56 Organizacija, V olume 57 Issue 1, February 2024 Research Papers 1 Received: 16th January 2023; Accepted: 1st August 2023 The Mediating Role of Innovation Capabilities on the Relationship between Dynamic Capabilities and Firm Competitive Performance Mohanad Ali KAREEM 1 , Harshavardhan Reddy KUMMITHA 2 , Naveen KOLLOJU 3 1 Universidad de las Américas, School of Business and Economics, México, mohannadali25@gmail.com 1 Budapest Business School, Budapest, Hungary, kummitha.harshavardhan@uni-bge.hu 1 School of Liberal Arts & Humanities, Woxsen University, Hyderabad, India, naveen.kolloju@woxsen.edu.in Purpose: The purpose of the study is to better understand the relationship between dynamic capabilities and firm competitive performance, and how innovation capabilities, specifically (a) product capability and (b) process capa - bility, may play a mediating role in this relationship. Design/Methodology/Approach: Simple Random Sampling technique was adopted to choose SMEs to collect data based on information obtained from Hungarian SMEs associations. A total of 565 completed questionnaires were obtained, with response rate of 65.50%. Confirmatory factor analysis (CFA) was used with AMOS 24 to assess the reliability and validity; and Cronbach’s alpha coefficient was additionally used to assess the dependability of the scales. The proposed model was put to the test using structured equation modelling (SEM). Results: The study results show that dynamic capacities have a significant direct effect on innovation capabilities: product capability and process capability. The study also proves that both product capability and process capability have a significant impact on a firm’s competitive performance. Conclusion: The study concludes that the relationship between dynamic capabilities and competitive firm perfor - mance is partially mediated by innovation capabilities. The study suggests that before enhancing product innovation capability, entrepreneurs should consider reorganizing and reallocating resources into process innovation capability. This study contributes to our understanding of the mediating mechanism of innovation capabilities through which dynamic capabilities enhance firm competitiveness performance. Keywords: Innovation capabilities, Dynamic capabilities, Competitive firm performance, Technological innovations DOI: 10.2478/orga-2024-0004 1 Introduction In today’s rapidly advancing technological landscape, the market environment is growing increasingly complex, where customer expectations are continuously changing, and product life cycles are becoming shorter. To compete in such a changing global market, organizations must in- novate by developing new products and services to stay competitive (Hwang et al., 2019). Owing to these radical and unavoidable changes, firms are compelled to adapt to dynamic market structures and produce innovative prod- ucts to maintain a competitive advantage and long-term sustainability. Under these conditions, scholars believe that ‘innovativeness’ is vital for any firm to compete in a competitive market environment (Huseyine et al. 2016). Innovation is believed to have a significant impact on a company’s business success, productivity, job creation, 57 Organizacija, V olume 57 Issue 1, February 2024 Research Papers and drive economic growth and success (Abuhashesh et al., 2019a). It is argued that possessing the ability to innovate is crucial for achieving long-term competitive performance in today’s extremely competitive business environment (Zehir et al., 2015). Before delving into innovation capa- bilities, it is pertinent to grasp the concept of capabilities. Capabilities refer to a firm’s skills and abilities to exploit its resources in a most productive way (Wheelen et al., 2018; Robbins and Coulter, 2016). Innovation aptitude, on the other hand, encompasses the abilities and expertise re- quired to advance and develop new technologies (Romijin and Albaladejo, 2002). In other words, successful techno- logical innovation demands critical capabilities, especially in areas such as manufacturing, marketing, organization, strategy, planning, learning, and resource allocation (Yam et al. 2004). In this context, Wheelen et al., (2018) intro- duced a new dimension by noting that capabilities can be- come ‘dynamic’ when they are modified and reconfigured, making them more adaptable to face uncertain conditions in organizations. To understand the synergies between dy- namic capabilities and gaining a competitive advantage, it is believed to be of paramount importance for any or- ganization to develop dynamic capabilities aligned with market expectations. This enables organizations to acquire a competitive edge. Given this context, the purpose of the study is to gain a deeper understanding of the relationship between dynamic capabilities and firm competitive performance as well as how innovation capabilities, in particular (a) product ca- pability and (b) process capability, may act as a mediating factor in this relationship. Thus, the context of the study assumed significance due to technological advancements and a rapidly changing competitive market environment. Because of these factors, there is a growing interest in re- searching organizations’ capabilities and how these can promote competitiveness, business practice and perfor- mance of any firm (Hwang et al., 2019). Previous research on organizational performance primarily focused on or- ganizational resources, demonstrating their role in inno- vation, competitive advantage, and overall organization- al growth (e.g. Penrose, 1959; Wernerfelt, 1984; Barney, 1991). However, recent research on organizational growth and performance has shifted to empirically investigate how innovation capabilities facilitate dynamic capabili- ties to enhance competitive firm performance (Helfat & Martin, 2015; Mostafiz et al., 2019a; Tasheva & Nielsen, 2020). Preliminary studies have explored the relationship between dynamic capabilities and organization’s competi- tive advantage (e.g., Chaharmahali & Siadat, 2010; Krzak- iewicz, 2013). However, the existing research has also shown a lack of adequate scientific studies addressing why firms still fail despite the potential synergy between dy- namic capabilities and firm competitive performance. Giv- en this context, the present study aims to fill the knowledge gap by addressing the following research questions: How significant is the role of innovation capabilities in influenc- ing dynamic capabilities to achieve a better competitive advantage for a firm? In doing so, the present study fo- cuses on three aspects: first, analysing the role of dynamic capabilities such as (a) Sensing capability (b) Learning ca- pability (c) Integration capability and (d) Reconfiguration capability on product and process capabilities. Secondly, the study examines the mediating role of innovation capa- bilities, specifically (a) product capability and (b) process capability on competitive firm performance. The present study draws upon Teece (2007), and Teece et al, (2018) to address the research questions and fill the knowledge gap. Organization of the Study: This paper is organized into seven parts. The first part serves as the introduction, establishing the context and significance of the study while emphasizing the role of dynamic capabilities in ensuring firm competitive perfor- mance. The second part represents the literature review, from which hypotheses are derived. The third part outlines the study’s objectives. The fourth part delves into the re- search methodology. The fifth part presents the results, and the sixth part provides the discussion and conclusion. The final part encompasses theoretical and managerial contri- butions and offers insights into future directions for the study. 2 Literature review and development of hypotheses 2.1 Understanding Dynamic Capabilities and Innovation Capabilities Innovation capabilities and dynamic capabilities are often used interchangeably while discussing the compet- itive advantage of any organization (Breznik and Hisrich, 2014). To start with dynamic capabilities, these are de- fined as the capacities of a firm to combine, develop and rearrange internal and external skills to address a rapidly changing market environment (Teece et al., 1997, p.516). Eisenhardt and Martin (2000) add that product develop- ment, strategic decision-making, and alliance-building are also included in the list of dynamic capabilities. Dynamic capabilities aim to achieve competitive advantage through combining and effectively utilizing all resources of a firm (Arranz et al., 2020). It is argued that these capabilities are capable enough in any competitive environment to solve an organization’s problems by using sensing opportunities and taking market-oriented decisions timely (Teece et al., 1997). However, innovation refers to the capacity to intro- duce a new product or service or bring innovative changes in the organizational structure and administrative system (Damanpour, 1991). Under innovation, firms frequently 58 Organizacija, V olume 57 Issue 1, February 2024 Research Papers implement new behaviours or procedures, as well as new programmes, policies or ideas (Mothe & Uyen, 2010). Thus, the aptitude for innovation refers to the abilities and expertise required to advance and develop new technolo- gies (Romijn and Albaladejo, 2002). Thus, the goal of innovation capabilities is to provide stakeholders with new processes, products and services that have greater value. In order to improve the existing processes and produce better services or goods, these capabilities also put a strong emphasis on implementing radical organizational changes (O’ Sullivan and Dooley, 2008). It is to mention that owing to the market’s short product life cycles and high rates of new product manufac- turing, innovation capability is crucial for superior innova- tion performance. 2.2 The impact of Dynamic capabilities on Product capability Teece (2007) states in an organization, dynamic capa- bilities play a pivotal role in identifying and seizing oppor- tunities while also equipping the firm to address threats. Moreover, these capabilities enhance competitiveness and contribute to the firm’s long-term sustainability. In par- ticular, one of the dynamic capabilities, that is, sensing capability, helps in gathering relevant market information (Teece, 2018), which is critical for any firm or compa- ny. It is imperative because predicting market trends and customer orientation assist firms in recognizing customer needs and wants. In particular, with reference to the ser- vice sector, sensing capabilities play a critical role in tar- geting customers and serving their needs. Thus, sensing capabilities are concerned with understanding and identi- fying the customer needs and changing the dynamics of the market environment (Teece, 2014; Zitkiene, Kazlausk- iene, Deksnys, 2015). Sensing capabilities also facilitate a firm’s required resources and capture value. As far as the learning capabilities are concerned, Collis (1994) posits that organizational learning capabilities pres- ent a pivotal component of an organization’s dynamic ca- pabilities, with the potential to transform the organization into a dynamic firm. It is believed that organizational learn- ing can shape the behaviour of an enterprise by expanding knowledge and instilling new perspectives (Olavarrieta & Friedmann, 2008). The process of organizational learning encompasses a firm’s capacity to perceive the market, get new information, distribute, and interpret it (Day, 1994). It is asserted that learning capabilities, particularly mar- ket sensing, can enhance a company’s performance (Day, 1994, 2002; Tseng & Lee, 2014). Adding another dimension of dynamic capabilities, Teece, Pisano, and Shuen (1997) assert that dynamic capa- bilities also signify an organization’s ability to cope with the rapidly changing market environment by integrating, developing and reconfiguring the internal and external competencies. This argument highlights the necessity to examine how integration capabilities can influence the product capability of an organization. Referring to recon- figuring capabilities, it is said that these capabilities have the capacity to create value, which has a direct impact on the firm’s operational capabilities (Wilden et al., 2016). The present study also examines whether or not reconfig- uration capability positively impacts product capability. Given these arguments, the present study examines the role of dynamic capabilities on product development in a firm. Thus, the study framed the following research hy- pothesis. H1a: Sensing capability has a positive impact on Product capability Figure 1: Conceptual framework of the Study 59 Organizacija, V olume 57 Issue 1, February 2024 Research Papers H1b: Iearning capability has a positive impact on Product capability H1c: Integration capability has a positive impact on Product capability H1d: Reconfiguration capability has a positive impact on Product capability 2.3 The impact of dynamic capabilities on Process capability Sensing capability is a critical and indispensable com- ponent of dynamic capabilities (Teece, 2018; Froehlich and Bitencourt, 2019), known for its positive influence on firm performance (Kihara, Ngugi, and Ogallah, 2016). Sensing capabilities not only facilitate generating and dis- seminating market intelligence in a firm but is also respon- sive to changing market conditions (Pavlou and EI Sawy, 2011; Teece, 2018). Thus, these capabilities positively im- pact the innovation of products and services (Al-Madadha et al., 2023). Further, it is argued that sensing capabilities enable firms to monitor the market continuously, find mar - ket opportunities accurately, and understand market threats (Fang et al., 2014). Given this context, the study framed the following hypotheses: H2a: Sensing capability has a positive impact on Pro- cess capability H2b: learning capability has a positive impact on Pro- cess capability H2c: Integration capability has a positive impact on Process capability H2d: Reconfiguration capability has a positive impact on Process capability 2.4 The impact of Innovation capabilities on firm ccompetitive performance Innovation capabilities become more crucial to a firm’s competitive performance. The ability to innovate can be described as enhancing and managing the knowledge and technology already in existence and also to create new ones. Owing to the rapid technological advancements and knowledge creation, it is pertinent for any firm to devel- op and adopt innovation capabilities that, in turn, achieve dynamic competitive advantage (Romijn and Albaladejo, 2022). Innovation capabilities, according to Alder and Shenbar (1990), can also be defined and understood in many aspects such as : (i) these capabilities can manu- facture new products and services according to the mar- ket demands, (ii) while producing the new products and delivering new services, innovation capabilities can apply required technological assistance that not only addresses the present needs of the customers but also satisfy the fu- ture demands, and (iii) these capabilities can also have the capacity to receive and face the unexpected opportunities and threats created by the competitors. Further, innovation capabilities can provide insights for firms so that the man- agement of firms can identify the strongest and weakest points, where a firm should develop. Due to these reasons, it is emphasized that innovation capabilities are the crit- ical components to developing effective, innovative out- comes within a firm. This process ensures the generation and transformation of knowledge and skills into products, processes and systems, which is beneficial for both firms and stakeholders (Rajapathirana, Jayani, R.P., and Yan Hui, 2017). Thus, firms with innovation capabilities may be able to successfully combine the essential skills and re- sources to foster innovation (Lawson and Samson, 2001). To put it in simple terms, innovation capabilities can be understood as the ability to bring innovations in the areas of technology and knowledge continuously as a response to rapidly changing market environment (Saunila et al. 2014). Referring to achieving competitive advantage, Tidd (2006) asserts that innovation can promote a positive im- pact between manufacturing new products and competing with the market performance. It has the ability to replace outmoded products with new ones, which ensures new product development relative to competitors. In light of this, the ensuing hypotheses have been developed. H3a: Product capability has a positive impact on Competitive firm performance H3b: Process capability has a positive impact on Com- petitive firm performance 2.5 Mediating effects of Product capability on firm competitive performance One of the key areas that the study attempts to probe is the mediating effects of innovation capabilities on firm competitive performance. It is evident from the existing literature that innovation capabilities are considered to be the key assets of a firm and have the potential to implement the entire strategy and sustain the competitive advantage (Lawson & Samson, 2001). As a mediating role, innova- tion capabilities facilitate firms to quickly introduce new products according to the needs of the changing market and challenge the ongoing competition. Thus, innova- tion capabilities can be comprised of assets and resources which are necessary for the firm competitive performance. Shou et al., (2018) argue that up-to-date information and knowledge are seen as a source of innovation for any firm, and the firms must look into opportunities in market and technologies. In this context, sensing capabilities play an important role in dealing with the situation. Interestingly, it is highlighted that sensing capabilities should be mediat- ed by innovation capabilities to have an effect on a firm’s 60 Organizacija, V olume 57 Issue 1, February 2024 Research Papers financial performance. It is highlighted that if any firm’s sensing capabilities are strong, it leads to higher techno- logical innovations (Zhou et al., 2017). With these argu- ments, the study framed the following hypotheses: H4a: Product capability mediates the positive effect of Sensing capability on Competitive firm performance H4b: Product capability mediates the positive effect of learning on Competitive firm performance H4c: Product capability mediates the positive effect of Integration capability on Competitive firm performance H4d: Product capability mediates the positive effect of Reconfiguration capability on Competitive firm perfor - mance 2.6 Mediating effect of the process capability on firm competitive performance Concerning an organization’s competitive perfor- mance, Martin-de Castro et al., (2013) state that creating and maintaining a competitive advantage for an organi- zation depends on developing and implementing the nec- essary technological innovations. In other words, firm’s propensity for promoting innovative approaches is more crucial in the market environment to gain a greater com- petitive advantage (McAdam and Keogh, 2004). In today’s dynamic and competitive business environment, innova- tion capability within these organizational capabilities is essential for achieving a sustainable competitive advan- tage (Zehir et al., 2015). Scholars also conceptualized that innovation capabilities are the combination of product in- novation and process innovation (Camison & Vilar-Lopez, 2014; Nwachukwu, Chladkova & Oltatunji, 2018), which has a more significant impact on the process capability that, in turn, influences the firm performance. Innovation capability in terms of process capability can be understood from Akman and Yilmaz (2008) who believe that the qual- ities of internal promotional activities and the capacity to comprehend and effectively respond to the external envi- ronment are all important factors that facilitates an inno- vative organizational culture. In light of this, the study put forth the following hypotheses: H5a: Process capability mediates the positive effect of Sensing capability on Competitive firm performance H5b: Process capability mediates the positive effect of learning on Competitive firm performance H5c: Process capability mediates the positive effect of Integration capability on Competitive firm performance H5d: Process capability mediates the positive effect of Reconfiguration capability on Competitive firm perfor - mance 3 Methodology 3.1 Questionnaire Design and Measurements The survey questionnaire designed by using Google forms tool. It contains three sections, First section contains respondents and SMEs profile, second and third section contain product capabilities and process capabilities of competitive firm performance. This study measurements developed based on pre-existing studies. The dynamic capabilities were implemented in four- dimensional var- iables: sensing capability, learning capability, integration capability, reconfiguration capability with four items were designed for each construct. The innovation capabilities were implemented in two- dimensional variables: product capability and process capability, in total ten items were designed to measure the innovation capabilities. Regard- ing competitive firm performance, it is a single variable, and 10 items were designed to measure it. These measure- ments were adopted from existing studies Teece, (2018), Kareem and Kummitha,(2020), Calantone et al.(2002), Tohidi and Mandegari (2012), Zehir et al. (2015), Shou et al. (2018), Al-Madadha et al., (2023). (List of Items see in appendix 1). All the questions were designed on sev- en-point Likert scale ranging from 1- strongly disagree to 7- strongly agree. 3.2 Sample and Data collection There are several reasons to investigate SMEs in this study. First, SMEs being are closer to the market, have flexible systems to adopted to changes occurring in the external market, which contributes to the growth of firm performance (Zehir et al., 2015). Second, SMEs play a vi- tal role in Hungarian economic growth as they bridge the gap between MNCs and customers (Nyikos et al., 2021). Therefore, we have chosen Hungarian SMEs to validate our research model. The Sampling of SMEs for our re- search was purposeful and based on the OPTEN databased, which includes all the present and former businesses reg- istered in Hungarian business registry (OPTEN,2022). SMEs were selected using random sample drawn from three different firm size strata (two to nine employees, 10 to 49 employees and 50-200 employees), with additional controls to ensure the sample represented various regions and sectors. The sample was very well distributed within Hungarian SMEs. For example. 56 percent of respondents were from capital city Budapest region compared with 44 percentage of respondents from different parts of the coun- try. The selected SMEs are mainly classified as Technical SMEs, Wholesale and retail trade SMEs, Information and communication. This selected SMEs deal with wide range of product development activities such as new technology 61 Organizacija, V olume 57 Issue 1, February 2024 Research Papers creation, pharmaceutical distribution, technical activities and information technologies. After initial information gathered from targeted SMEs, One of the authors make telephone call for approval, a questionnaire email was sent to either one of the owners, who were part of the top management (Where the SME had less than 25 employees), or one of the top executive (Not necessary having the ownership of the SMEs (In case of larger SMEs) and ask them fill and distribute question- naire among the top level management in SMEs . Out of 500 selected SMEs 800 email questionnaires are sent to CEOs, managers, top level employees, and senior exec- utives. At the same time, one of the authors visited some of the SMEs to collected 100 face to face questionnaire Table 1: Demographic characteristics Variables characteristics N Percentage Firm age (year) Less than 10 years 280 50% 11-20 years 190 34% More than 21 years 90 16% Firm size (number of employees) Less than 10 120 21% 10-30 130 23% 31-50 230 41% 51-100 80 14% More than 100 230 41% Industry Manufacturing 244 44% Wholesale and retail trade 122 22% Information and communica- tion 80 14% technical activities 114 20% Table 2: Descriptive statistics Constructs Mean SD Sensing capability Learning Capabilities Integration Capabilities Reconfiguration Capabilities Process innovation capability Product innovation capability Competi- tive firm perfomance Sensing capability 4.573 0.460 1 Learning Capabilities 4.517 0.434 .668** 1 Integration Capabilities 4.692 0.407 0.589** .589** 1 Reconfiguration Capabilities 4.694 0.402 0.534** .596** .583** 1 Process innovation capability 4.459 0.463 0.659** .547** .216** .542** 1 Product innovation capability 4.129 0.674 .298** .598** .198** .763 .591** 1 Competitive firm performance 4.114 0.677 .232** .347** .442** .216** .442** .763** 1 ** Correlation is significant at the 0.01 level (2-tailed). 62 Organizacija, V olume 57 Issue 1, February 2024 Research Papers data between September to December 2022. A total of 565 completed questionnaires were obtained. The sample in- cluded 250 micro firms, 180 small firms and 70 medium sized firms, with a response rate of 65.50%. We chose to collect more than one questionnaire from the same SMEs. Thus, (Kareem and Kummitha,2020; Chavez et al.,2017) suggest that competitive firm performance achieved in SMEs not only from top level CEOs or managing direc- tors of the SMEs but also from production and operational managers of the firm. This approach has provided to un- derstand the overall prospect from top level executives to middle and low-level managers functional area of com- petitive firm performance. The table 1 presents the demo- graphic characteristics of sample. The results show that half of the enterprises (50%) had age less than 10 years. The majority of the enterprises (41%) had firm size (31-50 employees). Most of the eenterprises (44%) belonged to the manufacturing industry. 3.3 Data analysis and results 3.3.1 Descriptive statistics Table 2 shows the descriptive statistics. The results in- dicate that the means values for all the variables ranges Table 3: Reliability and validity Constructs Measurement Items Factor Loading A CR AVE P .Value Sensing capability SC1 0.798 0.849 0.851 0.590 0.000 SC2 0.702 0.000 SC3 0.848 0.000 SC4 0.716 0.000 Learning Capabilities LC1 0.723 0.778 0.790 0.510 0.000 LC2 0.766 0.000 LC3 0.742 0.000 LC4 0.717 0.000 Integration Capabilities IC1 0.642 0.765 0.781 0.501 0.000 IC2 0.770 0.000 IC3 0.730 0.000 IC4 0.596 0.000 Reconfiguration Capabilities RC1 0.730 0.846 0.854 0.594 0.000 RC2 0.770 0.000 RC3 0.642 0.000 RC4 0.697 0.000 Process innovation capability Proc_IC1 0.692 0.810 0.840 0.569 0.000 Proc_IC2 0.814 0.000 Proc_IC3 0.705 0.000 Proc_IC4 0.697 Proc_IC5 0.751 0.000 Product innovation capability Prod_IC1 0.866 0.898 0.902 0.651 0.000 Prod_IC2 0.851 0.000 Prod_IC3 0.820 0.000 Prod_IC4 0.669 Prod_IC5 0.811 0.000 Competitive firm performance CFP1 0.781 0.940 0.938 0.595 0.000 CFP2 0.809 0.000 CFP3 0.860 0.000 CFP4 0.896 0.000 CFP5 0.821 0.000 CFP7 0.839 0.000 CFP8 0.855 0.000 CFP9 0.880 0.000 CFP10 0.532 0.000 A= Cronbach’s alpha, CR =Composite Reliability and Average, AVE=Variance Extracted 63 Organizacija, V olume 57 Issue 1, February 2024 Research Papers between (4.459-4.694) with a standard deviation (0.402- 0.463) which means that respondents positively agreed with questionnaire statements. Also, the results revealed that all constructs are significantly associated with each other. 3.3.2 CFA results: reliability and validity The reliability and validity of measurement items were tested by performing confirmatory factor analysis (CFA), buy using AMOS 24. Discriminant validity and conver- gent validity were utilized to estimate the validity of meas- urement items. The reliability of the scales was assessed by using Cronbach’s alpha coefficient as seen in (Table 3). The results show that Cronbach’s alpha coefficient for all constructs ranges between 0.765 and 0.940 which are higher cut-off value 0.50. This emphasizes that all the measurement items are internally consistent (Hair et al., 2010). The convergent validity was measured in three im- portant indicators, which are factor loadings, Average Var- iance Ex¬tracted (A VE), and Composite Reliability (CR). This study establishes 24 items (see in Table 3). Hair et al., (2006) suggests that the items with factor load¬ings greater than .50 can be maintained. This study reveals that the item loadings all exceeded the cut-off value and statistically significant (p<0.05) (see table 4). In terms of composite reliability (CR) , the results show that CR for all constructs ranges between 0.781-0.938 which are above 0.50, demonstrating that all the constructs have adequate level of composite reliability (CR) as suggested by Hair et al. (2012). Concerning the average variance extracted (A VE) value, the results report that A VE for all the con- structs is located be¬tween 0.501-0.651 which is higher threshold (.50) which is suggested by Hair et al., (2010). Based on the mentioned above, this study demonstrates a good reliability and validity of measurement items. Discriminant validity also was used to measure wheth- er the variables that theoretically should not be highly cor- rected to each other (Fornell & Larcker, 1981) . In this study used (Fornell & Larcker, 1981) they suggested that if the square root of the A VE for a construct is higher than the correla¬tion values among all the constructs then dis- criminant validity is confirmed. Table (4) presents that the square root of the A VE scores of all the variables is higher than the inter-construct correlations which confirms the discriminant validity of the constructs. Table 4: Discriminant validity Notes: Bold values in diagonal represent the squared root estimate of AVE. AVE= Average Variance Extracted Sensing capability Learning Capabilities Integration Capabilities Reconfiguration Capabilities Process innovation capability Product innovation capability Competitive firm performance Sensing Capability 0.768 Learning Capabilities 0.730** 0.699 Integration Capabilities 0.734** 0.674** 0.688 Reconfiguration Capabilities 0.653** 0.687** 0.672** 0.771 Process innova- tion capability 0.668** 0.612** 0.677** 0.637** 0.754 Product 0.421** 0.336** 0.139** 0.262** 0.458** 0.807 innovation capability 0.226** 0.176** 0.16** 0.154** 0.324** 0.766** 0.771 64 Organizacija, V olume 57 Issue 1, February 2024 Research Papers The goodness-of-fit measures were performed to as- sess the quality of fitness of the measurement model. The results demonstrate a good model fit (CMIN/df= 1.321, GFI=0.901, TLI= 0.910, CFI=0.921 RMSEA=0.051). Therefore, the measurement model shows good construct validity and reliability. 3.3.3 Common method bias Checks This research is used a cross-sectional data with a sin- gle-report questionnaire, therefore common method vari- ance (CMV) may affect the quality of the measurements (Podsakoff and Organ, 1986). Harman’s single-factor test was applied to solve this issue by preforming exploratory factor analysis (EFA). The results reveal that the total var- iance. for a single factor,is less than 50% indicating that common method bias does not affect he interpretations of the results. 4 Results Structured equation, modelling (SEM) was performed to examine the hypothesized model. The study tests direct and indirect effects. First, this study investigates the direct effect of dynamic capabilities on innovation capabilities, also the effect of innovation capabilities on competitive firm performance as shown in table 5 and figure 1. The SEM results show that all four constructs of dynamic ca- pabilities: sensing capability (β=0.176, p < 0.001), learn- ing capability (β=0.416, p < 0.001), integration capabil- ity (β=0.215, p < 0.001), and reconfiguration capability (β=0.268, p < 0.001) all have a positive and significant impact on product capability, thereby H1a, H1b, H1c, and H1d are supported. It seems the learning capability has the largest impact on product capability. Likewise, the results reveal that sensing capability (β=0.310, p < 0.001), learn- ing capability (β=0.160, p < 0.001), integration capabil- ity (β=0.179, p < 0.001), and reconfiguration capability (β=0.263, p < 0.001) all have a positive and significant impact on process capability, therefore H2a, H2b, H2c, and H2d are supported. The results showed that sensing capability was more likely enhance to process capability in comparison with other dynamic capabilities. Moreover, the SEM results show that the two constructs of innovation capabilities: product capability (β=0.330, p < 0.001), and process capability (β=0.755, p < 0.001) all have a positive and significant impact on competitive firm performance, thus H3a and H3b are supported. In addition, process ca- pability was more associated with competitive firm per- formance. Second, this study investigates the indirect effect of dynamic capabilities on competitive firm, performance by mediating role of innovation capabilities as shown in table 6. The bootstrapping was applied to estimate the 95% con- fidence interval of the indirect effect. The results show that the product capability (β=0.755, p < 0.05) positivity and significantly mediates the relationship between learning capability and competitive firm performance. Also, prod- uct capability (β=0.150, p < 0.01) positivity and signifi- cantly mediates the relationship between reconfiguration capability and competitive firm performance. Thus, Hab and H4d are supported. Which means the product capabil- ity explains well the linkage between learning capability, reconfiguration capability and competitive firm perfor - mance. However, the results shown that product capability doesn’t mediate the relationship between sensing capabil- ity and competitive firm performance (β=0.080, p >0.5) as well as the the relationship between integration capabil- ity and competitive firm performance (β=0.012, p >0.5), thereby Ha4 and Hac are not supported. Furthermore, the results reveal that process capability (β=0.341, p < 0.05) positivity and significantly mediates the relationship between sensing capability and competi- Table 5: SEM results of direct effect No Paths Beta Coefficient P value Results H1a Sensing capability→ Product capability 0.176 0.000 Supported H1b learning capability → Product capability 0.416 0.000 Supported H1c Integration capability → Product capability 0.215 0.000 Supported H1d Reconfiguration capability → Product capability 0.268 0.000 Supported H2a Sensing capability→ Process capability 0.310 0.000 Supported H2b learning capability → Process capability 0.160 0.000 Supported H3c Integration capability → Process capability 0.179 0.000 Supported H4d Reconfiguration capability → Process capability 0.263 0.000 Supported H3a Product capability → Competitive firm performance 0.330 0.000 Supported H3b Process capability → Competitive firm performance 0.755 0.000 Supported 65 Organizacija, V olume 57 Issue 1, February 2024 Research Papers tive firm performance, relationship between learning ca- pability and competitive firm performance (β=0.187, p < 0.01), and the relationship between integration capability and competitive firm performance (β=0.223, p < 0.01). Therefore, H5a, H5b, and H5c are supported. But the re- sults show that process capability has no meditation effect on the relationship between reconfiguration capability and competitive firm performance (β=0.079, p >0.05). Thus, H5d is not supported. In conclusion, process capability plays a key role rather than product capability in the asso- ciation between dynamic capabilities and competitive firm performance. 5 Discussions and Conclusions This paper investigates the impact of dynamic capac- ities on competitive firm performance, assuming that in- novation capabilities meditate this relationship. This study found that dynamic capacities, such as sensing capability, learning capability, integration capability, and reconfigu- ration capability have a significant direct effect on innova- tion capabilities: product capability and process capability. These findings are in line with (Pundziene et al., 2021; Froehlich and Bitencourt, 2019) who found that dynamic capabilities are key elements for the development of inno- vation capability and drive and enrich the firm’s innova- tion of products and processes. Moreover, this study demonstrates that both prod- uct capability and process capability significantly impact competitive firm performance. Notably, process capability exhibits the strongest effect on competitive firm perfor - mance. Continuous development of processes may lead to reduced production costs and manufacturing waste, there- by enhancing competitive firm performance. This finding is consistent with (Ferreira et al., 2018) who argue that Table 6: SEM results of indirect effect No Paths Beta Coefficient P value 95%LL 95%UL Results H4a Sensing capability→ Product capability → Competitive firm performance. 0.080 0.238 -0.004 0.029 Not supported H4b learning capability → Product capability → Competitive firm performance. 0.210 0.031 0.130 0.620 Supported H4c Integration capability → Product capability → Competitive firm performance. 0.012 0.247 -0.040 0.046 Not supported H4d Reconfiguration capability → Prod- uct capability → Competitive firm performance 0.150 0.007 0.180 0.440 Supported H5a Sensing capability→ Process capability → Competitive firm performance 0.341 0.001 0.196 0.501 Supported H5b learning capability → Process capability → Competitive firm performance. 0.187 0.011 0.071 0.301 Supported H5c Integration capability → Process capability → Competitive,firm performance 0.223 0.007 0.354 0.90 Supported H5d Reconfiguration capability → Pro- cess capability → Competitive firm performance 0.079 0.236 -0.038 0.204 Not supported 66 Organizacija, V olume 57 Issue 1, February 2024 Research Papers Figure 2: The SEM model analysis innovation capabilities are a fundamental asset of a firm, as well as a positive, and key driver of competitive firm performance. Whereas this finding is significantly differ - ent from some prior studies. For example, Ferreira et al., (2019) found that innovation capabilities didn’t have a sig- nificant impact on competitive firm performance. This study confirms that innovation capabilities con- struct product capability and process capability that partially mediated the association between dynamic ca- pabilities and competitive firm performance. These find- ings are in agreement with previous studies for instance (Pundziene et al., 2021; Mostafiz et al., 2021) who found that innovation capabilities partially mediated the relation- ship between dynamic capabilities and competitive firm performance. Furthermore, the results reveal that product capability doesn’t mediate the relationship between sens- ing capability, integrating capability and competitive firm performance. While process capability doesn’t mediate the relationship between reconfiguration capability and competitive firm performance. This indicates that process capability has a stronger mediating role in the relationship between dynamic capabilities and competitive firm perfor- mance. The results of this study also support the ideology of (Mostafiz et al., 2021; Teece, 2018) who argue that in the manufacturing industry, it is fundamental to improve the process innovation capability (e.g. reduce production costs; create and manage a portfolio of interrelated tech- nologies), followed by product innovation capability (e.g. expand the range of products). Thus, entrepreneurs should reconfigure and locate resources into process innovation capability before enhancing product innovation capability. In conclusion, this study contributes to understanding the mediating mechanism of innovation capabilities through which dynamic capabilities improve firm competitiveness and performance. 6 Theoretical and managerial contributions This paper makes several contributions to the litera- ture on dynamic capabilities and innovation capabilities. This study confirms that dynamic capabilities can shape and drive innovation capabilities (e.g. product and process capabilities). Furthermore, the results address a theoreti- cal and practical gap by confirming the indirect impact of dynamic capabilities on competitive, firm performance, mediated through innovation capabilities. In terms of managerial contributions, the paper offers the following contributions. Our results demonstrate that innovation capabilities can be cultivated through dynamic capabilities, helping companies enhance their competitive- ness. In additional, the study reveals that both process and product innovation capabilities lead to improved competi- tive firm performance. Furthermore, our results show that dynamic capabilities such as sensing capability, learning capability, integration capability, and reconfiguration ca- pability are important for firms’ scale-up processes. Thus, managers should strive to link firms ‘dynamic capabilities to the practical build-up of innovation capabilities, which could enhance sustainable competitive advantage. Howev- er, the study confirms that process innovation capability has the strongest mediating impact on the relationship be- tween dynamic capabilities and competitive firm perfor- 67 Organizacija, V olume 57 Issue 1, February 2024 Research Papers mance. 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A resource-based view of the firm, Strategic Management Journal, 5 (2), 171-180. https:// doi.org/10.1002/smj.4250050207 Yam, R. C. M., Guan J. C., Pun, K. F. & Tang E. P. Y . (2004). An Audit of Technological Innovation Capa- bilities in Chinese Firms: Some Empirical Findings in Beijing, China. Research Policy 33, 1123–1140. 69 Organizacija, V olume 57 Issue 1, February 2024 Research Papers https://doi.org/10.1016/j.respol.2004.05.004 Zehir, C., Köle, M., & Yıldız, H. (2015). The mediating role of innovation capability on market orientation and export performance: An implementation on SMEs in Turkey. Procedia-Social and Behavioral Sciences, 207, 700-708. https://doi.org/10.1016/j.sbspro.2015.10.141 Mohanad Ali Kareem is assistant professor is an Universidad de las Américas, School of Business and Economics, México. His research focuses on human resources management, strategic management, and organizational behaviour. Harshavardhan Reddy Kummitha is a senior researcher in Tourism and hospitality management at the Budapest Business School in Hungary. He has done extensive research on Ecotourism, sustainable tourism, social entrepreneurship, organizational studies and tourism economics. His current research focuses on various issues related to tourism and Human development, crises tourism and tourism social entrepreneurship, etc. Naveen Kolloju i s a n A s s o c i a t e P r o f e s s o r a n d C o - Chairperson of Zibs-Woxsen China-India Centre, at the School of Liberal Arts & Humanities, Woxsen University, Hyderabad, India. He has authored two books and eighteen research papers published in various Scopus- indexed and UGC CARE listed journals. His areas of expertise include Political Science, Public Policy, Governance, and International Political Economy. 70 Organizacija, V olume 57 Issue 1, February 2024 Research Papers Appendix 1: List of Items see in Sensing capability 1. Our firm conducts environmental assessment to identify new job opportunities. 2. Our firm ensures the performance assessment. 3. Our firm encourages the collaboration readiness. 4. Our firm encourages the changing and renewal. Learning Capabilities 1. Frequent industry knowledge learning program. 2. Frequent internal educational training. 3. Frequent knowledge sharing and establishment of learning groups. 4. Frequent internal cross-department learning program. Integration Capabilities 1. Focus on customer information collection and potential market exploration. 2. Employ specialized firms to collect industry information for managerial decisions. 3. Focus on integrating industry-related technologies to develop new products. 4. Record and integrate historical methods and experiences in handling firm issues. Reconfiguration Capabilities 1. Clear human resource reallocation procedure 2. Fast organizational response to market changes 3. Fast organizational response to competitor’s actions 4. Efficient and effective communication with cooperative organization Process innovation capability 1. Our firm continuously develops processes to reduce production costs. 2. Our firm has valuable knowledge for innovating manufacturing and technological processes. 3. Our firm is able to create and manage a portfolio of interrelated technologies. 4. Our firm assigns resources to the production department efficiently 5. Our firm is able to offer environmentally friendly processes Product innovation capability 1. Our firm is able to replace existing products . 2. Our firm is able to expand the range of products . 3. Our firm considers emerging trends in designing new products. 4. Our firm is able to develop innovative products. 5. Our firm is able to reduce the time to develop a new product. Competitive firm performance 1. We offer competitive prices 2. We are able to compete based on quality 3. We offer high quality products to our customers 4. We deliver customer orders on time 71 Organizacija, V olume 57 Issue 1, February 2024 Research Papers 5. We provide dependable delivery 6. We provide customized products 7. We alter our product offerings to meet client needs 8. We cater to customer needs for “new” features 9. We are first in the market in introducing new products 10. We have time-to-market lower than industry average.