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David T. Wilson
Pennsylvania State University
The purpose of this article is to determine market orientation's relative impact on small-business performance,
compared to other influences, in an integrated model using
longitudinal data. Contrary to expectations based on the
management literature, the results indicate weak causal
relationships between market environment, small-firm
structure, and small-firm strategy. The results further indicate weak influences of these variables, but strong and
consistent influences of market orientation, on various
measures of small-firm performance. Contrary to expectations based on business policy literature, relative product quality and new product success were not significant
influences on profitability, perhaps due to the significant
influence of market orientation on these variables. In
addition, although increases in growth~share had a significant short-term influence on increases in profitability, high
levels of previous years'firm growth~share had a negative
influence on current profitability. The previous year's level
of firm coordinating systems and market competitive intensity has a significant impact on the level of small-firm
market orientation.
Webster's (1981) survey of CEOs of large firms indicated that the technology culture of industrial firms comJournal of the Academy of Marketing Science.
Volume 24, No. 1, pages 27-43
Copyright 9 1996 by Academy of Marketing Science.
28
WINTER 1996
TABLE 1
Variable Relationships and Theory Source
Industrial Organization
Organization Theory
Business Policy
a. Porter (1979).
b. Park and Mason (1990).
c. Venkatraman and Prescott (1990).
d. Lawrence and Lorsch (1967).
e. Miles and Snow (1978).
CONCEPTUAL FOUNDATIONS
Market Orientation Influences
on Business Position
Narver and Slater's (1990) theoretical linkage between
market orientation and performance is based on the con-
29
30
WINTER 1996
implementation stage of innovative behavior. They cite
Deshpande' and Zaltman's (1982) study to suggest the
importance of interdepartmental connectedness in facilitating the dissemination and responsiveness to market
intelligence.
Although they found that interdepartmental connectedness significantly and positively influenced firm market
orientation, they found no influence of formalization, centralization, or departmentalization on market orientation.
However, there may be especially strong relationships
between these structural variables and the prevalence of
market orientation in small firms. Small-business presidents may recognize that increasing low levels of formalization, control systems, and coordinating systems may
improve internal efficiency but cannot positively affect
revenue enhancement without an increased emphasis on
market-oriented behaviors. This recognition is based on
understanding that a market-oriented firm can better use
these structural characteristics to consistently provide high
levels of customer service and value.
We argue that, on balance, because of the typical low
levels of formalization in small businesses, greater formalization and control systems will not significantly reduce
the innovative aspects of a market-oriented culture, but
will positively affect marketing implementation, which
will reinforce market-oriented behaviors. We further argue
that, given the low levels of small-firm control and coordinating systems, greater use of these systems increases
the appreciation of market information gathering and customer satisfaction across functions. Hence
P5: The greater the level of small-firm formalization, the
greater the level of market orientation.
P6: The greater the level of small-firm control systems,
the greater the level of market orientation.
P7: The greater the level of small-firm coordinating
systems, the greater the level of market orientation.
Given the evidence of the impact of decentralization on
innovative behaviors (Walker and Ruekert 1987) and information use (Deshpande' and Zaltman 1982), we contend that decentralization should positively affect the
prevalence of market-oriented behaviors. Decentralization, especially in small firms, should provide employees
across functions and levels with a greater involvement in
activities designed to improve customer satisfaction. Decentralization of decision making in small businesses
should increase market-oriented behaviors, as lower level
managers learn to appreciate the value of market information and spread that information. Hence
P8: The greater the level of small-firm decentralization,
the greater the level of market orientation.
One of the great strengths of small businesses is their
capacity for flexibility and adaptability due to simple
31
Figure 1 provides a model illustrating these propositions as well as the relationships between variables suggested by the management literature. Because we are
primarily interested in the significance of the antecedents
and consequences of market orientation, we did not formally present propositions based on the other relationships
32
WINTER 1996
FIGURE 1
An Integrated Model of Determinants of Business Profitability
MARKET ENVIRONMENT
Dynamism
Competitive Intensity
Ii
STRATEGY
Innovation/
Differentiation
<------:..... >
Low Cost
:
:
: P6
ORGANIZATION STRUCTURE
* Centralization
* Formalization
* Coordination
* Control Systems
* Product/Service
Differentiation
: P7
:
P5
MARKET ORIENTATION
J NEW
PRODUCT SUCCESS
>
.l|
~v
PROFITABILITY
Theory: Industrial Organization
Organization Theory
PI: :
: :
:
:
:
:
:
I<: :
P2 :
:
:
:
:
:
:
..........
1<<----
< ................ :
P4
Business Policy
Market Orientation .........
METHOD
Proposition testing was based on examination of parameter significance in models using year-to-year differences in the dependent and independent variables. Because
of the small sample size (and the complexity of some
models) and the potential for multicollinearity, we supple-
Pelham,Wilson/ SMALL-FIRMPERFORMANCE
mented multiple regression models (with all hypothesized
variables) with additional tests of parameter significance
using forward and backward stepwise regression to investigate parameter insignificance. Because of small year-toyear differences in some variables, we also used lagged
variable regression. Variance inflation factor (VIF) analysis (Neter, Wasserman, and Kutner (1985, p. 391) indicated
no significant parameter distortion due to multicollinearity. However, to reduce the impact of multicollinearity, we
mean-centered the data.
We were fortunate that a longitudinal database had been
developed by the Center for Entrepreneurship at Eastern
Michigan University, measuring a broad spectrum of internal firm and external industry variables. In the original
year of data collection, 71 percent of firm presidents contacted by phone agreed to participate in the panel. The
Center's panel is composed of 370 Michigan firms with
average sales of $2.9 million and 21.5 employees (30%
manufacturing, 28% wholesaling, 24% business services,
and 18% construction). However, because we added market orientation (79 respondents) and relative product quality (76 respondents) questions in the midst of their
telephone interview schedule in 1993 and because of our
need for complete responses to all measures for both the
current and previous year, regression models were based
on a respondent base of only 68 firms. A comparison of the
68 firms used in this study with those in the total panel
indicated a similar composition (29% manufacturing, 32%
wholesaling, 26% business services, and 13% construction). The average number of employees in the 68 firms
was 23. The range of firm sizes was fairly narrow (15 to
65), reducing the likelihood of the impact of firm size on
performance. Examination of correlation relationships
verified this supposition.
Construct validity analysis was based on variable responses in 1992 ranging from 145 to 370, thereby providing a sample size sufficient to run LISREL measurement
model analysis for those constructs. Because the 1993
respondent base available for all constructs was only 68
firms, use of LISREL for structural equation modeling was
not possible. Therefore, examination of paths suggested by
the model in Figure 1 was conducted with path analysis
(Duncan 1971) with separate multiple regression models.
Because market orientation and relative product quality
questions were added to the questionnaire in 1993, these
variables reflect a onetime measurement. The lack of longitudinal data on the firm's level of market orientation may
reduce confidence in causal effects of market orientation.
However, we contend that a firm's culture forms over a
long time, and a measure taken once within a 3- to 4-year
period will be representative of the firm's culture. Even in
small firms, which typically have considerably more flexibility than large firms, managers find that employee behavior modification is a slow and difficult process. The small
level of change in structural variables from 1991 to 1993
supports this argument.
Appendix A provides the survey questions for each
variable along with factor analysis (exploratory/varimax
rotation) loadings on the appropriate construct and LISREL measurement model squared multiple correlations (a
33
34
WINTER 1996
RESULTS
Table 2 provides the regression results of model testing
using year-to-year differences (in dependent and independent variables) as well as parameters based on lagged
independent variables. Differences in significance levels
between the first set of parameters and the second set could
be due to the short-term nature of an influence or to small
yearly differences in variables. Appendix B provides the
zero-order correlations between variables, which lends
insight to relationships beyond regression results.
35
TABLE 2
Regression Beta Parameters (N = 68)
D e p e n d e n t Variables
Yearly Difference Models a
Relative
Independent Variable
Market
Orientation
Innovation/
differentiation strategy
Low-cost strategy
Decentralization
Formalization
Coordination
Product differentiation
Control systems
Market dynamism
Competitive intensity
Market orientationb
New product success
Relative product qualityI~
Growth/share
Profitability (previous year)
Model R 2
Adjusted R2
Model F
Reduced model R 2
Reduced model F
Product
Quality
L a g g e d Variable M o d e l s
New
Product
Success
Growth/
Share
P r o fita b ility
Market
Orientation
Relative
New
Product
Quality
Product
Success
Growth/
Share
Profitability
(A) e
(B) r
ns
ns
ns
ns
ns
ns
ns
ns
.35**
ns
ns
-.03
-.27*
.24*
ns
ns
ns
ns
ns
ns
ns
ns
ns
~s
ns
ns
ns
ns
ns
ns
ns
ns
ns
.24"
ns
ns
ns
ns
ns
ns
.23*
.32*
ns
ns
ns
ns
ns
ns
ns
.23*
ns
ns
ns
ns
ns
ns
ns
ns
ns
-.27*
ns
ns
ns
ns
-.18"
-.24*
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
-.11
.3 I*
.24*
.24*
ns
ns
.37**
ns
ns
ns
ns
ns
.29*
.31"
.35*
ns
.52**
ns
.44*
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
-.24*
-.52**
.61'*
.47
.31
3.0**
.32
7.4**
.57*
.25
.13
2.3*
.12
4.5*
.22
.12
1.7
.07
5.03*
.43
.30
4.8**
.32
6.4**
.33
.18
2.2*
.19
4.9*
.55
.44
5.0**
.47
9.2**
.26
.2l
3.4**
.21
4.8*
.22
.03
1.13
.07
5.03*
.51
.40
4.3**
.43
4.7*
ns
.52**
.28
.18
1.4
.20
6.4*
.33
.19
1.8"
.24
6.6*
on any of the performance variables. Increases in competitive intensity only influenced the change in assessment of
new product success (.24; p < .05). The previous year's
level of competitive intensity has no influence on current
levels of business position or profitability. The results from
stepwise regression and reduced models indicated that
multicollinearity or parameter instability from the number
of variables in the model relative to the sample size was
not the cause of insignificant parameters. The minimal
impact of the market environment on strategy selection or
performance is consistent with Prescott's (1986) results.
The insignificant influence of competitive intensity on
growth/share differs from Jaworski and Kohli's (1993)
results. This difference is not merely due to the longitudinal nature of this study compared to the onetime measurement in their study, because we found no significant
same-year correlations between these variables. We suggest that the difference is due to the nature of the sampling
frames of large businesses and small business, where
small-business flexibility/adaptability reduces the impact
of competitive intensity on ability to exploit growth opportunities. However, significant (p < .01) same-year correlations between competitive intensity and profitability (-.25
and -.29) indicate that current-year perceptions of these
two variables are associated.
36
WINTER1996
Strategy Influences on
Business Position and Profitability
Increasing use of a low-cost strategy significantly (p =
.05) and negatively (-.27) influences the change in new
product success, but significantly and positively (.24) influences change in growth/share. However, the lack of
significant lagged regression parameters for low-cost
strategy in any performance model suggests that increased
use of low-cost strategy has only short-term influences on
small-firm performance, perhaps due to quick imitation by
competitors and the lack of resources to achieve a low-cost
producer status.
Changes in innovation/differentiation strategy have no
significant influence on changes in any performance variable, perhaps due to the length of time necessary for
increased use of this strategy to have an impact on performance. This possibility is bolstered by lagged regression
results indicating that previous high levels of use of this
strategy significantly (.35) influences current growth/share.
Neither strategy significantly influences profitability
directly. The weak influence of strategy on performance
may be due to the inability of small firms, noted by limited
financial resources, to successfully achieve competitive
advantage based only on emphasis on either low costs or
R&D-based differentiation. This result suggests the importance of implementation, rather than strategy selection,
as the key to small-business performance.
Pelham,Wilson/ SMALL-FIRMPERFORMANCE
P3 is rejected. Market orientation does not significantly
and directly influence growth/share in the yearly difference or lagged variable models. This result is consistent
with Jaworski and Kohli's (1993) results but is inconsistent
with Slater and Narver's (1994) results. Stepwise regression results indicate that the only variables meeting the .05
significance criterion are new product success and product
differentiation structure, resulting in an R-square level
o f . 19, compared to the R-square level of .33 (adjusted
R-square of .18) for the full model. Thus the impact of
market orientation on growth share is indirect through new
product success. By way of comparison/the R-square
levels of Jaworski and Kohli's market share model (in two
samples) is .06 and .11. Their model did not include
organization structure, strategy, or new product success
variables. Slater and Narver's sales growth model
achieved an adjusted R-square level of .34, reflecting the
significant negative influence of environmental competitive hostility on large-firm SBU sales growth. As indicated
earlier, competitive intensity is not a significant influence
on growth/share in our sample of small firms.
P4 is accepted. Market orientation significantly (p <
.01) and positively (.29) influences increases in profitability for small firms. This result is consistent with Narver
and Slater's (1990) and Slater and Narver's (1994)results.
In stepwise regression, only market orientation and
growth/share meet the criterion of significance (p = .05),
resulting in a model with an R-square of .47, compared to
the full model's R-square level of .55 (adjusted R-square
of .44).
Market orientation also significantly (p < .01) and positively (.52) influences the current year's level of profitability in the model where other independent variables are
lagged one year. In vector autoregressive modeling with
lagged profitability included in the profitability model, it
is important to note that market orientation remains a
highly significant (p < .01) influence on current year's
profitability (.52), regardless of the inclusion of business
position variables and lagged profitability. The reduced
vector autoregressive model with only significant influences achieved an R-square level of .32, compared to the
full model R-square level of .47 (adjusted R-square level
of .31).
By way of comparison, Narver and Slater's (1990)
study of SBUs of a large forest products firm presented
somewhat mixed results for the impact of market orientation on profitability across types of products and size of
business units. Market orientation had a negative impact
on commodity product SBU return on assets but a positive
impact on differentiated SBU profitability. Their profitability model, which included market environment variables and the business position variables of relative cost
and size (but did not include growth/share, firm structure
variables, or strategy variables) achieved an R-square level
of .41. Their 1994 study found a significant impact of
market orientation on return on assets, with an adjusted
R-square level of .34, reflecting the significant influences
of relative size and relative cost.
37
38
WINTER 1996
Managerial Implications
Following on the results of Narver and Slater (1990),
which indicated that large businesses may be the least able
to adopt a market orientation, presidents of small firms
have a unique opportunity to seek a competitive advantage
through their efforts to instill a market orientation. Due to
the small number of employees, small-firm presidents are
able to personally reinforce firmwide market-oriented
norms. They also have the opportunity to exploit a simple
and adaptable form of organization with that market
orientation.
Small-firm presidents should enhance formalization in
decision making and implementation, and an innovation/differentiation strategy should improve new product
success directly and indirectly through higher levels of
market orientation. They should be careful not to spread
resources too thin with organization structure modifica-
39
APPENDIX A
Measures of Constructs
Factor
Analysis
Loading
Market Orientation
1. All our functions (not just marketing and sales) are responsive to, and
integrated in, serving target markets. (agree/disagree)
2. Our firm's strategy for competitive advantage is based on our thorough
understanding of our customer needs. (agree/disagree)
3. All our managers understand how the entire business can contribute to
creating customer value. (agree/disagree)
4. Our firm responds (slowly/quickly) to negative customer satisfaction
information throughout the organization.
5. Our firm's market strategies are to a (moderate/great) extent driven by
our understanding of possibilities for creating value for customers.
6. Information on customers, marketing success, and marketing failures
is communicated across functions in the firm. (agree/disagree)
7. How frequently do top managers discuss competitive strengths and
weaknesses? (never/very frequently)
8. How frequently do you take advantage of targeted opportunities to
take advantage of competitors' weaknesses? (never/very frequently)
9. If a major competitor were to launch an intensive campaign targeted
at our customers, we would implement a response immediately. (agree/
disagree)
Performance (1 = much below expectations, 7 = much above expectations)
New product success
1. New product/service development
2. Market development
Growth/share
3. Sales growth rate
4. Employment growth rate
5. Market share
Profitability
6. Operating profits
7 Profit to sales ratio
8. Cash flow from operations
9. Return on investment
10.Return on assets
LISREL
Square
Multiple Correlation
Coefficient
Alpha~Item
Correlation
.92
.81
.52
.88
.53
.51
.87
.70
.41
.88
.67
.27
.94
.64
.40
.87
.58
.33
.85
.79
.66
.92
.77
.49
.88
.54
.39
.83
.74
.85
.85
.43
.91
.80
.68
.73
.71
.50
.58
.81
.87
.82
.93
.91
.69
.70
.64
.92
.85
.72
.71
.75
.72
.66
.70
.88
.79
.74
.72
.87
.86
(continued)
40
WINTER 1996
APPENDIX A Continued
Factor
Analysis
Loading
LISREL
Square
Multiple Correlation
Coefficient
Alpha~Item
Correlation
.80
.81
.79
.63
.66
.62
.87
.83
.85
.94
.71
.59
.56
.56
.52
.70
.69
.69
.40
.68
.80
.42
.70
.57
.83
.82
.38
.53
.33
.63
.51
.59
.52
.73
.59
.73
.81
.63
.35
.49
.35
.40
.59
.67
.69
.60
.74
.75
.74
.40
.53
.58
.77
.66
.63
.75
.72
.83
.50
.65
.40
.32
.27
.54
.32
.52
.80
.43
.41
.31
.44
.31
.35
.72
.71
.62
.71
.41
.45
.28
.34
.68
.79
.26
.35
.25
.25
.70
.64
.69
.70
.66
.50
.69
.70
.55
.72
.70
.71
.65
.66
.69
.64
.69
.51
II ~
II
o
..~
o~
~
"
,.
'
I"
~
~
*o
"~
II
~l'l'l'l'lll'l"
c~
"
I"
"
ILl cn
I'
. . . . .
I'I''I'I"
i' I. . . . .
~ "
"
~.
I. . . . . . . . . . .
i'I'I'I"
41
42
WINTER 1996
APPENDIX C
Means and Standard Deviations of Yearly Differences
1992
Construct
Market orientation
Innovation/differentiation strategy
Low-cost strategy
Formalization
Decentralization
Product differentiation structure
Coordination
Control systems
Dynamism in environment
Competitive intensity
New product success
Relative product quality
Growth/share
Profitability
Difference
1993-1992
1993
Mean
SD
4.50
3.57
0.53
1.65
"3.78
3.26
3.89
3.51
3.97
3.96
1.27
1.25
0.37
0.86
1.52
1.46
1.75
1.10
1.18
0.97
3.89
3.67
1.03
1.24
Mean
5.48
4.51
3.60
0.60
2.53
4.09
3.19
4.46
3.84
4.46
4.23
5.04
4.18
4.20
SD
0.79
1.38
3.60
0.32
1.32
1.23
1.32
1.63
1.00
1.19
1.33
1.42
1.25
1.51
Mean
Difference
1993-1991
SD
.21
.19
.09
.98
.31
-.01
.48
.25
.62
.19
1.26
1.36
0.28
1.30
1.67
1.63
1.51
1.22
1.29
1.39
.21
.38
1.43
1.72
Mean
SD
.05
.90
.22
.22
.28
.08
.75
0.31
1.38
1.76
1.65
1.76
1.50
1.31
NOTE: All scales have points from 1 to 7, with the exception of formalization (0 = no, 1 = yes) and decentralization (0 = low, 5 = high).
ACKNOWLEDGMENTS
The authors thank the Marketing Science Institute for funding
for this study and their constructive comments. The authors also
thank the JAMS reviewers for their comments and suggestions,
which significantly improved earlier versions of this article.
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