In today’s global and dynamic competitive environment

In today’s global and dynamic competitive environment, product innovation is becoming more and more relevant, mainly as a result of three major trends: intense international competition fragmented and demanding markets, and diverse and rapidly changing technologies Muchoki, (2013) : citing Wheelwright and Clerk,(1992).Unprecedented number of companies around the world have made significant improvement in technical specifications, components and materials, incorporated software , user or other functional characteristics in order to spur company performance. It has enabled numerous organizations to respond quickly and more effectively to new opportunities and unexpected pressures so as to re-establish their competitive advantage. In many cases the desired results cannot be achieved without subjecting the corporate strategy and structure to some transformation. In this context, innovation is no longer an option but a necessity for survival and growth (Rogovsky et al., 2005).Financial performance variables like cost of production, inflation rates, tax regime and size of company are among the factors within the current business setting that are affecting the performance of private manufacturing firms.
According to disruptive innovation theory (Christensen, 1997) product innovation creates a fresh market and significant proposition thus displacing reputable organizations, goods and alliances; as a result a firm deploying a disruptive innovation shall enjoy improved performance. Innovation is important to all organizations but particularly for manufacturing companies. An organization that innovates is bound to grow as well as surprise and delight customers with new, differentiated and relevant benefits Njagi, (2016): citing (Sharma, 2009). Product innovation is the introduction of new products to the market, redesigning already well known goods or make use of improved resources in the production of goods that are already in the market. (Kleinsmith, 2001) defined product innovativeness as product that possesses newness or a degree of newness. Product innovation refers to a product which is new, at least in some respect if not all, for the market for which the product is being introduced. Innovation is driven by customer and market requirements as well as competition among suppliers in order to satisfy a certain need.
Levinthal, (2001) Technology evolution is key in innovation of product and services. Innovation does not have to arise from new discoveries but it can result from product processes and organizational changes and a combination of technologies that are already in existence product innovation is key if an organization desires to be differentiated from its competitors, or it can be put across that for an organization to remain competitive then it must consistently innovate new products and services. An improvement in product innovation leads to improved revenue growth, Share performance and market capitalization and profitability Drucker,( 1985).
The Kenyan business environment has been undergoing drastic changes for some time now. Some of these changes include the accelerated implementation of economic reforms by the government, the liberalization of the economy, privatization and partial commercialization of the public sector not forgetting increased competition. In this dynamic operating environment, organizations have to constantly adapt their activities and to reflect the new external realities and hedge inherent financial risks expected Siro, (2013). This study will therefore seek to examine the effect of product innovation on financial performance of private manufacturing firms in Kenya.