and Morecroft highlighted managerial decision-making processes under a resource-based paradigm, and the relationship of decision-making to resource building and organizational innovation. Management style has been highlighted as a promoter of organizational change, because it helps to achieve the organization’s values, mission, and vision. Management style is about strengthening and influencing employees to achieve business targets, and in parallel, ornamenting their individual development in a way that brings positive energies to their professional attitudes and uplifts motivation and creativity. Therefore, a positive management style acquires consensus and teamwork, rather than enforces command and control. A positive leadership style motivates employees to look beyond their own interests and think outside of the box in regards to their routine tasks [42,43]. Both transformational and transactional leadership styles are appropriate for SMEs in their own context. The relationship between a leader and their followers is very crucial and important in SMEs, because of the fewer hierarchical layers. A positive leadership style encourages individuals to think further, look at problems from different angles, and innovate through providing an environment where innovative ideas are recognized and rewarded. People development refers to implementing a knowledge-based atmosphere that enables managers, team leaders, and other employees to acquire sufficient information, skills, and deep insights. This development is necessary for the individual as well as for the collective transformation of a workplace, as it produces a mindful workplace. The RBV emphasis that the firm achieves competitive advantages through integrating and effectively positioning their human and organizational resources in a manner that is hard for market competitors to intimate [12,46]. Succession planning is a systematic process of recognizing and developing future business leaders to grow competitive advantage-based knowledge. Successful succession planning is a critical issue for SMEs. To perform better, a firm needs more than resources and capabilities; it also requires the tacit knowledge that is embedded in firm’s routine in order to successfully coordinate and mobilize existing and future resources and capabilities. A knowledge-based approach helps the analysis of how firms create, acquire, apply, and transfer knowledge. Transferring knowledge internally sets the basis for innovating and improving efficiency, which is another key for succession development in SMEs. 2.2. Adaptive Capability Adaptive capability is firmly connected to an organization’s strategic plan to respond to changing business requirements by identifying and nurturing its key capabilities, resources, and other organizational processes. Paliokaite suggested that adaptive capability offers a competitive advantage, particularly in continuously changing environments. Adaptive capability is conceptualized as the consideration of three dimensions: horizon scanning, change management, and resilience. A varying resource base is a crucial antecedent to adaptive capability. The dynamic examining and scanning of market conditions is an integral part of adaptive capability , which consists of investigating strong and weak tie sources. Horizon scanning is the continuous process of gathering information about customers, suppliers, competitors, society, and technology, and using this information to make informed decisions. Change management is associated with amendments to objectives, plans, structures, and governance systems based on the horizon-scanning information. The magnitude of adaptive capability depends on changes in market/product expectations , and the firm’s ability to meet those expectations with its existing resources and capabilities. Change management is a structured Sustainability 2017, 9, 2157 5 of 23 Sustainability Sustainability 2017, 2017, 9, 9, 2157 2157 55 of of 23 23 Sustainability process 2017, 9, 2157 organizational and/or technological change. Therefore, any change in the firm’s for managing 5 of 23 previous resource Resilience basefirm’s is the and new resource ability to endurecombinations disruptions correlate of all with typesa [55,56]. change It in could its adaptability be viewed. as Resilience Resilience is is the the firm’s firm’s ability ability to to endure endure disruptions disruptions of of all all types types [55,56]. [55,56]. It It could could be be viewed viewed as as Resilience adaptability, is the firm’s ability responsiveness, and the to ability enduretodisruptions vigorously of all types revamp the [55,56]. business Itand could be viewed strategies as as the adaptability, responsiveness, and the ability to vigorously revamp adaptability, responsiveness, and the ability to vigorously revamp the business and strategies as the the business and strategies as the adaptability, circumstances responsiveness, change before andcase the the ability for change to vigorously revamp the obvious becomes desperately business[28,57].and strategies as the circumstances circumstances change change before before the the case case for for change change becomes becomes desperately desperately obvious obvious [28,57]. [28,57]. circumstances change before the case for change becomes desperately obvious [28,57]. 2.3. 2.3. Organizational Organizational Innovation Innovation 2.3. Organizational 2.3. Organizational Innovation Innovation Organizational Organizational innovation innovation is is a holistic process of innovation that involves generating, selecting, Organizationalinnovation Organizational innovationis is aaa holistic holistic process holistic process process of of innovation of innovation innovation that that involves that involves generating, involves generating, selecting, generating, selecting, selecting, developing, developing, and and implementing implementing ideas ideas.. Organizational Organizational innovation innovation is is not not just just innovation innovation as as developing,and developing, and implementing implementing ideas ideas.. Organizational Organizational innovation innovation is not just is innovation not just innovation as discussed as discussed discussed in in the the literature, literature, which which focuses focuses primarily primarily on on either either aa new new product product or or process process development, development, discussed in the literature, which focuses primarily on either in the literature, which focuses primarily on either a new product or process development, but rather a a new product or process development, but but rather aa system-wide approach that examines innovation at the strategic level. but rather system-wide a system-wide rather approach system-wide approach approach that examines that that examines innovation examines at the strategic innovation innovation level. at the the strategic at Organizational level level. strategic innovation. Organizational Organizational innovation innovation is is the the ‘‘ability ‘‘ability of of [a] [a] firm firm to to introduce introduce some some new new process, process, product, product, or or idea idea Organizational innovation is the ‘‘ability of [a] firm to introduce is the “ability of [a] firm to introduce some new process, product, or idea in the organization [60,61] some new process, product, or idea in in the the organization organization [60,61] [60,61] that that leads leads to to strategic strategic outcomes outcomes which which are are beyond beyond mere mere innovation” innovation”.. in the organization [60,61] that leads to strategic outcomes that leads to strategic outcomes which are beyond mere innovation”. According to this point of which are beyond mere innovation”. According According to to this point of view, innovative and agile organizations always keep themselves ahead of According view, to this innovative thisandpoint point of of view, agile view, innovative innovative organizations and and agile always organizations agile themselves keep organizations always aheadalways keep themselves keepcompetitor of their themselves ahead ahead and rivals of of their their competitor competitor and and rivals rivals by by focusing focusing on on and and developing developing key key organizational organizational capabilities capabilities and and their competitor and rivals by focusing on and by focusing on and developing key organizational capabilities and resources [7,9,63]. developing key organizational capabilities and resources resources [7,9,63]. [7,9,63]. resources In this[7,9,63]. study, organizational innovation represents holistic innovation activities ranging from the In In this this study, study, organizational organizational innovation innovation represents represents holistic holistic innovation innovation activities activities ranging ranging from from participatorystudy, In this creation organizational and implementation innovation represents of new products, holistic services,innovation and ideas activities in the ranging marketplace, from the the participatory participatory creation creation and and implementation implementation of of new new products, products, services, services, and and ideas ideas in in the the the participatory creation and implementation of to developing an ability to foresee customer requirements and respond better than competitors. new products, services, and ideas in the marketplace, marketplace, to to developing developing an an ability ability to to foresee foresee customer customer requirements requirements and and respond respond better better than than marketplace, to innovation Organizational developing isanalso ability to foresee measured customertorequirements according how the business and respond is managingbetter than the competitors. competitors. Organizational Organizational innovation innovation is is also also measured measured according according to to how how the the business business is is managing managing competitors. innovation Organizational process. innovation is also measured according to how the business is managing the the innovation process. the innovation innovation process.process. 3. Hypothesis Development 3. 3. Hypothesis Development 3. Hypothesis Hypothesis DevelopmentDevelopment In the light of the past research discussed above, our underlying model was developed by In In the light of the past research discussed above, our underlying model was developed by In the categorizing the light light managerialof of the past past research thecapability, researchadaptivediscussed discussed capability,above, above,andourour underlying model underlyinginnovation. organizational model was wasThe developed developed dimensions by by categorizing categorizing managerial managerial capability, capability, adaptive adaptive capability, capability, and and organizational organizational innovation. innovation. The The categorizing of both managerial managerialand adaptivecapability, adaptive capabilities are capability, proposed toand organizational influence organizational innovation. innovation The dimensions dimensions of of both both managerial managerial and and adaptive capabilities are proposed to influence organizational dimensions in the context of of both SMEs. managerial and adaptive Investigating adaptive capabilities capabilities these variables are are proposed within a causal to proposed to influence model shedsorganizational influence organizational light on the innovation innovation in in the the context context of of SMEs. SMEs. Investigating Investigating these these variables variables within within a a causal causal model model sheds sheds light light on innovation in the between interrelationships context of SMEs. these Investigating variables, in additionthesetovariables helping within explainaorganizational causal model sheds innovationlight on on in the the interrelationships between these variables, in addition to helping explain organizational the interrelationships greater interrelationships detail. The proposed between betweenmodel these these variables, variables, is presented in in addition in Figure addition 1. to to helping helping explainexplain organizational organizational innovation innovation in greater detail. The proposed model is presented in Figure 1. innovation in in greater greater detail. detail. TheThe proposed proposed model model is is presented presented in in Figure Figure 1. 1. Figure 1. Proposed research model (with significant and non-significant paths). Note: All arrows Figure Figure 1. Proposed Figure 1. 1. Proposed research Proposed research model research model (with model (withsignificant (with significantand significant andnon-significant and non-significantpaths). non-significant paths). Note: paths). Note: All Note: All arrows All arrows arrows indicate indicate hypothesized hypothesized positive positive relationships. relationships. Suggested Suggested relationship relationship confirmed confirmed in in the the indicate hypothesized indicate hypothesized positive positiverelationships. relationships. confirmed in Suggested relationship confirmed in the the model. model. Suggested Suggested relationship relationship rejected rejected in in the the model. model. model. model. Suggested relationship rejected in the Suggested relationship rejected in the model.model. Sustainability 2017, 9, 2157 6 of 23 3.1. Managerial Capability and Adaptive Capability Managerial capability encourages management to accumulate and analyze information from internal and external sources in order to mine the evolution of technologies as well as changing customer needs and requirements. This involves observing and examining both internal and external technological advancements and business techniques. Here, managers’ capabilities that have been developed through training and skill development help management anticipate change, as well as which parts of the firm will be affected by approaching change. Change is accompanied with crises that need timely and well-contextualized decisions. Pal argued that the three major responsibilities of leadership are to envision change, engage and tackle the change, and act as resilient as possible. Many studies under the umbrella of RBV and DC emphasize employee training and qualifications as ways of achieving competitive advantages [46,66–68]. Empirical studies show that firms use training and skill enhancement programs to develop human resources that can respond to the changing business environment by scanning the market and other external sources. Better-trained workers perform more productively, and they are also more motivated, valuable, and ready to take on more responsibility. Human capital is one of the pivotal types of knowledge resource that resides within individual workers ; it encompasses both tacit and explicit knowledge, which enhance their ability to generate knowledge that could be used to achieve organizational innovation. Other essentials of human capital include experience, industry knowledge, creativity , teamwork, competence, training, loyalty, and contributions and commitment to business missions, goals, and objectives [68,72]. Also, the management has to develop future leaders based on the gathered information in order to anticipate future needs and continue the competitive advantage based on knowledge acquired over time. To summarize, after considering the three elements of adaptive capability, we consider that managerial style, decision-making, people development, and the succession planning of managerial capability are strongly associated. Hypothesis 1 (H1). Managerial capability will affect adaptive capability. In particular: Hypothesis 1a (H1a). Management style is positively linked to change management, horizon scanning, and the resilience of adaptive capability. Hypothesis 1b (H1b). Decision-making is positively linked to change management, horizon scanning, and the resilience of adaptive capability. Hypothesis 1c (H1c). People development is positively linked to change management, horizon scanning, and the resilience of adaptive capability. Hypothesis 1d (H1d). Succession planning is positively linked to change management, horizon scanning, and the resilience of adaptive capability. 3.2. Adaptive Capability and Organizational Innovation SMEs are highly vulnerable in times of crisis , and their relative strength is measured in terms of adaptability, resilience, and innovation. Extreme rivalry and technological development make it difficult to point out the specific external resources that facilitate innovation for current or emerging markets. Therefore, firms need scanning capabilities to figure out valuable sources in order to gain competitive advantages and the knowledge required for creativity. Hence, to achieve and stimulate organizational innovation, firms require the continuous observation and monitoring of business markets and technological advancements. Sustainability 2017, 9, 2157 7 of 23 Hamel and Valikangas suggested that being proactive required resilience, which is the ability to change before the case for change becomes desperately inevitable. External systems and sources can furnish firms with access to new information and technological advancements. Scanning the environment can increase the amount of ideas; therefore, the more a firm scans the external environment, the more access it will obtain to new knowledge, which can stimulate organizational innovation. Horizon scanning is positively related to product innovation in SMEs. Gracht stated that horizon scanning better contributes to organizational innovation, provided two requirements. First, the gathered information can inspire and create new ideas; second, it can help evaluate the exciting products and processes. Many other studies have also explored the relationship between resilience and innovation. Gunasekaran argued that resilience is positively related to competitive advantage and innovation. Based on the above literature discussed, we hypothesize that adaptive capability is positively linked to organizational innovation. Hypothesis 2 (H2). Managerial capability will affect organizational innovation. In particular: Hypothesis 2a (H2a). Change management is positively linked to organizational innovation. Hypothesis 2b (H2b). Horizon scanning is positively linked to organizational innovation. Hypothesis 2c (H2c). Resilience is positively linked to organizational innovation. 3.3. Managerial Capability and Organizational Innovation Organizational innovation is an extensive and multifaceted process, and managerial capability plays a crucial role in its accomplishment, as leaders can affect employees’ innovative behaviors through their thoughtful engagement, which can stimulate idea generation. Therefore, to leverage the innovative and creative potential of employees, and motivate them to think outside of the box, there must be an innovation-friendly culture that supports as well as rewards every initiative regarding innovation. Leadership plays a vital role in the success of product innovation [45,75], whereas process innovation requires the capability to manage resources efficiently. Leadership style and human resources both have a positive relationship with achieving organizational innovation [76,77]. Many other studies also argue that leadership is positively linked to organizational innovation [78–80]. Participatory decision-making accelerates the decision-making process, and imparts a sense of ownership in involved employees. Zehir argues that decision-making is positively related to the innovative performance of employees. Hypothesis 3 (H3). Managerial capability will affect organizational innovation. In particular: Hypothesis 3a (H3a). Management style is positively linked to organizational innovation. Hypothesis 3b (H3b). Decision-making is positively linked to organizational innovation. Hypothesis 3c (H3c). People development is positively linked to organizational innovation. Hypothesis 3d (H3d). Succession planning is positively linked to organizational innovation. Sustainability 2017, 9, 2157 8 of 23 4. Research Methodology and Measurement 4.1. Data Collection and Sample This study is based on quantitative and causal research, which involved hypotheses and theories that test the causal relationship between predictors and criterion variables. We investigated manufacturing SMEs in light of firm-level information gathered from two different regions of Pakistan. This study adopted the cross-sectional method to gather data over a single period of time. An online survey was designed to collect information about the organizational innovation performance of the firms in the context of the managerial and adaptive capability of individual manufacturing firms. The data provided relevant information about the firms’ innovation processes, and how the innovation processes were being managed. We focused on the most developed part of Pakistan in terms of industry in order to get the insights of SMEs in that particular region. At the completion of the data collection phase, 210 responses from managers were found to be usable for the analysis within this study. Therefore, structural equation modeling (SEM) was adopted for both measurement analysis and testing hypotheses, by using partial least squares structural equation modeling (PLS–SEM) and path modeling. 4.2. Measurement Variables An attempt was made to adapt measurement items from existing scales wherever possible. For new scale items, established procedures for new scale development were used [83,84]. To start, a theoretical model was created based on an extant literature review. Organizational innovation was treated as a dependent variable, whereas managerial and adaptive capability were independent variables, incorporating all research hypotheses (Figure 1). Next, the content domains of the constructs were specified, followed by selecting scales from a pool of potential items gathered from relevant studies, as shown in Table 1. The underlying pool was refined in light of feedback and criticism from specialists in the field, and the results are in the final draft of the questionnaire. Based on the arguments of Churchill, Gerbing and Mowen [85–87], the validity was preserved in a rigorous process. Several discussions and reflections on the initial draft with a professor, five Ph.D. students, and one professional in the study matter, ensured the instruments’ content validity. A pre-test was carried out by 10 professionals who discussed and reflected in order to verify the validity of each question, and suggested some modifications or enhancements. Also, the five academic specialists evaluated the questionnaire and offered remarks. Therefore, a few adjustments were made to the questionnaire as indicated by their remarks to guarantee a consistency across the language and the general meaningfulness of each question. After going through this processing, the questionnaire was ready for the pilot study. The questionnaire items associated with all of the constructs of the theoretical model are shown in Table 1. A pilot study was administered to a convenience evaluation sample of 10 potential executives who were excluded from the final sample, in order to assess the content validity and other unpredictable problems related to field work (e.g., timing). Finally, after making some minor corrections, it was confirmed that all of the items were understandable, and respondents filled out the questionnaires successfully. To assess the four dimensions of managerial capability, the current methodology used six items to measure management style, five items to measure decision-making, eight items to measure people development, and four items to measure succession planning. Three dimensions of adaptive capability were assessed through using five items to measure horizon scanning, four items to measure change management, and five items to measure resilience. Finally, organization innovation was measured through 10 items. Since the respondents were fluent in the English language, and the past research has effectively employed English-language questionnaires in Pakistan [88,89], the questionnaires are not translated into Urdu. Five-point Likert-type scales (ranging from 1 = No to 5 = Yes) were used for every construct. Sustainability 2017, 9, 2157 9 of 23 Table 1. A brief summary of definitions and literature sources for the main constructs. Construct Item No Operational Definition Sources Managerial capability The management style of leaders/managers inside the Management style 6 business regarding their approach, needs, priorities, and [43–45,77–79,90–92] communication with workers. How and why decisions are made inside the business, Decision-making 5 [41,93,94] and which stakeholders are involved. People development 8 The business’s approach to developing its employees. [46,95–98] The selection and training of new leaders; also, how the Succession planning 4 [47,99–101] succession plan works in the business. Adaptive capability How the business comprehends what happens in the Horizon scanning 5 external business environment, and how this data [23,25,64] is utilized. How the business acts/reacts to internal/external Change management 4 [102–104] changes, and how it manages the process of change. The business approach when things go wrong; also, how Resilience 5 [28,65,105–107] it survives and flourishes during crises. Organizational innovation 10 How the innovation process is developed and managed. [43,61,108–115] 5. Empirical Results and Analysis This study employed a multivariate analysis technique, i.e., a PLS–SEM tool. More specifically, SmartPLS 3 [116,117] was used to estimate the research model (for detailed reasons of why and when to use PLS–SEM, see for example, Richter, Cepeda, Roldán, & Ringle ). Despite a surprising level of animosity towards PLS–SEM [118–121], PLS–SEM has been widely accepted by the scholarly community, including authors, reviewers, and editors [122–125]. The following points summarize why this study adopted PLS–SEM instead of Linear structural relations (LISREL) or Analysis of a moment structures (AMOS) as more suitable statistical techniques: (1) the structural model is complex, and contains four series of dependent relationships [118,126]; (2) the research objective of the structural model is prediction oriented, and explaining the variance in key target constructs [126,127]; (3) this study analyzes the relationships between managerial capability, adaptive capability, and organizational innovation; which is being considered in the initial stages of theory development, therefore motivated us to investigate the related phenomena in this emerging area ; (4) the sample size (n = 210) is also believed to be relatively small , finally; (5) this study also takes advantage of PLS–SEM in terms of its less rigorous requirements for restrictive assumptions, which motivates researchers to develop and estimate such models through enabling them to avoid additional limiting constraints [117,128]. 5.1. Model Evaluation of PLS-SEM The study embraces a two-step approach to examining and interpreting the PLS–SEM results: (1) evaluation of the measurement model; and (2) evaluation of the structural model. 5.2. Evaluation of the Measurement Model The measurement model when employs PLS–SEM, the assessment of the individual reliability of the reflective items depends on examining the factor-loading values. In this study, in order to assess the validity and reliability of all of the reflective first-order items, an exploratory factor analysis was carried out, which confirmed the unidimensionality of the constructs. Generally, the factor loading of all of the reflective items was found to be above 0.70 or 0.50 which are significant at the 0.001 level (Table 1), except for the items: DM4, MS2, MS3, SP2, HS2, RE3, IN3, IN5, and IN7, which are less than 0.50, and were dropped in the final analyses to guarantee the convergent validity of the scales. The measures for construct reliability (CR) and convergent validity (CV) represent measures of internal consistency reliability and validity for reflective items. Generally, measures of construct Sustainability 2017, 9, 2157 10 of 23 reliability include Cronbach’s alpha and composite reliability. This study reported both Cronbach’s alpha and composite reliability, because Chin recommended that researchers examine Cronbach’s alpha, composite reliability, and average variance extracted (AVE) to assess reflective construct properties. Table 1 shows that all of the values of Cronbach’s alpha and composite reliability are greater than or equal to 0.70, suggesting acceptable reliability. Convergent validity (CV) is assessed by examining the average variance extracted (AVE), which provides the sum of variance that a construct gains from its items in relation to the amount of the variance due to the measurement error. Table 2 shows that the values of average variance extracted (AVE) of all the constructs are greater than 0.50 at the construct level. Hence, the measurement model’s convergent validity is acceptable. This study uses three common approaches to examine discriminant validity: (1) the Fornell– Larcker criterion; (2) cross-loading; and (3) the heterotrait–monotrait (HTMT) ratio. Based on the results, the Fornell-Larcker criterion was examined by comparing the square root of average variance extracted (AVE) with the correlations between the focal construct and all of the other constructs. All of the the variables fulfill this criterion, because the square roots of each AVE are higher than the correlations between the other latent variables. The cross-loadings of each item’s outer loading on the related construct are greater than all of its loadings on other constructs (i.e., the cross-loadings). Finally, the results of the heterotrait–monotrait (HTMT) ratio confirm that none of the HTMT criteria are greater than 0.85 or 0.90. Sustainability 2017, 9, 2157 11 of 23 Table 2. Measurement model. Constructs Code Items SL α CR AVE Managerial capability Decision-making 0.72 0.82 0.54 DM1 Leaders/managers delegate decision-making power to employees within their scope of responsibility. 0.82 DM2 All of the concerned stakeholders are involved, consulted, and asked for their opinion/feedback during decision-making. 0.74 DM3 All employees feel that their feedback/opinions are taken into consideration when decisions are made. 0.74 DM4 * The management team becomes a bottleneck in decision-making. 0.44 DM5 Decisions are made with the vision of the business in mind. 0.63 Management style 0.70 0.81 0.52 MS1 Leaders/managers encourage open communication and feedback among all employees. 0.79 MS2 * All employees can talk to their managers about any aspect of the business without fear of consequences. 0.49 MS3 * Leaders/managers give all employees the opportunity to try new ways of doing things for the benefit of the business. 0.49 MS4 All employees are given responsibility/ownership for the delivery of key goals and objectives. 0.73 MS5 All employees know how their role contributes to the success of the business. 0.67 MS6 Leaders/managers regularly give praise to all employees for the work they have done. 0.70 People development 0.83 0.87 0.50 PD1 All employees have been adequately trained to do their job. 0.71 PD2 All employees are assessed for training or development needs. 0.69 PD3 All employees can suggest training or development opportunities for themselves. 0.64 PD4 There is a budget for the training and development of all employees. 0.61 PD5 Managers discuss career development with all employees. 0.65 PD6 All employees are given the opportunity to become multi-skilled. 0.69 PD7 All employees have regular staff appraisals (annual, biannual, etc.). 0.67 PD8 There is a formal appraisal process for all staff. 0.71 Succession planning 0.70 0.77 0.53 SP1 The management knows where there may be skill gaps in the business in the next two to five years. 0.67 SP2 * The management team assessed the risk to the business of losing key employees at all levels. 0.34 SP3 The leader/manager has identified people in the business who can be developed into higher roles. 0.82 SP4 The management team discussed how the risk of losing key employees at all levels could be minimized, or how to react if it occurs. 0.69 Adaptive capability Change management 0.77 0.85 0.60 CM1 Once made, all changes are sustained. 0.83 CM2 There is continuous communication during change processes. 0.77 CM3 The change(s) happen quickly and effectively. 0.65 CM4 Following a change in the business, does the management team discuss how well it was executed? 0.80 Sustainability 2017, 9, 2157 12 of 23 Table 2. Cont. Constructs Code Items SL α CR AVE Horizon scanning 0.71 0.82 0.54 HS1 The information is gathered in a structured and deliberate way. 0.71 HS2 * The information is stored in a location where relevant employees have access to it. 047 HS3 The information is communicated to the management team on a regular basis. 0.72 HS4 Opportunities and threats are identified from the information. 0.69 HS5 The management team knows the key trends and changes in the environment that could impact the business. 0.80 Resilience 0.70 0.81 0.52 RE1 The business has strong social connections. 0.72 RE2 The business finds it easy to adapt to changing situations. 0.74 RE3 * The management team is optimistic, even when things are difficult. 0.49 RE4 The management team is usually calm in high-stress situations. 0.69 RE5 The leader/manager feels confident in the abilities of employees to tackle problems. 0.72 Organizational innovation 0.86 0.90 0.55 IN1 Employees in the business are always looking for new ways of doing things. 0.75 IN2 The business (management team) is open to making a change or implementing something new if an opportunity arises. 0.76 IN3 * The business (management team) enter new markets/create niches in existing markets. 0.44 The information from the external business environment (e.g., customers, new technology, social trends, etc.) is used to initiate new IN4 0.76 products, services, or improvements. The business (management team) invests (above the industry average) in new technology, research, and development or new IN5 * 0.46 product development. IN6 Employees are rewarded for coming up with ideas. 0.67 IN7 * The ideas are evaluated for their relevance/benefit to the business. 0.43 IN8 When an idea is deemed useful, it is taken to the development stage on a priority basis. 0.76 IN9 The one (employee) who suggested an idea(s) is also involved in the idea evaluation phase. 0.75 IN10 The one (employee) who suggested an idea(s) is also involved in the idea development phase. 0.74 Note: SL = Standard loadings; α = Cronbach’s Alpha; CR = Composite reliability; AVE = Average variance extracted. * Items have low factor loadings, and were deleted accordingly. Sustainability 2017, 9, 2157 13 of 23 5.3. Evaluation of the Structural Model This study draws the results of the structural model on Hair et al.. First, to examine the structural model is to evaluate every set of predictors for possible collinearity. The results exhibit minimal collinearity with the variance inflation factor (VIF). Therefore, the collinearity among the predictor constructs is not an issue in the structural model, as all VIF values are below the threshold of five. Second, the standardized beta values (β) of path coefficients were computed by using the PLS algorithm function in SmartPLS 3. Further, to test the research model ,hypothesis, and to measure the direction, strength, and significance level of the path coefficients, we used the PLS–SEM technique called bootstrapping to generate standard errors and t-values [129,131]. The estimated path relationships between the latent variables in the model are assessed through the sign, magnitude of path coefficients, and 95% bias-corrected and accelerated (BCa) bootstrap confidence intervals. Table 3 shows the results. Table 3. Construct reliability, convergent validity, and discriminant validity through Fornell–Lacker and heterotrait–monotrait (HTMT) criterion. Mean SD 1 2 3 4 5 6 7 8 Managerial capability 1. Decision-making 3.09 0.66 0.74 0.48 0.56 0.36 0.78 0.58 0.57 0.66 2. Management style 3.12 0.79 0.35 ** 0.72 0.73 0.27 0.46 0.56 0.52 0.43 3. People development 2.96 0.59 0.43 ** 0.56 ** 0.67 0.23 0.45 0.60 0.62 0.48 4. Succession planning 2.70 0.64 0.23 ** 0.16 * 0.15 * 0.73 0.26 0.4 0.52 0.32 Adaptive capability 5. Change management 3.08 0.66 0.58 ** 0.34 ** 0.36 ** 0.16 * 0.77 0.46 0.60 0.64 6. Horizon scanning 3.01 0.66 0.41 ** 0.40 ** 0.46 ** 0.25 ** 0.34 ** 0.73 0.71 0.57 7. Resilience 3.13 0.60 0.41 ** 0.37 ** 0.47 ** 0.33 ** 0.44 ** 0.50 ** 0.72 0.60 Organizational innovation 8. Innovation 3.11 0.67 0.53 ** 0.34 ** 0.41 ** 0.22 ** 0.53 ** 0.45 ** 0.47 ** 0.74 Note: * Correlation significance levels: p < 0.05 *; p < 0.01 **; SD = Standard deviation; italicized values on the diagonal are the square roots of the AVE (average variance extracted) and represent Fornell–Lacker’s criteria; values below the diagonal are the correlations between the constructs. Values above the diagonal are the HTMT values. Third, in general, the values of R2 for the endogenous constructs can be interpreted as substantial (R2 0.75), moderate (R2 0.50), and weak (R2 0.25),. Following these rules of thumb, Table 4 reports the values of R2 of change management (0.42), horizon scanning (0.31), resilience (0.38), and innovation (0.50), which are considered as moderate values. These R2 values were relatively high and acceptable. Fourth, this study assesses the relative predictive relevance of the structural model by using the Stone–Geisser criterion (Q2 ), which was derived through the blindfolding technique in PLS–SEM with an omission distance of eight. All of the Q2 values are considerably greater than zero, which provides support for the model’s predictive relevance concerning the reflective endogenous latent variables. The results are given in Table 4. Finally, as additional analysis, this study also reports a recently introduced overall goodness-of-fit measure—standardized root mean square residual (SRMR)—as an index for PLS–SEM model validation. The difference between the observed correlation and the predicted correlation is defined as the absolute measure of model fit. A value of less than 0.08 is considered as a suitable level for this indicator. The composite model of SRMR analysis produces a value of 0.07, which confirms the overall model fit of the PLS–SEM model. Sustainability 2017, 9, 2157 14 of 23 Table 4. Significant testing results of the structural model path coefficients. Significant 95% BCa Path Structural Path Difference Confidence Conclusion Coefficient (p < 0.05)? Interval SRMR composite model = 0.07 R2 Horizon scanning = 0.31; Q2 Horizon scanning = 0.15 R2 Resilience = 0.38; Q2 Resilience = 0.18 R2 Change management = 0.42; Q2 Change management = 0.22 R2 Innovation = 0.50; Q2 Innovation = 0.20 H1: Managerial capability → Adaptive capability Management style → Change management 0.10 n.s No (−0.04, 0.23) H1a partially Management style → Horizon scanning 0.14 * Yes (0.01, 0.27) supported Management style → Resilience 0.05 n.s No (−0.10, 0.18) Decision-making → Change management 0.47 *** Yes (0.34, 0.59) Decision-making → Horizon scanning 0.22 *** Yes (0.10, 0.34) H1b supported Decision-making → Resilience 0.14 * Yes (0.00, 0.26) People development → Change management 0.01 n.s No (−0.12, 0.15) H1c partially People development → Horizon scanning 0.28 *** Yes (0.11, 0.43) supported People development → Resilience 0.23 ** Yes (0.08, 0.38) Succession planning → Change management −0.03 n.s No (−0.15, 0.08) H1d partially Succession planning → Horizon scanning 0.12 * Yes (0.01, 0.22) supported Succession planning → Resilience 0.19 *** Yes (0.06, 0.30) H2: Adaptive capability → Organizational innovation Change management → Innovation 0.27 *** Yes (0.13, 0.40) H2a supported Horizon scanning → Innovation 0.14 ** Yes (0.01, 0.26) H2b supported Resilience → Innovation 0.15 * Yes (−0.01, 0.31) H2c supported H3: Managerial capability → Organizational innovation H3a not Management style → Innovation 0.02 n.s No (−0.16, 0.20) supported Decision-making → Innovation 0.19 ** Yes (0.05, 0.33) H3b supported H3c not People development → Innovation 0.08 n.s No (−0.08, 0.27) supported H3d not Succession planning → Innovation 0.03 n.s No (−0.11, 0.15) supported Note: n.s = Not significant (based on t(4999), one-tailed test); BCa = bias-corrected and accelerated; Sig. = Significance; SRMR = Standardized root mean square residual; * |t| ≥ 1.65 at p 0.05 level; ** |t| ≥ 2.33 at p 0.01 level; *** |t| ≥ 3.09 at p 0.001 level. R2 = Determination coefficients; Q2 = Predictive relevance of endogenous (omission distance = 8). Threshold for R2 value: ≥0.25 (weak); ≥0.50 (moderate); ≥0.75 (substantial). Threshold for Q2 value >0 indicates predictive relevance. 5.4. Predictive Validity of PLS Path Model Using Holdout Samples The coefficient of determination or R2 value shows how well the proposed structural model explains the outcome of interest, while the Stone–Geisser criterion (Q2 ) value shows the adequacy of the predictive validity of the structural model. Yet, the model is not indicative of how independent variables predict dependent variables (outcome of interest). A fit is not always a good way of assessing predictive validity. Therefore, recently Shmueli, Ray, Estrada, & Chatla opened a discussion about the different dimensions of prediction and their effect on predictive performance assessment with PLS path models. To address this limitation, this study follows the recommendations in Woodside to perform predictive validity assessment. To perform cross-validation tests with holdout samples, this study follows Cepeda–Carrión et al. by dividing the sample number (n = 210) randomly into a training sample (two-thirds of the sample, n = 140) and a holdout sample (the remaining sample, n = 70). Then, the training sample is used to estimate the parameters in the PLS path model (weights and path coefficients). Then, using the holdout sample, each observation is standardized, and the Sustainability 2017, 9, 2157 15 of 23 construct scores are formed as linear combinations of the respective observation by using the weights, which are obtained from the training sample. The construct scores are then standardized. For all of the endogenous constructs (in the PLS path model) in the case of the holdout sample, the predictive scores are created by using the path coefficients obtained from the training sample. For the four endogenous constructs, the correlations between their predictive scores and construct scores (change management, r = 0.68, Sustainability p < 0.01; 2017,horizon PEER REVIEWr = 0.49, p < 0.01; resilience, r = 0.55, p < 0.01; and 9, x FORscanning, 15 ofinnovation, 23 r = 0.79, p < 0.01) suggest that the PLS path model in this study has acceptable predictive validity. training sample. For the four endogenous constructs, the correlations between their predictive scores and construct scores (change 5.5. Importance-Performance Matrix management, r = 0.68, p < 0.01; horizon scanning, r = 0.