ORIGINAL EMPIRICAL RESEARCH Innovation pathway to profitability: the role of entrepreneurial orientation and marketing capabilities S. Arunachalam 1 & Sridhar N. Ramaswami 2,3 & Pol Herrmann 2,4 & Doug Walker 5 Received: 31 January 2017 /Accepted: 18 December 2017 # Academy of Marketing Science 2018 Abstract Drawing from the marketing capabilities and innovation literatures, we identify aprocess by which a firm’ s entrepreneurial orientation impacts profits and show that it is dependent on marketing capabilities. Using a half-longitudinal design we integrate survey data with performance metrics over two time periods, from a sample of 190 firms. While the effect of entrepreneurial orientation (EO) on innovation is enhanced by architectural marketing capabilities, the effect of innovation outcomes on profits is enhanced by specialized marketing capabilities. Ultimately, the pathway from EO to performance, mediated by innovation, is positively significant at higher levels of both marketing capabilities. The results uncovered using Bayesian conditional process modeling, are robust to alternate model specifications, endogeneity tests, and provide insights into the capabilities-based under- standing of entrepreneurism-marketing interface. We discuss resource allocation implications for managers as they attempt to maximize profits through innovation. Keywords Marketing capabilities . Innovation . Pathway to profitability . Moderated mediation In today’ s markets, characterized as they are by high customer expectations, intense global competition, and a rapidly changing technological landscape, organizations must raise their entrepre- neurial profile if they are to survive and perform well (Webb et al. 2011). Because of this, understanding the performance benefits of being entrepreneurial has received substantial concep- tual and empirical attention over the past 30 years (Covin and Lumpkin 2011; Wales 2016). In a meta-analysis, Rauch et al. (2009) noted that entrepreneurism, captured by the concept of entrepreneurial orientation (EO), has a strong positive impact on firm performance. EO firms show higher willingness to inno- vate, take risks to develop new and uncertain products, and are more proactive that competitors in tapping into marketplace op- portunities (Lumpkin and Dess 1996). Several arguments have been proposed to explain this posi- tive relationship, including organizational integration (Miller 1983), learning orientation (Wang 2008), market orientation (Matsuno et al. 2002; Baker and Sinkula 2009), and innovation success (Baker and Sinkula 2009; Wiklund and Shepherd 2005; Zhou, Yim and Tse 2005). The focus of the present study is on innovation—specifically, how EO creates customer value through greater innovation success (which we call ‘value crea- tion’) and how innovation success translates into superior firm performance (which we term ‘value extraction’). 1 We call this 1 We distinguish between EO and innovation in our study. We consider inno- vation an outcome that is based on organizational responses to Benvironmental opportunities^ and is captured by the number of new products and services and major alterations to existing products developed and implemented by firms. We consider EO the firm’ s entrepreneurial focus or intent. Rajkumar Venkatesan served as Area Editor for this article. * S. Arunachalam s_arunachalam@isb.edu Sridhar N. Ramaswami sramaswa@iastate.edu Pol Herrmann pol@iastate.edu Doug Walker dmwalker@ksu.edu 1 Indian School of Business, Gachibowli, Hyderabad 500032, India 2 Ivy College of Business, Iowa State University, 3216 Gerdin Business Building, Ames, IA 50011-1350, USA 3 Indian School of Business, Hyderabad, India 4 Tecnológico de Monterrey, EGADE Business School, San Pedro Garza García, Mexico 5 Kansas State University, 201 A Calvin Hall, Manhattan, KS 66506, USA Journal of the Academy of Marketing Science https://doi.org/10.1007/s11747-017-0574-1