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Measuring market-sensing capabilities for new product development success

Article  in  Journal of Small Business and Enterprise Development · October 2021

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Álvaro Lopes Dias Luis Filipe Lages

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Purpose

The purpose of this paper is to conceptualize and operationalize the concept of sensing
capabilities and analyse its relationship with new product development (NPD) success and
organic organizational structures. To our knowledge, past measures of market sensing
capabilities have never included opportunity interpretation, through business experience
and organizational articulation, as part of the concept.

Design/methodology/approach

Based on a sample of over 180 SMEs, market sensing capabilities constructs and their
relationships were tested through academics’ and managers’ perceptions. The measure was
tested using confirmatory factor analysis.

Findings

Findings reveal theoretically sound constructs based on four underlying sensing capabilities
components: analytical processes, customer relationship, business experience, and
organizational articulation. Results demonstrate reliability, convergent, discriminant, and
nomological validity. All four dimensions are positively associated with new product
development success and are more likely to appear in organic organizational structures.

Originality/value

Existing sensing capabilities measures are focused on environmental scanning, and the
essence of the concept is not fully expressed by the traditional measures of analytical
processes and customer relationship. Our new measure includes opportunity interpretation
through business experience and organizational articulation.

Practical implications

The resulting instrument provides managers with a valuable tool to measure firms’ abilities
to address environmental uncertainty. By using this instrument, managers can assess
internal organizational structures and resources allocated to sensing capabilities. By
developing sensing capabilities, managers might ultimately influence their new product
development strategy. Findings also reveal that sensing capabilities are positively and
significantly associated with organic organizational structures.

1
 “Entrepreneurship is about sensing and understanding opportunities”
(Teece, 2007: 1346)
“If opportunity does not knock build a door”
(Milton Berlinger)

1. Introduction

Market opportunity sensing is a fundamental capability of market-driven organizations

(Morgan, et al., 2009). A market sensing capability can be defined as the firm's ability to

learn about customers, competitors, intermediaries and the market context in which it

operates (Day, 1994). In a context of uncertainty and dynamism in competitive

environments the demand for sensing capabilities increases due to global competition,

information overload, technology changes, and high innovation rates (Barrales‐Molina, et

al., 2014). To address environmental uncertainties, firms must be open to change, look for a

wider range of solutions and decision-making styles, and embrace outside views (Asseraf,

et al., 2019; Lages, 2016). In today’s dynamic world, managers must be able to develop

unique capabilities for sensing market opportunities in the decision making context, and to

determine when an opportunity has been identified (Eckhardt and Shane, 2003).

Sensing capabilities also require the ability to search and explore new domains

(Hodgkinson and Healey, 2011). This makes it possible to reach different markets and build

relationships with customers that the firm does not yet have (Danneels, 2008). Firms should

have a basis for successful innovations and value added strategies to sustain competitive

advantage (Harmsen and Jensen, 2004). Furthermore, sensing capabilities are found to be

important for reducing production and acquisition costs (Hult, 1998), and linked with firms'

revenue, and margin and profit growth (Morgan, et al., 2009).

2
 The theoretical and managerial relevance of sensing capabilities is related to the

sustainability of competitive advantage in changing environments (Teece et al., 1997;

Zahra, et al., 2006; Eisenhardt and Martin, 2000), forming the basis of the dynamic

capabilities framework (Teece, 2007). Research on dynamic capabilities has evolved from

identifiable, specific, and stable patterns of collective routines (e.g. Eisenhardt and Martin,

2000; Zollo and Winter, 2002) to a more complex approach based on microfoundations

(e.g. Teece, 2007; Dixon, et al., 2010; Hodgkinson and Healy, 2011). As such, a new

perspective for the causes of sustainable performance implies a more complex approach,

more consistent with rapidly changing global business environments, which requires that

firms develop heterogeneous capabilities (Drnevich and Kriauciunas, 2011; Teece, 2007).

The importance of sensing capabilities is reflected in several attempts to

operationalize the concept. In the context of the framework advanced by Teece (2007),

several measures are proposed for sensing, seizing, and reconfiguring capabilities (e.g.

Pavlou and El Sawy, 2011; Wilden, et al., 2013; Janssen, et al., 2016). These measures

focus on the assessment of the firm’s sensing capabilities including items related to

environmental scanning processes, such as gathering market and business information,

observing and adopting the best practices, or identifying customer needs. The word

“scanning” is used by Danneels (2008) with regard to measurement. It includes aspects

such as attending scientific or professional conferences or frequently participating in trade

shows. This measure is further extended by Wilden, et al. (2013) incorporating items of the

measure proposed by Jantunen (2005) regarding the knowledge acquisition dimension.

Despite the relevance of these scales in the operationalization of the construct of

dynamic capabilities, we posit that the essence of sensing capabilities is not fully reflected.

Sensing capabilities goes beyond environmental scanning. The measure alertness (Tang, et
3
al., 2012) addresses the individual's ability to identify opportunities, framing it in the

context of the entrepreneur, not the organization. As suggested by Rastkhiz, et al. (2019) it

should be placed within the scope of a multi-expert decision-making process, or collective

mind (Ettlie and Pavlou, 2006). In this vein, we argue that market sensing should reflect its

true essence.

This study revisits the concept, role, and key components to develop and

empirically test a new sensing capabilities measure that incorporates the essence of the

construct. Accordingly both researchers and practitioners might better assess and thereby

tackle this construct more efficiently. Furthermore, by doing so, they can improve NPD

success and amplify this source of competitive advantage (Ettlie and Pavlou, 2006). NPD

success depends on firms’ abilities to scan the environment to transfer new market

knowledge into the organizational processes (Dosi, et al., 2008).

The articulation could be related to cooperation between marketing and sales and

NPD project managers (Ernst, et al. 2010), to link marketing resources to sensing

capabilities (Kozlenkova, et al., 2013), to develop NPD inter-firm partnerships (Day, 1994;

Ettlie and Pavlou, 2006), or to incorporate past NPD experience (Marsh and Stock, 2003).

This article aims to propose a market sensing capabilities measure using to scale

development procedures. Instead of treating this measure as a unidimensional construct,

various measurement units for each of the four dimensions are presented. The measurement

properties of the market sensing capabilities measure were assessed using a confirmatory

factor analysis approach and a multi-industry sample from a European Union country

(Portugal). Considering the need for SMEs to adapt their organisational structure to

integrate the proposed dimensions of scale and simultaneously improve their performance

in the development of new products, this article also aims to explore the relationship
4
between the four dimensions of scale and the pursuit of an organic organisational structure

and performance in the development of new products.

2. Sensing Capabilities: concept, role, and key components

We posit that the essence of sensing capabilities is not fully captured in existing measures,

which are more focused on scanning activities. However, based on the essence of the

concept, we argue that sensing capabilities are also related to processes occurring inside

firms’ borders, such as opportunity interpretation through business experience and

organizational articulation. We build on reported research to lay three theoretical

assumptions: concept, role, and key components.

To integrate the essence, the concept should be clarified. One critical concept is

opportunity recognition. Opportunity recognition is concerned with the formation of

subjective beliefs that an opportunity exists (Shepherd, et al., 2007). This means that

opportunity recognition is an element of the larger opportunity exploration-recognition-

exploitation process (Gregoire, et al., 2010). Sensing capabilities goes further, consisting of

the organizational ability to spot, interpret, and pursue opportunities (Pavlou and El Sawy,

2011). It is therefore not only about scanning and recognition of market opportunities. The

definition also includes interpretation and mobilization of resources (Teece, 2009; Katkalo

et al., 2010), meaning that sensing is a process that incorporates intuition, which is

particularly important on more turbulent environments (Zacca, et al., 2017). In sum,

sensing new opportunities “is much a scanning, creation, learning and interpretative

activity” (Teece, 2007, p. 1322).

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 The role of sensing capabilities within the organization should also be specified. It

is not clear in the literature whether roles are a precedent of dynamic capabilities (Inan and

Bititci, 2015) or a part of them. The latter enjoys more consensus in the literature (Pavlou

and El Sawy, 2011; Wilden et al., 2013). More specifically, Teece (2007) considers sensing

capabilities to be the organizational and managerial processes that underlie dynamic

capabilities.

Accepting this assumption, roles are important enablers of firms’ evolutionary

mechanisms (Janssen, et al., 2016), of innovation performance and long-term

competitiveness (Jantunen, 2005; Bruni and Verona, 2009; Barrales‐Molina, et al., 2014),

of the ability to reconfigure operational or ordinary capabilities (Danneels, 2008; Drnevich

and Kriauciunas, 2011; Pavlou and El Sawy, 2011; Laaksonen and Peltoniemi, 2018), and

of competitive advantage (Harmsen and Jensen, 2004; Perry, et al., 2011). This is

consistent with the indirect effect of dynamic capabilities on firm performance (Laaksonen

and Peltoniemi, 2018). In the field of SMEs, management competences influence

performances indirectly with the mediating role of entrepreneurial orientation and

willingness to change (Zacca and Dayan, 2018).

The decomposition of sensing capabilities is especially important to bring new

insights on this matter (Singh, 2001) and must be established considering organizational

capabilities in order to build the link to action (Harmsen and Jensen, 2004). The key

components of sensing capabilities are presented in Figure 1.

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Insert Figure 1 about here

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6
 Key components of sensing capabilities include several routines. First, the firm

must be able to perform an environmental scanning. Two major streams of literature can be

identified addressing this topic. One asserts that the firm must possess capabilities to

develop a systematic scanning mechanism to track and interpret market trends, based on

analytical processes and organizational articulation (Teece, 2007; Schreyögg and Kliesch-

Eberl, 2007; Laamanen and Wallin, 2009). The other is based on managerial cognition

factors that complement processes analysis through individually accumulated knowledge

and experience, relational capabilities (Shane and Venkataraman, 2000; Hodgkinson and

Healy, 2011; Tumasjan and Braun, 2012), and managerial intuition (Zacca, et al., 2017).

Scanning activities are related to search activities in the business ecosystem (Teece,

2007), to the generation of market intelligence (Pavlou & El Sawy, 2011), and to the

allocation of resources, processes, and employees to scan the environment (Wilden et al.,

2013). Being close to the customer also facilitates detailed comprehension of customer

needs and frustrations (Teece, 2007). For this reason customer relationship is also an

important task for scanning activities (Danneels, 2008; Zahra et al., 2006). Accordingly,

scanning is about an orchestration between analytical reasoning and relationship

capabilities (Wood and McKinley, 2010).

Second, the scanning results should be evaluated through mechanisms of

interpretation (Eckhardt and Shane, 2003), avoiding situations in which attention is

diverted by all the opportunities that a successful scanning activity might reveal (Teece,

2007). Recognizing the potential profit of an opportunity depends on the possession of the

experience necessary to identify it (Groysberg and Lee, 2009) and on the cognitive ability

to value it (Shane and Venkataraman, 2000; Zott and Huy, 2012). As such, interpretation
7
plays a key role in filtering and aligning the opportunities to be explored in the context of

the organizational vision (Wood and McKinley, 2010). Interpreting the glimpsed

opportunities means that managers and entrepreneurs should evaluate new developments

and identify which technology and which market segment to target (Teece, 2007).

Opportunity evaluation is considered “a multi-expert decision-making process in which

main decision makers of the firm or key entrepreneurial team members who are responsible

for the business engage in evaluation” (Adel Rastkhiz, et al., 2019). Through this process

the dissemination of market intelligence should occur (Kogut and Zander, 1996; Pavlou and

El Sawy, 2011).

Third, responding to market opportunities is related to mobilizing resources (Teece,

2007) and initiating plans to capitalize on market intelligence (Pavlou and El Sawy, 2011).

These plans promote the development of cross functional business processes, leading to

superior customer value (Fang and Zou, 2009). Organizational articulation can be

completed by embedding this new market knowledge in business processes designed by

middle management (Teece, 2007).

3. The Four Dimensions of Sensing Capabilities

Literature about sensing capabilities addresses the need for the integration of three key

components, as discussed above. First, the existence of formal analytical processes

allowing a systematic approach to market research (Teece, 2007; Schreyögg and Kliesch-

Eberl, 2007; Laamanen and Wallin, 2009), market knowledge as a driving force to achieve

high level of market response (Barrales‐Molina, et al., 2014), and customer relationship to

obtain first hand market intelligence (Danneels, 2008; Pavlou and El Sawy, 2011). The

8
outcomes of these processes must flow toward the firm’s decision makers. They must

interpret (Teece, 2007) and respond through organizational articulation practices (Narver

and Slater, 1990; Allred, et al., 2011). Second, sensing capabilities also depend on

managerial experience in opportunity recognition and the subjacent means-end relationship

(Shane and Venkataraman, 2000; Welpe, et al., 2012), representing a subjective perception

of environmental change (Teece, 2007).

The differences in opportunity sensing depend on the management team to respond

in conformity (Baron, 2004; Tumasjanand and Braun, 2012). To do so, managers must

interpret which opportunities are aligned with firms’ visions as a basis to launch new

ventures (Hoskisson, et al., 2011; Rasmussen, et al., 2011). While integrating these topics,

our measure combine scanning, interpretation, and responsiveness as key components of

sensing capabilities. As such, our measure comprises the perspective of organizational

systems to obtain and translate the market information into organizational learning, but also

includes the human experiential and relational factor. Our measure is thus composed of four

dimensions supporting sensing capabilities: (1) analytical processes, (2) customer

relationships, (3) business experience, and (4) organizational articulation, (as presented in

Figure 2). Next, these four constructs are explained in detail.

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Insert Figure 2 about here

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9
4.1. Analytical processes

Sensing capabilities are related to the existence of analytical processes that result in

a methodical scanning of changes in environmental opportunities. Firms that do not build

these kinds of processes are less prepared to assess their market and spot opportunities

(Teece, 2007). Analytical processes follow theoretical development of dynamic capabilities

that lead to a general agreement that they can be considered as organizational routines or

processes (Eisenhardt and Martin, 2000). By continuously scanning environmental change,

the monitoring function of analytical processes is fundamental to the adoption of corrective

actions (Schreyögg and Kliesch-Eberl, 2007). Market orientation also integrates the essence

of mechanisms of generation and dissemination of market intelligence (Kohli and Jaworski,

1990), considering a sequence of processes and routines with the goal of monitoring

customers’ needs and wants. By assuring the environmental comprehension, managers are

more able to identify real and potential failures and take the appropriate responses (Shane

and Venkataraman, 2000). As the skills to do so are not equally distributed throughout the

organization, it is suggested that analytical processes should be embedded within the

organization (Teece, 2007).

The literature related to analytical processes to identify opportunities considers

several mechanisms and systems, such as in-house market research, formal and informal

contacts with stakeholders (Vorhies, et al., 2005; Teece, 2007), customer and prospects

tracking (Harmsen and Jensen, 2004), and detection of changes in their preferences

(Jaworski and Kohli, 1993). According to the degree of market uncertainty, traditional

approaches for new product development like Stage-Gate can be combined with more agile

solutions, especially when exists a greater need for experimentation (Cooper and Sommer,

2016). As such, the hybrid Agile-Stage-Gate approach allows to rapidly creating prototypes
10
that can be market tested for feedback, in a trial and error solution more suited when there

is much uncertainty (Cooper, 2016). The construct presented below has eight items and

assesses the strength of analytical processes for sensing capabilities in relation to

competitors.

4.2. Customer relationships

Sensing opportunities requires the firm to maintain close relationships with customers

(Teece, 2007). Being close to customers is important for monitoring market demands and

for translating them into organizational responses (Harmsen and Jensen, 2004). The

adaptation of organizational activities also depends on the relational perspective established

by the firm and its individuals (Rothaermel and Hess, 2007; Zahra et al., 2006; Hodgkinson

and Healy, 2011). Customer relationship management is a mechanism that helps to achieve

superior competitive advantage (Barrales‐Molina, et al., 2014). Wang, et al. (2015)

underpinned relational capabilities (including innovation and information) as a critical

enabler of firm capabilities. They enhance collaboration, which is independent of the level

of market turbulence (Wang et al., 2015). The concretization of this dimension is related to

organizational culture toward customers and to listening to the market (Zahra et al., 2006).

In fact, market sensing can be more fine-tuned about customers’ needs and wants than

proposals made by competitors (Danneels, 2008).

As capabilities “usually evolve over time in the context of complex and partly

implicit experiences, organizations often lack a well-articulated understanding of their own

capabilities” (Schreyögg and Kliesch-Eberl, 2007:928). Opportunity recognition depends

partially on managerial experience and organizational knowledge and learning capabilities

(Teece, 2007; Dosi, et al., 2008). This construct is inspired by the work of Parasuraman, et
11
al. (1988) and seeks to capture employees’ behaviour regarding customer assistance,

responsiveness to customer’s needs, and relationship with customers.

4.3. Business Experience

As mentioned above, the interpretation encompasses customer relationships and the ability

to filter the options detected through analytical processes. This is the field of subjective

perception and creativity of the management team (Kor, et al., 2007). Recent studies

underscore the complementary importance of managers’ experience in the interpretation of

the information produced by the analytical processes. It has been argued that analytical

processes dim the comprehension of market trends, diminishing true sensing, and losing

several important managerial capabilities such as intuition and emotion (Hodgkinson and

Healy, 2011). Differences in strategic change are linked to differences in managerial

cognition (Zott and Huy, 2012). Experience is a key issue to explore new markets, a part of

the essence of dynamic capabilities (Groysberg and Lee, 2009). Business learning and

managers’ past experience develop in a co-evolution perspective (Zollo and Winter, 2002;

Dixon, et al., 2010), and failure recognition plays an important role in experience

accumulation (Mitchell, et al., 2008). A higher level of business experience allows

companies to combine “emotion to update mental representations and (…) skilled

utilization of intuitive processes to synthesize information and form expert judgments”

(Hodgkinson and Healy, 2011, p.1502).

Different managers can thus interpret or exploit the same market opportunities

differently. In their mental equation they evaluate several outcomes of exploiting market

opportunities, based on their caracteristics (Shane and Venkataraman, 2000). However,

12
Welpe, et al. (2012) argue that subjective evaluations are more important than market

opportunities’ caracteristics, as “innovative activities in organizations occur through

managers’ subjective sensing of processes that need to be initiated to then search, learn,

establish, and implement this creativity” (Lin, et al., 2016, p. 866).

Another perspective that reinforces the importance of the managerial experience

emerges from the entrepreneurship literature, suggesting that opportunity recognition needs

the development of specific capabilities such as experience in the industry (Rasmussen, et

al., 2011). This component of sensing capability is important because the exclusive use of

analytical processes can lead to competitive parity. Since these systems are sought by

several firms, in the limit all competitors are aware of the same market opportunities.

Decision making can thus produce similar strategies between rival firms (Porter, 1996).

After opportunity detection by analytical processes, entrepreneurs and managers must

determine how to interpret new events and developments (Teece, 2007). The quality of this

decision depends on the use of a mixture of analytical and intuitive styles (Hodgkinson and

Healy, 2011). This construct is inspired by the work of Morgan, et al. (2004), who consider

that sensing capabilities must include firms’ accumulated experience. It captures the

experiential evolution recognizing that market, client, and business wisdom lead to better

sense when reading environmental scanning information.

4.4. Organizational articulation

The effectiveness of analytical processes and learning through customer relationship

depends on the existence of organizational articulations. Asset orchestration and sensing

capabilities are closely related managerial functions (Helfat and Martin, 2014). They make

13
it possible to absorb knowledge and create a bridge between external opportunities and

internal operationalization (Teece, 2007; Pavlou and El Sawy, 2011; Pinheiro et al., 2021).

There are two key underpinnings: interpretation and knowledge absorption. First, this

articulation assures a “filter so that attention is not diverted to every opportunity and threat

that ‘successful’ search reveals” (Teece, 2007, p. 1326) and is an essential requisite to

accurately change operational capabilities (Cepeda and Vera, 2007). A key assumption in

marketing dynamic capabilities is the ability to absorb market knowledge and facilitate its

integration into the organization (Barrales‐Molina, et al., 2014), and application to

commercial ends (Cohen and Levinthal, 1990). Zahra and George (2002) consider

absorptive capacity as a set of abilities to manage knowledge. Marketing resources and

capabilities have the potential to reach new market opportunities and disseminate

knowledge through the organization (Kozlenkova, et al., 2014).

Several aspects such as established organizational structures, cultures that

negatively affect inter-firm collaboration, and the unavailability of other organizational

enablers (Allred, et al., 2011) constitute a holistic approach for structuring sensing

capabilities across the organization and entrepreneurial teams (Lim, et al., 2012). Key

barriers to the organizational articulation could also be inefficient coordination and

integration of capabilities and entrenched learning processes that create rigidities (Sirmon,

et al., 2007). In a healthy organizational articulation, managerial decisions must gather and

leverage capabilities, establish a climate of strong collaboration, and focus the organization

on a common vision (Sirmon et al., 2007). This leads to the need of more organic

organizational structures that allow firms to implement “management practices among

functional departments for the generation and sharing of market intelligence on current and

future demands and customer needs” (Wong ang Tong, 2012, p. 102). Furthermore, a
14
positive organizational climate and culture are at the core of sensing capabilities (Dyer, et

al., 2008). This context promotes the articulation between entrepreneurial team members,

especially the adoption of behaviours that increase the probability of generating new ideas

(Dyer, et al., 2008).

Learning also plays an important role in sensing capabilities (Gavetti, 2005;

Rothaemel and Hess, 2007; Laamanen and Wallin, 2009), from several perspectives: first,

in resource management in dynamic environments it promotes improvement (Sirmon et al.,

2007); second, in organizational transformation processes it is important for deployment

and environmental search (Dixon, et al., 2010); and finally, for modifying operating

routines, since it is based on systematic methods (Zollo and Winter, 2002).

Our study adapts the organizational learning construct from the work of Hult, et al.

(2003), considering that previous conditions must be joined in an organizational articulation

that reinforces team spirit, the existence of a commonality of purpose, a total agreement

regarding the organizational vision, the comprehension of how each one’s work fits into the

value chain of the organization, and the recognition of the importance of learning as a key

to improvement. Our construct comprises 10 items.

4. Hypotheses development and research model

4.1. Sensing Capabilities Dimensions and NPD Success

The new product development construct relies on Vorhies and Morgan’s (2005) work, and

measures “the processes by which firms develop and manage product and service

offerings” (p. 82). NPD success “involves the transformation of innovative ideas into

15
products” (Wong and Tong, 2012, p. 101), and can be defined as the relative success rate

on revenue and margin growth resulting from new products (Atuahene-Gima et al., 2005).

New product development success includes knowledge resulting from the

identification of customers expressed and latent needs (Tsai, et al., 2008). Accurate reading

of market trends and necessities ensures that the firm is able to respond with concrete

products (Harmsen and Jensen, 2004). Sensing capabilities play an important role in the

identification of those needs, providing fundamental information for new product

development success. By focusing on this capability the firm is thus able to create more

value for the customer through its offering (Drnevich and Kriauciunas, 2010). The way that

value is created in new product development is an object of scholarly debate. Some

consider that it results from a dynamic, intentional, and complex process (Eisenhardt and

Martin, 2000; Helfat and Peteraf, 2009; Schreyögg and Kliesch-Eberl, 2007) in which firms

apply experience resulting from previous product development projects (Marsh and Stock,

2003). Others argue that the knowledge source can also be external – acquired through

dynamic partnership capabilities that arise from the co-existence of absorptive and

coordination capabilities and a collective mind (Ettlie and Pavlou, 2006; Rothaermel and

Hess, 2007).

The successful development of new products, involving significant costs and risks,

and nearly 50% of the new products that are introduced each year fail (Sivadas and Dwyer,

2000). To improve this rate, a close articulation between marketing and NPD is a key

success factor (Wong and Tong, 2012). The constant contact with customer needs held by

marketing department is essential to deliver information to the relevant parties (Voss and

Voss, 2000). More specifically, Cooper and Kleinschmidt (2003) alerts to the key role of

the predevelopment activities, such as preliminary market assessment, detailed market

capabilities can be linked with superior product success rates (Morgan et al., 2009). The

literature indicates several reasons for which market sensing capabilities contribute to NPD

success. First, they allow a firm to identify underserved segments or unsatisfied customers

and channel requirements (Slater and Narver, 2000). Second, strong market sensing

capabilities are found to be linked with the identification of the least price sensitive

customers and prospects, enabling practicing higher prices (Morgan et al., 2009), or to

increase non-price value to customers (Slater and Narver, 2000). Third, opportunity

recognition can be enhanced by exploring customer requirements (Morgan, et al., 2005).

Fourth, market sensing capabilities provide information for a better match between resource

investment and customer needs, contributing to reduce NPD and operational costs (Morgan

et al., 2009). Finally, market sensing capabilities allow learning about competitor actions

and reactions (Morgan et al., 2009). Within this context, the development of sensing

capabilities plays a key role in the success of NPD. As such we hypothesize:

H1a. The development of analytical processes for sensing capabilities positively

relates to NPD success

H1b. The development of customer relationships for sensing capabilities positively

relates to NPD success

H1c. Business experience for sensing capabilities positively relates to NPD success

H1d. The organizational articulation for sensing capabilities positively relates to

NPD success

17
4.2. Sensing Capabilities Dimensions and organic organizational structure

The “organic organizational structure” (Wilden et al, 2013) is associated with

interdepartmental connectedness of market orientation literature (Jaworski and Kohli,

1993), and assesses the ease of communication between different departments. There is

theoretical evidence for the existence of more sensing capabilities in organic organizational

structures. Taking into consideration that the decision maker’s distance from action reduces

the ability to interpret market information (Gavetti, 2005), organic organizational structures

are more likely to be close to the client (Harmsen and Jensen, 2004; Laamanen and Wallin,

2009). The involvement of top management and the existence of a supportive

organizational structure that articulates knowledge and customer relationships are critical

(Ernst, et al., 2010; Sethi, et al., 2012).

Organic organizational structures promote intra-firm communication (Macher and

Mowery, 2009) that allows people in the organization to be close to the market. The

communication is more agile and the effect of interdepartmental barriers becomes weaker.

Simultaneously, business experience articulation can be stimulated though the existence of

more direct communication resulting even from informal ways (Krasnikov and

Jayachandran, 2008). It is therefore expected that in order to better sense the market, an

organic organizational structure will be useful (Jaworski and Kohli, 1993). Another

important feature resulting from a flatter structure is the use of subjective information,

which can be better captured by experienced managers (Krasnikov and Jayachandran,

2008). This perspective emphasizes that in organic organizational structures (i) the

information resulting from market scanning can be more rapidly articulated and embedded

in the organization, and (ii) the organization is more able to be close to the customer and to

18
“read” more accurately the signs coming from the market. Both perspectives benefit from

bureaucracy reduction and increased collaboration between departments, features expected

to result from a flatter organizational structure.

H2a. The development of analytical processes for sensing capabilities positively

relates to an organic organizational structure

H2b. The development of customer relationships for sensing capabilities positively

relates to an organic organizational structure

H2c. Business experience for sensing capabilities positively relates to an organic

organizational structure

H2d. The organizational articulation for sensing capabilities positively relates to an

organic organizational structure

Figure 3 provides a graphic representation of the research model.

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Insert Figure 3 about here

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5. Method

5.1. The research setting

The research setting is the country of Portugal, a member of the European Union (EU),

which is the second largest economy in the world in nominal terms, after the United States.

As with many EU countries, Portugal’s economic growth depends heavily on its

entrepreneurial activity. Since entering the EU in 1986, the country’s entrepreneurial

19
activity has boomed. The most recent data on entrepreneurial behaviour and attitudes

(GEM, 2020) show that in 2019, Portugal matched or surpassed the global average in

indicators related with sensing capabilities, such as Perceived Opportunities Rate (Portugal

53.52% and global average 53.65%) or Perceived Capabilities Rate (Portugal 61.43% and

global average 58.27%).

This paper targets small and medium-sized enterprises (SMEs), for several reasons.

First, in Europe, for example, SMEs are estimated to make up 99% of all businesses

(Eurostat, 2015). Second, SMEs play an important role in many economies (Inan and

Bititci, 2015; Zou and Stan, 1998). Third, SMEs are generally considered to be less adapted

to compete on price when compared to large firms, having to explore their strengths by

other means (Lages and Montgomery, 2004). While large companies have vast resources to

conduct market research and systematically scan opportunities globally, SMEs struggle to

do the same. Furthermore, it is essential to conduct research that enables SMEs to focus on

sensing activities to improve new product development performance. The key issue goes

beyond environmental scanning. These firms must be able to access and interpret market

knowledge, changing internal resources and processes to rapidly react to opportunities

identified, thereby leveraging on their lighter structure (Lages and Montgomery, 2004).

5.2. Survey instrument development

This study follows Churchill’s (1979) traditional approach to scale development. The first
step consisted on building on the existing literature in the field of sensing capabilities.
Then, to assure reliability and reduce measurement error we adopted multi-item scales of
the conceptual framework rather than single-item scales. As such, we operationalized the
four sensing capabilities dimensions identified in the literature review (1. Analytical
Processes; 2. Customer relationship; 3. Business experience; and 4. Organizational

20
articulation). To measure analytical processes we adapted from Vorhies, et al. (2005) and
Jaworski and Kohli (1993) scales. Customer relationship was measured by adopting the
scale from Parasuraman, et al. (1988). Business experience measure was adopted from an
adaptation of Morgan, et al. (2004). Finally, organizational articulation was adapted from
Hult, et al. (2003). The scale items are presented in Table 1 and Table 2. A preliminary
survey was developed and evaluated by two academic judges, one with knowledge of the
method employed in this study and another with business knowledge. They assessed the
final survey instrument’s content and face validity. After revisions, we used a pre-test
sample of five firms in order to test the comprehension of the questionnaire. In order to
avoid translation errors, the items were back-translated into English by a different
researcher (cf. Douglas and Craig, 1983). Respondents were asked to assess all the items
using a 5-point Likert scale (ranging from “1- Much worse than competitors” to “5- Much
better than competitors”), while taking into consideration the competitive position of their
firm in relation to their competitors. The anchor based on competitors’ relative position is
in line with the sensing capabilities concept.

5.3. Data collection, assessment of non-response bias, and data profile

Similar to earlier research on dynamic capabilities (e.g. Kale and Singh, 2007; Kusunoki, et

al., 1998; Song, et al., 2005) our study is based on an inter-industry sample of firms

selected from a commercial list of Portuguese firms performing their activity in the country

mainland. The inclusion criteria were: (i) to have less than 250 persons employed; (ii) the

annual turnover should be inferior to EUR 50 million; and, (iii) the balance sheet total of no

more than EUR 43 million. The final data collection was conducted with a questionnaire,

applied through in-depth interviews. In line with Cavusgil and Zou’s (1994) research, we

also “believed that the data collected through in-depth personal interviews were more

comprehensive, accurate, and reliable than what would have been possible through a mail

survey” (p.6). Questionnaires were filled out by directors of Portuguese firms who agreed

to participate in this study. We assured confidentiality and promised a final summary to

21
ensure a higher rate of return. As suggested by Laaksonen and Peltoniemi (2018) and

Danneels (2008), we selected general or marketing directors because they should be

knowledgeable of the overall firm strategy, marketing, organizational decisions, and

performance compared to direct competitors. Of the 207 questionnaires filled out, a final

sample of 187 respondents was obtained.

Non-response bias was tested by assessing the differences between early and late

respondents of filled-in questionnaires with regard to the means of all the variables

(Armstrong and Overton 1977). No significant differences between the two groups of

questionnaires were found, suggesting that response bias was not a significant problem in

the study. The data profile is presented in table 1.

***************************************

Insert Table 1 about here

***************************************

6. Results

6.1. Measurement analysis

After exploratory factor analysis (EFA), the items were subjected to confirmatory factor

analysis (CFA) using full-information maximum likelihood (FIML) estimation procedures

in LISREL 8.8. (Jöreskog and Sörbom, 1993). In this model each item is restricted to load

on its pre-specified factor, with the four first-order factors allowed to correlate freely. After

CFA purification, the initial list of 43 items was reduced to a final list of 25 items. The full

listing of the 25 final items and their scale reliabilities is included in Table 2 (see also Table

3 for excluded items).

22
 The chi-square for this model is significant (χ2=1097.79, 269 df, p<.00). Since the

chi-square statistic is sensitive to sample size, we also assessed additional fit indices: the

Normed Fit Index (NFI), the Comparative Fit Index (CFI), the Incremental Fit Index (IFI),

and the Non-Normed Fit Index (NNFI). The NFI, CFI, IFI, and NNFI of this model are .91,

.93, .93, and .92, respectively. Figure 4 provides an overview of the standardized estimates

of each item on its intended construct.

***************************************

Insert Figure 4 about here

***************************************

As Figure 4 shows, convergent validity is evidenced by large and significant

standardized loadings (average loading size was .80). As shown in Table 1, coefficients

alpha for the variables in the model are good (.87 or greater) and all four constructs present

the desired levels of composite reliability (over .70) (cf. Bagozzi, 1980). The Fornell and

Larcker (1981) test also indicates that the level of average variance extracted compares well

to accepted levels in the field (e.g. Lusch and Brown, 1996; Johnson, 1999; Lages and

Lages, 2004). Discriminant validity among the constructs is also revealed in the correlation

estimates between any two constructs (Jöreskog and Sörbom, 1993). No correlation

includes a value of 1 and none of the correlations is sufficiently high to jeopardize

discriminant validity (Anderson and Gerbing, 1988). As such, all constructs demonstrate

discriminant validity. Overall, these results suggest unidimensionality, internal consistency,

and adequate reliability for these measures.

23
6.2. Nomological validity and hypotheses testing

In order to test nomological validity we tested our measures with respect to other constructs

to which, as previously stated, we hope our construct is theoretically related (cf. Churchill,

1995). To test the degree to which our construct behaves as a marketing sensing capabilities

measure, we considered two previously identified related factors, designated as “organic

organizational structure” (ORGANIC)1(α= .85) and “new product development success” (NPDS)2

(α= .96)., corresponding to the research hypotheses.

We found that there is a significant positive correlation between all sensing capabilities

scale dimensions and new product development success, and that they are more likely to

appear in organic organizational structures. Table 4 summarizes our results.

***************************************

Insert Table 4 about here

***************************************

All the research hypotheses were supported given that all of the coefficients are positive

and significant (at p<.05 or better) – a much greater proportion than would be anticipated

by chance – we may conclude that sensing capabilities are associated with new product

development success and that they occur more often in organic organizational structures,

and as a result the nomological validity of the four proposed measures is supported

(Cadogan, et al., 1999; Cross and Chaffin, 1982).

1
Organic organizational structures was adapted from Jaworski and Kohli’s (1993) work and was measured on
a 5-point scale (1=Much worse than competitors; 5= Much better than competitors) in relation to the
statements, “It is easy to talk with virtually anyone you need to, regardless of rank or position” and
“Employees from different departments feel comfortable calling each other when the need arises”.
2
New product development success was adapted from Vorhies and Morgan’s (2005) work and was measured
on a 5-point scale (1=Much worse than competitors; 5= Much better than competitors) in relation to the
statements, “Ability to develop new products/services”; “Developing new products/services to exploit RandD
investment”; “Test marketing of new products/services”; “Successful launching of new products/services”,
and “Insuring that product/service development efforts are responsive to customer needs”.

24
7. Discussion

Based on the hypotheses testing, it is possible to observe that each of the four dimensions

of market sensing capabilities has a varying level of influence on NPD success. Our results

show that of the four dimensions, customer relationship exerted the least influence on NPD

success when compared to those exerted by analytical process, business experience and

organizational articulation. In the same vein, Ryals (2005) found that customer relationship

approaches by focusing on “high-potential” clients, are more likely to attract fewer new

customers. This finding suggests, to SMEs, that the most effective way to secure NPD

success is to foster analytical processes, business experience and strengthen organizational

articulation. This aligns with the hybrid solution for the stage gate or planed new product

development approach, which must be combined with more agile solutions, especially in

more uncertain contexts (Cooper, 2016; Cooper and Sommer, 2016; Dias et al., 2021). As

one interviewee from a manufacturing firm referred “we develop new products by

systematically evaluating the market and competitors. The opportunities identified are

initially filtered out by senior managers”.

The four dimensions evidence stronger but also distinct relationships with organic

organizational structures. The customer relationship exerted the least influence, while

organizational articulation and analytical process showed a stronger influence. This finding

suggests that SMEs must strengthen the internal mechanisms for organizational articulation

and to invest in analytical process in order to obtain more organic organizational structures.

One interviewee from a commercial firm affirmed that “An important step to keep up with

market changes is to have a strong procurement department, which allows us to capitalise

more quickly than our competitors in launching new products”. Previous research identified

the key role of cross-functional integration and knowledge management on new product

25
development (Sherman et al., 2005). More recently, Gao and Bernard (2018) recognized

that knowledge sharing speeds up and improves the quality of NPD. Our findings extend

existing knowledge by providing a more comprehensive flow on this topic. The starting

consists on the allocation of resources and processes to scan the environment as suggested

by Wilden et al. (2013), which must be combined with customer relationship capabilities

(Wood and McKinley, 2010). This assures the scanning activities, the first component of

market sensing capabilities. Then, firms must be able to interpret that data and information,

activity that is enhanced by accumulated business experience. At this level, cognition plays

an important role as previously suggested by Zott and Huy (2012). Finally, organizational

articulation is related with the third element - respond to market opportunities - meaning

that the firm must transfer knowledge through a more organic structure to develop new

products and deliver superior customer value. This sequence of elements and its relation to

NPD success and organic organizational structures constitutes an important contribution of

this study.

8. Conclusions

This study conceptualizes and operationalizes the concept of sensing capabilities. We

articulated sensing capabilities drawing on existing theories and research by interpreting

dimensions covering the essence of the concept. Our review indicates that previous

measures are not in line with the theoretical development defining the essence of sensing

capabilities. Specifically, we present sensing capabilities as comprising four dimensions:

analytical processes, customer relationship, business experience, and organizational

articulation. By doing so, several contibutions can be identified.

26
 First, we further developed existing sensing capabilites measures by including

several dimensions. One important dimension is the role of managerial cognition (Kor et

al., 2007; Hodgkinson and Healy, 2011; Zott and Huy, 2012), experience (Zollo and

Winter, 2002; Mitchel, et al., 2008; Dixon, et al., 2010), and factors for strategic change

(Helfat and Martin, 2015). These dimensions tend to complement traditional approaches

based on the discussion around processes and organizational routines, with new

contributions of individual perspectives, based mostly on customer relations (Gavetti, 2005;

Rothaermel and Hess, 2007; Hodgkinson and Healy, 2011). We integrate analytical

processes and organizational articulation with business experience and relational

capabilities into a common measurement instrument.

Second, sensing capabilities represent an organizational ability that can be

structured and improved, providing firms with a tool to become aware of market

opportunities and act accordingly. This provides the ability to reach and sustain competitive

advantage in changing environments. By combiningseveral internal capabilities and

processes in a single instrument, the sensing capabilities measure provides a framework to

align marketing resources and NPD processes as suggested by Ernst et al. (2010).

Furthermore, when it is combined with organic organizational structures, the measure

provides a basis for the use of sensing capabilities processes (Wilden, et al., 2013). In so

doing, it establishes the path to resource orchestration that enables sensing capabilities

(Helfat and Martin, 2015).

Third, the nomological validation advances crucial relationships between sensing

capabilities and new product development success, stablishing a link that is never easy

(Wong and Tong, 2012). By measuring sensing capabilities managers are able to evaluate

27
the contribution of opportunity recognition in early stages of new product development

(Marsh and Stock, 2003). All dimensions correlate with new product development. Organic

organizational structures were also found to have a close relationship with sensing

capabilities, in all dimensions. This finding has interesting implications in fields such as

new product development, entrepreneurship, and organization theory.

The measure considers not only the identification of opportunities but also the

interpretation and mobilization of the organization to respond. As such, SMEs can take

advantage of their lighter structure (Lages and Montgomery, 2004). Organic structures

allow more agile processes for opportunity recognition exploration and exploitation

(Gregoire et al., 2010). Furthermore, more informal structures enhance the ability to

interpret (Rasmussen, et al. 2012, Teece, 2007) and establish a means-end relationship

(Welpe et al., 2012).

Fourth, opportunity recognition plays an important role from both corporative

(Hoskisson, et al., 2011) and entrepreneurial perspectives (Singh, 2001; Mitchell, et al.,

2012; Tang, et al., 2012). Recent research has brought important insights on how to define

organizational structures, resources, and capabilities to develop corporate entrepreneurship

(Hornsby, et al., 2009; Ireland, et al., 2009). Our research provides a deeper knowledge on

this subject by defining how to measure the firm’s awareness for opportunity recognition

and by enhancing the link between the managerial and organizational dimensions, as well

the articulation that must be considered within the firm.

Fifth, we address several calls for dynamic capabilities construct development and

measurement (Jeffrey and Mowery, 2009; Katkalo, et al., 2010; Pavlou and El Sawy, 2011)

by developing and validating a theoretically justified measure for sensing capabilities. We

28
extend knowledge on dynamic capabilities, an “elusive” concept (Pavlou and El Sawy,

2011; Wilden, et al., 2013), in which there is a lack of “sufficient empirical testing of the

contributions” (Drnevich and Kriauciunas, 2011, p. 255-6). A tool to measure sensing

capabilities allows both researchers and praticioners to evaluate the dimensions that

contribute to the firm’s abilitity to identify, absorb, and integrate market knowledge in

business processes, which are key assumptions for dynamic capabilities (Zollo and Winter,

2002). Firms can improve innovation management and strategic change (Bruni and Verona,

2009), which is consistent with the renewal nature of dynamic capabilities (Barrales‐

Molina, et al., 2014). Sensing capabilities also help to define more precisely which ordinary

capabilities should be changed by dynamic capabilities (Laaksonen and Peltoniemi, 2018).

This measure also has managerial implications. Opportunity recognition and

organizational structures are areas in which managers have the responsibility to guide firm

strategy and growth. An integrative managerial perspective of the four dimensions suggests

the development of a more organic organizational structure. This will promote the

analytical processes of marketing sensing and fundamental connections that must be

established in order to articulate learning and knowledge inside the firm,making it possible

to monitor customer relationhips and market evolution. Moreover, the sensing capabilities

measure gives some guidance on how to better pursue a more focused business strategy and

improve the likelihood of new product development success.

The scale may be used by managers and public policy makers for self-assessment

and benchmarking purposes. The construction of an organic structure can go through the

adequacy of the four dimensions. This includes the allocation of resources to the areas of

sensing and defining policies that formalize the various dimensions; for example, the level

29
of analytical mechanisms and customer relationships may encourage employees through

rewards system. In a pandemic context, the policy-making approach of digital

transformation can benefit from the incoporation of sensing mechanisms allowing to create

resilient firms and more aware of the contextual tendencies. Simoultaneously, society can

benefit from more competitive business ecosystems, well prepared to identify and respond

to societal trends and problems. In the organizational articulation it will be important to

foster policies related to the willingness to collaborate cross-functionally within the firm to

respond effectively to the opportunities detected and interpreted. Policy making can

increase this capability by enhancing the firms’ collaborative mechanisms and by

promoting inter-firm knowledge exchange, stimulating the creation or development of

innovative clusters.

This study also points to avenues for future research. First, sensing capabilities

represent a first moment of the microfoundations of dynamic capabilities. According to

Teece (2007), seizing and operationalizing capabilities follow. The development of

equivalent measures for these constructs would be an essential further step for future

research. With the development of a measure of market sensing capabilities and its

implications for NPD and organisational structure, a research field is opened for marketing,

innovation and strategy research by understanding how sensing capabilities directly affect

other organisational capabilities and indirectly affect business performance and innovation

as dependent variables.

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