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Market orientation in the context of SMEs: A conceptual framework
Journal of Business Research 64 (2011) 1320–1326
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Journal of Business Research
Market orientation in the context of SMEs: A conceptual framework☆ P.S. Raju a,⁎, Subhash C. Lonial a, Michael D. Crum b a b
Department of Marketing, College of Business, University of Louisville, Louisville, KY 40292, United States College of Business, University of Louisville, Louisville, KY 40292, United States
a r t i c l e
i n f o
Article history: Received 4 June 2008 Accepted 30 November 2010 Available online 13 January 2011 Keywords: Market orientation SME performance Small business strategy Small business marketing
a b s t r a c t A number of studies in the marketing literature have examined the construct of market orientation (MO). These studies generally show a positive link between MO and organizational performance. This paper examines MO specifically in the context of small and medium sized enterprises (SMEs). An in-depth review of the extant literature is used to develop a conceptual framework by exploring the major antecedents of MO, the MO–Performance relationship, and the key mediators and environmental moderators of this relationship. This paper also examines several studies on SMEs with respect to various aspects of this framework and offers suggestions for future research in order to understand more thoroughly how MO influences SME performance. © 2011 Elsevier Inc. All rights reserved.
1. Introduction
2. Relevance of the SME context
In a general sense, MO pertains to an organizational culture that emphasizes aspects such as customer orientation, competitor orientation, interfunctional coordination, and responsiveness as keys to organizational success (Kohli and Jaworski, 1990; Narver and Slater, 1990). Although the MO–Performance relationship has been the focus of many studies, efforts to synthesize existing findings to better understand this relationship in the context of smaller organizations have been virtually nonexistent. Past research shows some key differences between SMEs and larger organizations (Acs and Audretsch, 1987; Coviello et al., 2000) and one can expect the role of MO in SMEs to be quite distinct from that in larger organizations. The primary objective of this paper is to formulate a conceptual framework to examine MO in the context of SMEs. Such a framework could help us better comprehend the role of MO and its influence on SME performance. The MO literature is used to identify constructs of particular relevance to SMEs. Increased emphasis is given to the antecedents of MO and the mediators and moderators of the MO– performance relationship. Following the discussion of the conceptual framework, this paper examines SME research in relation to the framework and offers suggestions for future research. Prior to development of the conceptual framework, the next section examines the significance of the SME context for MO.
Firm size is an important consideration with respect to the competitive advantage of organizations. Larger firms are known to have advantages such as economies of scale, bargaining power with suppliers and distributors, brand name recognition, experience curve effects, and monopoly power to set prices above the competition (Fiegenbaum and Karnani, 1991). Larger firms also have access to key resources (Ettlie and Rubenstein, 1987). In contrast, smaller firms often face many obstacles, termed “liability of smallness” by Aldrich and Auster (1986). Additionally, smaller new ventures could have the added burden of the “liability of newness” leading to higher mortality rate among these organizations (Stinchcombe, 1965). In spite of these liabilities SMEs are often highly market oriented and known to compete effectively with larger organizations, making it valuable to gain a better understanding of MO in the SME environment. With respect to characteristics, several differences between SMEs and their larger counterparts can be noted. For example, SMEs tend to be intrinsically more innovative, especially in the early stages of the industry lifecycle (Acs and Audretsch, 1987; Audretsch, 2002). Smaller firms are also likely to have more customer contact (Coviello et al., 2000), a greater propensity for action (Chen and Hambrick, 1995) and more output flexibility than larger firms (Fiegenbaum and Karnani, 1991). Such differences could be significant for studying the role of MO in smaller firms. SMEs and larger organizations are also likely to differ with respect to resources. Firm resources include a variety of elements (assets, capabilities, information, etc.) and these resources are often the key to sustained competitive advantage and superior performance. Hult et al. (2005) use a resource-based view (RBV) to examine the interrelationship between MO and elements such as information processing
☆ The authors thank the associate editor and anonymous reviewers who provided several valuable comments on this paper. ⁎ Corresponding author. Tel.: + 1 502 852 4860. E-mail addresses: [email protected] (P.S. Raju), [email protected] (S.C. Lonial), [email protected] (M.D. Crum). 0148-2963/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2010.12.002
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and organizational responsiveness. Olavarrieta and Friedmann (2008) consider knowledge-related resources to provide a key link between MO and firm performance. It is possible that SMEs may be quite distinct from larger organizations in terms of how they integrate various elements such as information processing, knowledge, and responsiveness into a unique strategic resource. While they may not have as many resources as larger firms, this ability to develop unique strategic resources could be a key distinguishing feature of SMEs. The synergistic effect of MO in conjunction with these elements could therefore be instrumental to understanding the role of MO in SMEs.
3. The conceptual framework Since the conceptual framework discusses MO in the context of SMEs it might be useful to first briefly review the definition of SME and the nature of MO. In the United States, the Small Business Administration (SBA) Table of Small Business Size Standards uses a varying definition of small business based on the NAICS code of the firm. For example, while a masonry contracting firm is considered a small business if its annual revenue is $13 million or less, a soft drink manufacturer is not considered a small business unless it has 500 or fewer employees, regardless of revenue. On the other hand, in Europe, the definition of an SME appears to be more consistent across industries with the upper limit for an SME being set at 250 employees and revenues no greater than €50,000,000 or a total balance sheet value of €43,000,000 or less. More details regarding SME definition are available in websites such as www.sba.gov/size and http://ec. europa.eu/enterprise/sme. For purposes of this paper an SME can be generally considered as a firm with fewer than 500 employees. Revenue considerations are not directly relevant to the conceptual framework in the paper although the guidelines mentioned above could be useful for conducting future empirical work based on the proposed framework. Traditionally, the marketing literature has considered MO to be a key part of organizational culture. Narver and Slater (1990) view MO as being made up of three components: customer orientation, competitor orientation, and interfunctional coordination. Kohli and Jaworski (1990) identify intelligence generation, intelligence dissemination, and organizationwide responsiveness as the dimensions of MO. Based on these earlier works, this paper supports the view of MO being comprised of four dimensions—the three dimensions suggested by Narver and Slater (1990) supplemented by the responsiveness dimension of Kohli and Jaworski (1990). Both approaches have some
Organizational Structure - Formalization - Centralization - Departmentalization
Organizational Culture - Organizational Learning - Market Focus - Entrepreneurial Proclivity - Quality Context
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advantages, and other researchers have used such an integrative approach before (Hult et al., 2005). The conceptual framework proposed in this paper is shown in Fig. 1. This framework identifies key antecedents and consequences of MO and also the major environmental moderators of the MO–Performance relationship in the SME context. While essentially viewing MO as being part of the organizational culture, the framework also acknowledges that MO leads to specific organizational behaviors which could be instrumental in the link between MO and performance. These mediators could be significant for understanding SME performance. This framework is developed from a comprehensive literature review and the primary intent is to identify the constructs that could be most beneficial to examining the differences between SMEs and larger organizations. While the constructs in the proposed framework might not in themselves be unique it is felt that the applicability of many of the constructs and the strength and/or nature of the relationships among the constructs might differ significantly between SMEs and larger organizations. These differences are brought out clearly in the next section which applies the conceptual framework to SMEs and examines key differences between SMEs and larger organizations. The rest of this section outlines the conceptual framework and the rationale for the inclusion of specific constructs within the framework.
3.1. Antecedents of MO The major antecedents of MO can be divided into two categories— Structural variables, which include the objective aspects of the organization (Aiken et al., 1980), and Cultural variables, which reflect the norms and shared values of organization members (Deshpandé and Webster, 1989).
3.1.1. Structural variables Jaworski and Kohli (1993) identify three structural antecedents of MO. These include formalization (existence of formal rules and regulations), centralization (extent to which authority is limited to the top executives and not shared or delegated), and departmentalization (number of departments into which activities are segregated or compartmentalized). Greater levels of these structural levels are generally seen to impede MO within organizations. Although past results have been mixed (Hurley and Hult, 1998; Jaworski and Kohli, 1993; Matsuno et al., 2002) structural variables provide a fairly
Market Orientation -
Customer Orientation
-
Competitor Orientation
-
Responsiveness
-
Interfunctional Coordination
Env. Moderators - Market Turbulence - Technology Turbulence - Competitive Intensity - Market Growth
Mediators - Innovation - Quality Practices
Performance - Product Dev. - Market Dev. - Customer Loyalty & Ret - Financial Performance
Fig. 1. Conceptual framework to examine differences in MO between SMEs and larger firms.
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obvious point of difference between SMEs and larger organizations and have been included in Fig. 1. 3.1.2. Cultural variables One major cultural variable that appears to impact on MO is how organizations deal with information. Kohli and Jaworski (1990) consider the effective generation and dissemination of market information across departments to be so important for performance that they consider these to be dimensions of MO itself. Slater and Narver (1995), on the other hand, prefer to include information processing and sharing of information among departments within the broader context of organizational learning. Terms like “participative decision making” (Hurley and Hult, 1998) and “interdepartmental dynamics” (Jaworski and Kohli, 1993) have also been used to describe this aspect of organizational culture. Olavarrieta and Friedmann (2008) characterize organizational learning as an evolutionary approach to strategy where organizations don't just depend on existing resources, as in the RBV, but constantly evolve through learning, discovery, and adaptation. A firm's capacity to gather and interpret knowledge from the market, or “market-sensing capability,” is seen to evolve from MO. A second important aspect of organizational culture is market focus. Jaworski and Kohli (1993) consider this to be a function of the emphasis top management places on MO and of the degree to which managers are rewarded on the basis of market-based factors. Hurley and Hult (1998) claim that a market focus helps stimulate new ideas and improve responsiveness to markets. Verhoef and Leeflang (2009) suggest that MO increases with customer connectedness which, in turn, would be expected to strengthen with market focus. In general, the evidence suggests that market focus should impact MO positively. A third major cultural antecedent of MO is entrepreneurial proclivity (Matsuno et al., 2002), which is an entrepreneurial predisposition characterized by the dimensions of innovativeness, risk taking, and proactiveness (Miller, 1983). Matsuno et al. (2002) suggest that these three dimensions “collectively facilitate the organization's willingness and ability to engage in market learning activities, recognize the need to reduce undue uncertainty, and take a more calculated risk, thus promoting market orientation” (p. 21). Evidence also suggests that quality context could be a cultural antecedent of MO. In the management literature, quality context refers to an organizational culture conducive to producing a quality product or service (Benson et al., 1991). Top management knowledge of quality and corporate support for quality are considered to be two of the major dimensions of quality context. In summary, the literature suggests four major aspects of organizational culture as good candidates for being antecedents of MO—organizational learning, market focus, entrepreneurial proclivity, and quality context. All four cultural dimensions also appear to be quite relevant to SMEs and could possibly offer SMEs distinct advantages over larger organizations. 3.2. Mediators of the MO–performance relationship In order to explain how MO culture leads to organizational performance Zhou et al. (2008) make an important distinction between MO culture and MO behaviors. They view MO behaviors as mediators providing a necessary link between MO culture and organizational performance. These behaviors or practices help to translate aspects of MO culture into processes and practices that facilitate better organizational performance. The conceptual framework in Fig. 1 identifies two such potential mediators—Innovation and Quality practices. 3.2.1. Mediating role of innovation It is well known that innovation plays a vital role in the success of organizations (Deshpandé et al., 1993; Jaworski and Kohli, 1993,
1996; Slater and Narver, 1995). Considerable research also supports the meditational role of innovation in determining organizational performance (Atuahene-Gima, 1996; Han et al., 1998; Langerak et al., 2007; Lukas and Ferrell, 2000). Intuitively, one would expect innovation related processes and behaviors resulting from an MO based culture to provide a significant competitive edge to organizations in terms of performance dimensions such as product development and market development.
3.2.2. Mediating role of quality practices Zhou et al. (2008) consider product quality to be a crucial aspect of MO behavior since it provides a major competitive advantage to an organization. The marketing literature also suggests that product and service quality are instrumental in generating customer satisfaction and retention which are key dimensions of organizational performance and possible precursors to financial performance (Anderson et al., 1994; Rust et al., 1995). Fig. 1 recognizes the mediational role of quality but uses the term “Quality Practices” instead of Product/ Service Quality since the term is generally more inclusive and can also incorporate quality related processes such as Total Quality Management (TQM). It should be noted that the two mediators proposed previously, Innovation and Quality practices, are quite distinct from aspects of organizational culture such as innovativeness (part of entrepreneurial proclivity) and quality context. In keeping with Zhou et al. (2008), these mediators can be viewed as behavioral counterparts of corresponding organizational culture elements.
3.3. Environmental moderators of the MO–Performance relationship The literature suggests four major environmental moderators of the MO–Performance relationship. These are market turbulence (rate of change in the composition of customers and their preferences), technological change, competitive intensity (how viciously the firms in the industry compete with each other), and market growth. While several researchers have examined these moderators, findings have often been mixed (Jaworski and Kohli, 1993; Olavarrieta and Friedmann, 2008; Slater and Narver, 1994). Generally one would expect that if a firm is able to adapt more easily to customer preferences, leverage new technologies effectively to meet customer needs, monitor and meet competitive threats quickly, and find means to remain profitable even under slow market growth conditions then it would be successful in the long term. Consequently, firms that are able to maintain a high level of MO even under adverse conditions should generally meet with higher levels of success. A high MO–Performance relationship is therefore likely to be facilitated by higher levels of market and technological turbulence, higher competitive intensity, and lower market growth since firms with higher MO are more likely to be rewarded in such circumstances. Despite the limited number of studies these moderators have been incorporated in Fig. 1 due to their intuitive appeal and high potential significance for SMEs. SMEs may have some unique advantages in facing environmental threats in terms of their closer contact with customers, nimbleness and innovativeness, focus on niche markets, output flexibility, etc. in spite of their limited resources and market access as compared to larger firms.
4. Application of conceptual model to SMEs This section identifies significant research studies dealing with MO in the SME context and provides the reader with a general idea of how these findings fit into the conceptual framework.
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Table 1 Selected studies on the MO–Performance relationship in SMEs. Study
Sample
MO Scale(s)
Performance measures
MO–Performance relationship
Appiah-Adu (1997)
110 manufacturing firms in the U.K. with between 10 and 50 employees 101 manufacturing and service firms in the U.K. with between 50 and 200 employees 147 entrepreneur led firms
Narver and Slater (1990), Jaworski and Kohli (1993) Deshpandé et al. (1993) customer orientation scale
Sales growth, new product success rate, return on investment (Subjective) Sales growth, new product success rate, return on investment (Subjective)
Positive
Morris and Paul (1987)
Change in profits compared to three years ago (Subjective) Change in sales and profits over past 3 years (Subjective)
Appiah-Adu and Singh (1998) Becherer and Maurer (1997) Becherer et al. (2003) Demirbag et al. (2006) Horng and Chen (1998) Kara et al. (2005)
Keskin (2006) Ngai et al. (1998)
Pelham and Wilson (1996) Pelham (1997a)
Pelham (1997b)
Pelham (1999)
Pelham (2000)
Salavou (2002) Armario et al. (2008)
215 small businesses with median sales of $3.5 M and a median of 22 employees 141 Turkish textile firms with between 10 and 100 employees. 76 firm-members in the National Association of Small and Medium Enterprises of Taiwan 153 small and medium size businesses in New York, Maryland, and Pennsylvania 157 Turkish firms with less than 250 employees 73 textile and garment companies with 90% having less than 500 employees 68 Michigan firms with an average of 23 employees. 160 industrial manufacturing firms with sales between $20 M and $100 M 160 industrial manufacturing firms with sales between $20 M and $100 M 229 industrial manufacturing firms with sales between $20 M and $100 M 235 industrial manufacturing firms with sales between $12 M and $200 M 61 Greek food and beverage firms with fewer than 250 employees 112 agricultural, consumer goods, and industrial goods companies with more than 20 employees and annual sales greater than 1.5 m euros.
Morris and Paul (1987)
Jaworski and Kohli (1993)
Positive relationship between customer orientation and Performance No significant relationship Positive
Financial, nonfinancial, efficiency (Subjective) Business performance (Subjective)
No direct relationship, indirect positive relationship Positive
Jaworski and Kohli (1993)
Sales, revenue growth, market share, return on investment (Subjective)
Positive
Ruekert (1992)
Overall success, market share, growth rate, profitability (Subjective) Growth/share, profitability (Subjective)
No direct relationship, indirect positive relationship Positive except for last year's profitability Positive except for growth/share
Narver and Slater (1990), Jaworski and Kohli (1993)
New product success, growth/share, profitability, relative product quality (Subjective) Firm effectiveness, market position/share, profitability/cash flow (Subjective)
Narver and Slater (1990), Jaworski and Kohli (1993)
Firm effectiveness, growth/share, profitability (Subjective)
Narver and Slater (1990), Jaworski and Kohli (1993) Narver and Slater (1990), Jaworski and Kohli (1993)
Marketing sales effectiveness, growth/share, profitability (Subjective); index of sales growth (Objective) Growth/share, profitability, marketing/sales effectiveness (Subjective)
Ruekert (1992)
Average ROA from 1995–1997 (Objective)
Positive
Jaworski and Kohli (1993)
Scale comprised of sales, profits, sales growth, and profits growth & the rate of success of new products in foreign markets. (subjective)
Positive relationship between MO and export performance
Narver and Slater (1990), Jaworski and Kohli (1993)
Narver and Slater (1990)
Narver and Slater (1990), Jaworski and Kohli (1993)
4.1. The MO–Performance relationship and mediators in SMEs Table 1 provides a summary of sixteen recent studies that have examined the MO–Performance relationship in the SME context. Thirteen of the sixteen studies support a direct and positive relationship between MO (or its components) and performance. Generally, the MO–Performance correlations in these studies range from .20 to .44 (Pelham and Wilson, 1996; Pelham, 1999). This is consistent with the correlation of 0.26 found by Ellis (2006) in the general MO literature based on a meta-analysis of 56 studies. Only three studies, those by Becherer and Maurer (1997), Demirbag et al. (2006) and Keskin (2006) did not find a direct positive relationship between MO and firm performance. However, two of these studies (Demirbag et al., 2006; Keskin, 2006), in fact, did find evidence for an indirect positive relationship between MO and performance when the analysis included mediating variables. Hence, in effect, fifteen of the sixteen studies support a positive relationship (direct or indirect) between MO and performance. Interestingly, the positive relationship between MO and performance among SMEs appears to hold across a wide variety of contexts and measurement methods for both MO and performance. Table 1 also shows the MO scales and the performance measures from these
Positive
Direct positive relationship for firm effectiveness; indirect positive relationship for growth/share Positive
Positive
studies. Firm size across studies ranges from 10 to 250 employees and the studies feature a variety of industries with many studies spanning multiple industries. This lends considerable credence to the overall strength and robustness of the MO–Performance relationship. There is also some evidence in the SME research for the mediating role of both Innovation and Quality practices in the MO–Performance relationship. The ability to introduce unique products and the conjunction of MO and product innovation have been found to contribute to superior performance in SMEs (Avlonitis and Salavou, 2007; Salavou, 2002). Akman and Yilmaz (2008) find that the customer orientation component of MO impacts the innovative capability of SMEs. Low et al. (2007) report a positive correlation between MO and innovation, and between innovation and firm performance. Laforet's (2008, 2009) findings support the broad hypothesis that size, strategic orientation, and market orientation associate with innovation in SMEs. Verhees and Meulenberg (2004) find support for product innovation as a mediator between MO and company performance for smaller firms. With respect to quality practices, Demirbag et al. (2006) find that TQM implementation mediates the MO–Performance relationship in SMEs. Reasons exist to believe that the MO–Performance relationship might be generally stronger in SMEs as compared to larger firms.
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Table 2 Differences between SMEs and larger organizations with respect to MO in conceptual framework. Construct category in framework
Findings with respect to SMEs
Key references to support findings
Organizational structure antecedents
SMEs are more likely to have simpler organizational structures. SMEs and less likely to use formal planning procedures. SMEs will tend to have more personal contact with their customers and are more likely to emphasize customer-based performance measures. Ability to focus on the market is a key success factor for SMEs. SMEs tend to compete in a narrow market niche, which could facilitate intelligence generation. SMEs smaller size should facilitate intelligence dissemination. Incompatible information systems within SMEs could impede information dissemination. SMEs tend to be more innovative and also have a greater “propensity for action” than larger firms. Entrepreneurial orientation of SMEs has a synergistic relationship with MO. Innovativeness of owner is a key element of entrepreneurial orientation for smaller firms and positively affects MO. SMEs seem to have the same or a lower level of MO than larger organizations. Flexibility, adaptability, and closeness to the customer are attributes that might facilitate a higher degree of MO in SMEs. Ability to introduce new products is a key factor in the success of SMEs. Conjunction between MO and product innovation improves performance of SMEs MO impacts the innovative capability of SMEs. Innovation acts as a mediator between MO and SME performance.
Intuitive reasoning Coviello et al. (2000) Coviello et al. (2000)
Organizational culture antecedents
Market Orientation
Mediators
Environmental moderators
MO–Performance relationship
Size, strategic orientation, and market orientation of SMEs broadly associate with innovation in SMEs, although there are differences between small and medium firms. TQM implementation (which is related to Quality Practices) mediates the MO–Performance relationship in SMEs. SMEs have greater output flexibility which should help in times of market turbulence. Findings with respect to the moderating effects of environmental variables have been inconclusive although they do appear to impact the MO–Performance relationship in SMEs. Quicker response times of SMEs and/or the complacency of larger firms could be factors determining the moderating effects of environmental variables. Many studies have examined the MO–Performance relationship in SMEs. Most studies have found a direct and positive relationship between MO and Performance. The MO–Performance correlation in these studies has ranged between 0.20 and 0.44. Flexibility, adaptability, and closeness to the customer of SMEs could provide the basis for a stronger MO
Pelham (1999) argues that smaller firms can “leverage their potential advantages of flexibility, adaptability, and closeness to their customer base into superior, individualized service” (p.34). Since SMEs typically have fewer strengths, one possibility is that they might be better at identifying and leveraging those strengths as compared to larger firms. In spite of these intuitive arguments, few studies have directly compared the MO–Performance relationship in larger organizations and SMEs. In one study examining the MO–Performance relationship in the hospital industry, Raju et al. (2000) find the relationship to be significantly stronger for smaller hospitals than for larger hospitals. It would be interesting to find out if this relationship holds in other industries. 4.2. Antecedents of MO With respect to structural variables, SMEs by nature tend to have simpler organizational structures. Coviello et al. (2000) also find that SMEs are less likely to use formal procedures for planning purposes. With respect to organizational culture, SMEs typically tend to have more personal contact with their customers and also tend to
Ghosh et al. (2001) Carroll (1984) Intuitive reasoning Levy and Powell (1998) Chen and Hambrick (1995) Li et al. (2008) Verhees and Meulenberg (2004) Liu (1995), Becherer et al. (2003), Pelham (2000), Raju et al. (2000) Pelham (1999) Avlonitis and Salavou (2007) Salavou (2002) Akman and Yilmaz (2008) Low et al. (2007), Verhees and Meulenberg (2004) Laforet (2008, 2009)
Demirbag et al. (2006) Fiegenbaum and Karnani (1991) Appiah-Adu (1997), Becherer and Maurer (1997), Low et al. (2007) Chen and Hambrick (1995), Hannan and Freeman (1984) See Table 1 for major references.
Pelham and Wilson (1996), Pelham (1999) Pelham (1999)
emphasize customer-based performance measures (Coviello et al., 2000). If this is the case, employees should have an economic incentive to align their actions with customer needs and this should improve the market focus aspect of SMEs. The ability to identify and focus on the market is seen to be a key success factor contributing to superior performance among SMEs (Ghosh et al., 2001). In relation to organizational learning, the fact that SMEs often compete in a narrow market niche (Carroll, 1984) should generally facilitate the intelligence generation function within SMEs. The fact that SMEs generally have fewer employees should favor better information dissemination, although some evidence suggests that their tendency to use multiple incompatible information systems might work against them (Levy and Powell, 1998). In the case of entrepreneurial proclivity, SMEs tend to be more innovative (Acs and Audretsch, 1987; Audretsch, 2002) and also have “a greater propensity for action” than larger firms (Chen and Hambrick, 1995). Li et al. (2008) report evidence for the synergistic relationship between entrepreneurial orientation and MO in Chinese small firms. Verhees and Meulenberg (2004) find that owners' innovativeness seems to be an essential element of entrepreneurial orientation in small firms
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which, in turn, is a major determinant of innovation and performance in these firms. In summary, the structural and cultural antecedents generally favor SMEs having a higher degree of MO than larger firms. Interestingly, some studies indicate that SMEs tend to have either the same or lower levels of MO than larger organizations (Becherer et al., 2003; Liu, 1995; Pelham, 2000; Raju et al., 2000). However, it is important to note that the level of MO in these studies has often not been examined in relation to the presence or absence of specific antecedents. This area therefore represents a major limitation in current SME research. However, this could also present a great opportunity for future research in terms of examining each antecedent with respect to each of the dimensions of MO. There is also a distinct possibility that the current measures of MO are biased toward favoring larger organizations. Indeed, the well known MO scales have all been constructed in the context of larger organizations. Another possible limitation of current MO scales is that the emphasis placed on the individual dimensions of MO might prove to be a disadvantage for SMEs in the sense that they might underestimate the degree of MO for these organizations. Perhaps SMEs view MO as an amalgam of all these dimensions and do not emphasize each of these dimensions separately. As mentioned earlier, SMEs could be different from larger organizations in terms of how they integrate various elements into unique strategic resources. Consequently, for SMEs, having a high level of MO could be as simple as having one senior individual in the organization with an overarching integrative view of all the MO dimensions who is capable of applying this integrative view in the day to day functioning of the company. In contrast, large firms might tend to emphasize each dimension of MO separately and use formal mechanisms for integrating these dimensions into a strategic focus. Measures of MO designed for larger organizations might therefore not be ideally suited for SMEs. 4.3. Impact of environmental moderators The impact of environmental moderators on the MO–performance relationship is equivocal at best. Fiegenbaum and Karnani (1991) find that output flexibility offers a competitive advantage for smaller firms especially in industries characterized by highly fluctuating demand. This output flexibility might encourage SMEs to monitor the market more carefully, thereby strengthening the MO–Performance relationship. In the context of smaller firms in U.K., Appiah-Adu (1997) argues that, when market turbulence or competitive intensity is high, being market oriented would be critical to success and this would strengthen the MO–Performance relationship. On the other hand, when technological turbulence or market growth is high, firms can rely on technology and the growth in demand for their success in lieu of being market oriented and this would weaken the MO–Performance relationship. His research finds partial support for the hypotheses with respect to market turbulence and competitive intensity. Technological turbulence did not affect the MO–performance relationship, and Appiah-Adu suggests that this might be due to the fact that small firms might not have the needed resources to invest in the latest technological advances in times of high technological turbulence. The impact of market growth was in the opposite direction to that predicted, and Appiah-Adu suggests that when market growth is high the multiple choices available to customers in the marketplace could persuade SMEs to remain market oriented in order to compete effectively. Other studies have examined the impact of environmental variables in the SME context but do not provide conclusive evidence regarding their impact (Becherer and Maurer, 1997; Low et al., 2007). In summary, many aspects of the role of environmental moderators with respect to the MO–performance relationship still remain to be explored. Attributes such as the quicker response times of SMEs (Chen and Hambrick, 1995) and/or the
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complacency of larger firms (Hannan and Freeman, 1984) could be factors in how firms respond to the environment, and clarifying these relationships in the context of SMEs could be beneficial. 5. Implications for future research While this paper has provided a basic conceptual framework that could be useful to study MO in the context of SMEs, considerable potential exists for future research to improve the framework and elaborate on the role played by the major constructs. Table 2 summarizes the key findings with respect to SMEs in relation to the construct categories that are part of the conceptual framework. Future testing of this framework with respect to individual constructs would enable us to better understand the role played by MO in SMEs and provide specific recommendations to improve SME performance. Contrasting the results for SMEs vis-à-vis larger organizations using the conceptual framework could also be useful in this regard. With respect to the specific relationships proposed in the conceptual framework, the exploration of the following types of issues would be quite useful: 1. Antecedent variables: How do structural and cultural antecedents impact the MO of SMEs? How can SMEs create an organizational structure that facilitates MO? How can SMEs improve their market focus, organizational learning, entrepreneurial proclivity, and quality context and how would these dimensions impact their MO? 2. Dimensions and measurement of MO: Are the customer orientation, competitor orientation, responsiveness, and interfunctional coordination dimensions of MO influenced selectively by different antecedent variables? Would a separate examination of each component of MO with respect to each antecedent variable be more beneficial? Would it be more appropriate to design specific measures of MO just for SMEs? 3. Mediators: How do Innovation and Quality practices relate to the performance of SMEs? Is the mediating role of Innovation and Quality practices different in SMEs and larger firms? 4. Environmental moderators: Do environmental variables moderate the relationship between MO and performance in the case of SMEs? How can SMEs adjust their business strategy in response to different environmental conditions? 5. Overall MO–Performance relationship: To what degree is SME performance impacted by MO? How is this different from larger firms? Are different dimensions of performance impacted differently by MO? Does the level of MO impact the strategy choice of an SME (Lukas, 1999)? Once differences between larger firms and SMEs have been explored in the context of the conceptual framework presented in this paper, the extension of this research to different types of SMEs could also be useful. Current thinking assumes SMEs to be relatively homogenous when, in fact, there could be considerable variation within the SME category. Research by Laforet (2008, 2009), for example, suggests that medium sized firms may behave differently from smaller firms in terms of their strategic orientation and innovativeness. Finding ways to categorize SMEs into homogeneous clusters and exploring the role of MO within these different clusters could be quite useful especially given the growth in the small business sector of the economy. References Acs Zoltan J, Audretsch David B. Innovation, market structure, and firm size. Rev Econ Stat 1987;69:567–74 [November]. Aiken Michael, Bacharach Samuel B, French J Lawrence. Organizational structure, work processes, and proposal making in administrative bureaucracies. Acad Manage J 1980;23:631–52 [December]. Akman Gulsen, Yilmaz Cengiz. Innovative capability, innovation strategy, and market orientation: an empirical analysis in Turkish software industry. Int J Innov Manag 2008;12(1):69-111.
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Aldrich Howard, Auster Ellen R. Even dwarfs started small: liabilities of age and size and their strategic implications. Res Org Beh 1986;8:165–98. Anderson Eugene, Fornell Claes, Lehmann Donald. Customer satisfaction, market share, and profitability: findings from Sweden. J Mark 1994;58(3):53–66. Appiah-Adu Kwaku. Market orientation and performance: do the findings established in large firms hold in the small business sector? J Eur Mark 1997;6(3):1-26. Appiah-Adu Kwaku, Singh Satyendra. Customer orientation and performance: a study of SMEs. Manage Decis 1998;36(6):385–94. Armario Julia M, Ruiz David M, Armario Enrique M. Market orientation and internationalization in small and medium-sized enterprises. J Small Bus Manag 2008;46(4):485–511. Atuahene-Gima Kwaku. Market orientation and innovation. J Bus Res 1996;35:93-103. Audretsch David B. The dynamic role of small firms: evidence from the U.S. Small Bus Econ 2002;18(1-3):13–40. Avlonitis George J, Salavou Helen E. Entrepreneurial orientation of SMEs, product innovativeness, and performance. J Bus Res 2007;60(5):566–75. Becherer Richard C, Maurer John G. The moderating effect of environmental variables on the entrepreneurial and marketing orientation of entrepreneur-led firms. Entrep Theory Pract 1997;22:47–58 [Fall]. Becherer Richard C, Halstead Diane, Haynes Paula J. Marketing orientation in SMEs: effects of the internal environment. New Eng J Entre 2003;6:13–22 [Spring]. Benson George P, Saraph Jayant V, Schroeder Roger G. The effects of organizational context on quality management: an empirical investigation. Manage Sci 1991;37(9): 1107–24. Carroll Glenn R. The specialist strategy. Calif Manage Rev 1984;26:126–37 [Spring]. Chen Ming-Jer, Hambrick Donald C. Speed, stealth, and selective attack: how small firms differ from large firms in competitive behavior. Acad Manage J 1995;38: 453–82 [April]. Coviello Nicole E, Brodie Roderick J, Munro Hugh J. An investigation of marketing practice by firm size. J Bus Venturing 2000;15:523–45 [September–November]. Demirbag Mehmet, Koh SC Lenny, Tatoglu Ekrem, Zaim Selim. TQM and market orientation's impact on SMEs' performance. Ind Manage Data Sys 2006;106(8): 1206–28. Deshpandé Rohit, Webster Jr Fredrick E. Organizational culture and marketing: defining the research agenda. J Mark 1989;47:101–10 [October]. Deshpandé Rohit, Farley John U, Webster Jr Frederick E. Corporate culture, customer orientation, and innovativeness in Japanese firms: a quadrad analysis. J Mark 1993;57:23–37 [January]. Ellis Paul D. Market orientation and performance: a meta-analysis and cross-national comparisons. J Manage Stud 2006;43:1089–107 [July]. Ettlie John E, Rubenstein Albert H. Firm size and product innovation. J Prod Innov Manag 1987;2:89-108. Fiegenbaum Avi, Karnani Aneel. Output flexibility—a competitive advantage for small firms. Strateg Manage J 1991;12:101–14 [February]. Ghosh BC, Liang Tan W, Meng Tan T, Chan Ben. The key success factors, distinctive capabilities, and strategic thrusts of top SMEs in Singapore. J Bus Res 2001;51(3): 209–21. Han Jin K, Kim Namwoon, Srivastava Rajendra K. Market orientation and organizational performance: is innovation a missing link? J Mark 1998;62:30–45 [October]. Hannan Michael T, Freeman John. Structural inertia and organizational change. Amer Soc Rev 1984;49:149–64 [April]. Horng Shun-Ching, Chen Arthur Cheng-Hsui. Market orientation of small and medium-sized firms in Taiwan. J Small Bus Manag 1998;36:79–85 [July]. Hult G Tomas M, Ketchen Jr David J, Slater Stanley. Market orientation and performance: an integration of disparate approaches. Strateg Manage J 2005;26: 1173–81. Hurley Robert F, Hult G Tomas M. Innovation, market orientation, and organizational learning: an integration and empirical examination. J Mark 1998;62:42–54 [July]. Jaworski Bernard J, Kohli Ajay K. Market orientation: antecedents and consequences. J Mark 1993;57:53–70 [July]. Jaworski Bernard J, Kohli Ajay K. Market Orientation: Review, Refinement, and Roadmap. J. Market Focus. Manage. 1996;1(2):119–35. Kara Ali, Spillan John E, DeShields Jr Oscar W. The effect of a market orientation on business performance: a study of small-sized service retailers using MARKOR scale. J Small Bus Manag 2005;43:105–18 [April]. Keskin Halit. Market orientation, learning orientation, and innovation capabilities in SMEs. Eur J Innov Manag 2006;9(4):396–417. Kohli Ajay K, Jaworski Bernard J. Market orientation: the construct, research propositions, and managerial implications. J Mark 1990;54:1-18 [April].
Laforet Sylvie. Size, strategic, and market orientation effects on innovation. J Bus Res 2008;61:753–64. Laforet Sylvie. Effects of size, market and strategic orientation on innovation in non-high-tech manufacturing SMEs. Eur J Mark 2009;43(1/2):188–212. Langerak Fred, Hultink Erik J, Robben Henry SJ. The mediating role of new product development in the link between market orientation and organizational performance. J Strateg Mark 2007;15:281–305. Levy Margi, Powell Philip. SME flexibility and the role of information systems. Small Bus Econ 1998;11(2):183–97. Li Yuan, Zhao Yongbin, Tan Justin, Liu Yi. Moderating effects of entrepreneurial orientation on market orientation–performance linkage: evidence from Chinese small firms. J Small Bus Manag 2008;46(1):113–33. Liu Hong. Market orientation and firm size: an empirical examination. Eur J Mark 1995;29(1):57–71. Low David R, Chapman Ross L, Sloan Terry R. Inter-relationships between innovation and market orientation in SMEs. Manage Res News 2007;30(12):878–91. Lukas Bryan A. Strategic type, market orientation, and the balance between adaptability and adaptation. J Bus Res 1999;45:147–56. Lukas Bryan A, Ferrell OC. The effect of market orientation on product innovation. J Acad Mark Sci 2000;28(2):239–47. Matsuno Ken, Mentzer John T, Özsomer Ayşegül. The effects of entrepreneurial proclivity and market orientation on business performance. J Mark 2002;66:18–32 [July]. Miller Danny. The correlates of entrepreneurship in three types of firms. Manage Sci 1983;29(7):770–91. Morris Michael H, Paul Gordon W. The relationship between entrepreneurship and marketing in established firms. J Bus Venturing 1987;2:247–60 [Summer]. Narver John C, Slater Stanley F. The effect of a market orientation on business profitability. J Mark 1990;54:20–35 [October]. Ngai Jimmy, Hung Chan, Ellis Paul. Market orientation and business performance: some evidence from Hong Kong. Int Mark Rev 1998;15(2):119–39. Olavarrieta Sergio, Friedmann Roberto. Market orientation, knowledge-related resources and firm performance. J Bus Res 2008;61(6):623–30. Pelham Alfred M. Market orientation and performance: the moderating effects of product and customer differentiation. J Bus Ind Mark 1997a;12(5):276–96. Pelham Alfred M. Mediating influences on the relationship between market orientation and profitability in small industrial firms. J Mark Theory Pract 1997b;5:55–76 [Summer]. Pelham Alfred M. Influence of environment, strategy, and market orientation on performance in small manufacturing firms. J Bus Res 1999;45:33–46 [May]. Pelham Alfred M. Market orientation and other potential influences on performance in small and medium-sized manufacturing firms. J Small Bus Manag 2000;38:48–67 [January]. Pelham Alfred M, Wilson David T. A longitudinal study of the impact of market structure, firm structure, strategy, and market orientation culture on dimensions of small-firm performance. J Acad Mark Sci 1996;24:27–43 [Winter]. Raju PS, Lonial Subhash C, Gupta Yash P, Ziegler Craig. The relationship between market orientation and performance in the hospital industry: a structural equations modeling approach. Health Care Manage Sci 2000;3(3):237–47. Ruekert Robert W. Developing a market orientation: an organizational strategy perspective. Int J Mark 1992;9(3):225–45. Rust Roland T, Zahorik Anthony J, Keiningham Timothy L. Return on quality: making service quality financially accountable. J Mark 1995;59:58–70 [April]. Salavou Helen. Profitability in market-oriented SMEs: does product innovation matter? Eur J Innov Manag 2002;5(3):164–71. Slater Stanley F, Narver John C. Does competitive environment moderate the market orientation–performance relationship? J Mark 1994;58:46–55 [January]. Slater Stanley F, Narver John C. Market orientation and the learning organization. J Mark 1995;59:63–74 [July]. Stinchcombe Arthur L. Social structure and the founding of organizations. In: March James G, editor. Handbook of Organizations. Chicago, IL: Rand McNally; 1965. p. 153–93. Verhees Frans JH, Meulenberg Matthew TG. Market orientation, innovativeness, product innovation, and performance in small firms. J Small Bus Manag 2004;42(2): 134–54. Verhoef Peter C, Leeflang Peter SH. Understanding the marketing department's influence within the firm. J Mark 2009;73:14–37 [March]. Zhou Kevin Z, Li Julie J, Zhou Nan, Su Chenting. Market orientation, job satisfaction, product quality, and firm performance. Strateg Manage J 2008;29:985-1000.
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Journal of Business Research
Market orientation in the context of SMEs: A conceptual framework☆ P.S. Raju a,⁎, Subhash C. Lonial a, Michael D. Crum b a b
Department of Marketing, College of Business, University of Louisville, Louisville, KY 40292, United States College of Business, University of Louisville, Louisville, KY 40292, United States
a r t i c l e
i n f o
Article history: Received 4 June 2008 Accepted 30 November 2010 Available online 13 January 2011 Keywords: Market orientation SME performance Small business strategy Small business marketing
a b s t r a c t A number of studies in the marketing literature have examined the construct of market orientation (MO). These studies generally show a positive link between MO and organizational performance. This paper examines MO specifically in the context of small and medium sized enterprises (SMEs). An in-depth review of the extant literature is used to develop a conceptual framework by exploring the major antecedents of MO, the MO–Performance relationship, and the key mediators and environmental moderators of this relationship. This paper also examines several studies on SMEs with respect to various aspects of this framework and offers suggestions for future research in order to understand more thoroughly how MO influences SME performance. © 2011 Elsevier Inc. All rights reserved.
1. Introduction
2. Relevance of the SME context
In a general sense, MO pertains to an organizational culture that emphasizes aspects such as customer orientation, competitor orientation, interfunctional coordination, and responsiveness as keys to organizational success (Kohli and Jaworski, 1990; Narver and Slater, 1990). Although the MO–Performance relationship has been the focus of many studies, efforts to synthesize existing findings to better understand this relationship in the context of smaller organizations have been virtually nonexistent. Past research shows some key differences between SMEs and larger organizations (Acs and Audretsch, 1987; Coviello et al., 2000) and one can expect the role of MO in SMEs to be quite distinct from that in larger organizations. The primary objective of this paper is to formulate a conceptual framework to examine MO in the context of SMEs. Such a framework could help us better comprehend the role of MO and its influence on SME performance. The MO literature is used to identify constructs of particular relevance to SMEs. Increased emphasis is given to the antecedents of MO and the mediators and moderators of the MO– performance relationship. Following the discussion of the conceptual framework, this paper examines SME research in relation to the framework and offers suggestions for future research. Prior to development of the conceptual framework, the next section examines the significance of the SME context for MO.
Firm size is an important consideration with respect to the competitive advantage of organizations. Larger firms are known to have advantages such as economies of scale, bargaining power with suppliers and distributors, brand name recognition, experience curve effects, and monopoly power to set prices above the competition (Fiegenbaum and Karnani, 1991). Larger firms also have access to key resources (Ettlie and Rubenstein, 1987). In contrast, smaller firms often face many obstacles, termed “liability of smallness” by Aldrich and Auster (1986). Additionally, smaller new ventures could have the added burden of the “liability of newness” leading to higher mortality rate among these organizations (Stinchcombe, 1965). In spite of these liabilities SMEs are often highly market oriented and known to compete effectively with larger organizations, making it valuable to gain a better understanding of MO in the SME environment. With respect to characteristics, several differences between SMEs and their larger counterparts can be noted. For example, SMEs tend to be intrinsically more innovative, especially in the early stages of the industry lifecycle (Acs and Audretsch, 1987; Audretsch, 2002). Smaller firms are also likely to have more customer contact (Coviello et al., 2000), a greater propensity for action (Chen and Hambrick, 1995) and more output flexibility than larger firms (Fiegenbaum and Karnani, 1991). Such differences could be significant for studying the role of MO in smaller firms. SMEs and larger organizations are also likely to differ with respect to resources. Firm resources include a variety of elements (assets, capabilities, information, etc.) and these resources are often the key to sustained competitive advantage and superior performance. Hult et al. (2005) use a resource-based view (RBV) to examine the interrelationship between MO and elements such as information processing
☆ The authors thank the associate editor and anonymous reviewers who provided several valuable comments on this paper. ⁎ Corresponding author. Tel.: + 1 502 852 4860. E-mail addresses: [email protected] (P.S. Raju), [email protected] (S.C. Lonial), [email protected] (M.D. Crum). 0148-2963/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2010.12.002
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and organizational responsiveness. Olavarrieta and Friedmann (2008) consider knowledge-related resources to provide a key link between MO and firm performance. It is possible that SMEs may be quite distinct from larger organizations in terms of how they integrate various elements such as information processing, knowledge, and responsiveness into a unique strategic resource. While they may not have as many resources as larger firms, this ability to develop unique strategic resources could be a key distinguishing feature of SMEs. The synergistic effect of MO in conjunction with these elements could therefore be instrumental to understanding the role of MO in SMEs.
3. The conceptual framework Since the conceptual framework discusses MO in the context of SMEs it might be useful to first briefly review the definition of SME and the nature of MO. In the United States, the Small Business Administration (SBA) Table of Small Business Size Standards uses a varying definition of small business based on the NAICS code of the firm. For example, while a masonry contracting firm is considered a small business if its annual revenue is $13 million or less, a soft drink manufacturer is not considered a small business unless it has 500 or fewer employees, regardless of revenue. On the other hand, in Europe, the definition of an SME appears to be more consistent across industries with the upper limit for an SME being set at 250 employees and revenues no greater than €50,000,000 or a total balance sheet value of €43,000,000 or less. More details regarding SME definition are available in websites such as www.sba.gov/size and http://ec. europa.eu/enterprise/sme. For purposes of this paper an SME can be generally considered as a firm with fewer than 500 employees. Revenue considerations are not directly relevant to the conceptual framework in the paper although the guidelines mentioned above could be useful for conducting future empirical work based on the proposed framework. Traditionally, the marketing literature has considered MO to be a key part of organizational culture. Narver and Slater (1990) view MO as being made up of three components: customer orientation, competitor orientation, and interfunctional coordination. Kohli and Jaworski (1990) identify intelligence generation, intelligence dissemination, and organizationwide responsiveness as the dimensions of MO. Based on these earlier works, this paper supports the view of MO being comprised of four dimensions—the three dimensions suggested by Narver and Slater (1990) supplemented by the responsiveness dimension of Kohli and Jaworski (1990). Both approaches have some
Organizational Structure - Formalization - Centralization - Departmentalization
Organizational Culture - Organizational Learning - Market Focus - Entrepreneurial Proclivity - Quality Context
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advantages, and other researchers have used such an integrative approach before (Hult et al., 2005). The conceptual framework proposed in this paper is shown in Fig. 1. This framework identifies key antecedents and consequences of MO and also the major environmental moderators of the MO–Performance relationship in the SME context. While essentially viewing MO as being part of the organizational culture, the framework also acknowledges that MO leads to specific organizational behaviors which could be instrumental in the link between MO and performance. These mediators could be significant for understanding SME performance. This framework is developed from a comprehensive literature review and the primary intent is to identify the constructs that could be most beneficial to examining the differences between SMEs and larger organizations. While the constructs in the proposed framework might not in themselves be unique it is felt that the applicability of many of the constructs and the strength and/or nature of the relationships among the constructs might differ significantly between SMEs and larger organizations. These differences are brought out clearly in the next section which applies the conceptual framework to SMEs and examines key differences between SMEs and larger organizations. The rest of this section outlines the conceptual framework and the rationale for the inclusion of specific constructs within the framework.
3.1. Antecedents of MO The major antecedents of MO can be divided into two categories— Structural variables, which include the objective aspects of the organization (Aiken et al., 1980), and Cultural variables, which reflect the norms and shared values of organization members (Deshpandé and Webster, 1989).
3.1.1. Structural variables Jaworski and Kohli (1993) identify three structural antecedents of MO. These include formalization (existence of formal rules and regulations), centralization (extent to which authority is limited to the top executives and not shared or delegated), and departmentalization (number of departments into which activities are segregated or compartmentalized). Greater levels of these structural levels are generally seen to impede MO within organizations. Although past results have been mixed (Hurley and Hult, 1998; Jaworski and Kohli, 1993; Matsuno et al., 2002) structural variables provide a fairly
Market Orientation -
Customer Orientation
-
Competitor Orientation
-
Responsiveness
-
Interfunctional Coordination
Env. Moderators - Market Turbulence - Technology Turbulence - Competitive Intensity - Market Growth
Mediators - Innovation - Quality Practices
Performance - Product Dev. - Market Dev. - Customer Loyalty & Ret - Financial Performance
Fig. 1. Conceptual framework to examine differences in MO between SMEs and larger firms.
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obvious point of difference between SMEs and larger organizations and have been included in Fig. 1. 3.1.2. Cultural variables One major cultural variable that appears to impact on MO is how organizations deal with information. Kohli and Jaworski (1990) consider the effective generation and dissemination of market information across departments to be so important for performance that they consider these to be dimensions of MO itself. Slater and Narver (1995), on the other hand, prefer to include information processing and sharing of information among departments within the broader context of organizational learning. Terms like “participative decision making” (Hurley and Hult, 1998) and “interdepartmental dynamics” (Jaworski and Kohli, 1993) have also been used to describe this aspect of organizational culture. Olavarrieta and Friedmann (2008) characterize organizational learning as an evolutionary approach to strategy where organizations don't just depend on existing resources, as in the RBV, but constantly evolve through learning, discovery, and adaptation. A firm's capacity to gather and interpret knowledge from the market, or “market-sensing capability,” is seen to evolve from MO. A second important aspect of organizational culture is market focus. Jaworski and Kohli (1993) consider this to be a function of the emphasis top management places on MO and of the degree to which managers are rewarded on the basis of market-based factors. Hurley and Hult (1998) claim that a market focus helps stimulate new ideas and improve responsiveness to markets. Verhoef and Leeflang (2009) suggest that MO increases with customer connectedness which, in turn, would be expected to strengthen with market focus. In general, the evidence suggests that market focus should impact MO positively. A third major cultural antecedent of MO is entrepreneurial proclivity (Matsuno et al., 2002), which is an entrepreneurial predisposition characterized by the dimensions of innovativeness, risk taking, and proactiveness (Miller, 1983). Matsuno et al. (2002) suggest that these three dimensions “collectively facilitate the organization's willingness and ability to engage in market learning activities, recognize the need to reduce undue uncertainty, and take a more calculated risk, thus promoting market orientation” (p. 21). Evidence also suggests that quality context could be a cultural antecedent of MO. In the management literature, quality context refers to an organizational culture conducive to producing a quality product or service (Benson et al., 1991). Top management knowledge of quality and corporate support for quality are considered to be two of the major dimensions of quality context. In summary, the literature suggests four major aspects of organizational culture as good candidates for being antecedents of MO—organizational learning, market focus, entrepreneurial proclivity, and quality context. All four cultural dimensions also appear to be quite relevant to SMEs and could possibly offer SMEs distinct advantages over larger organizations. 3.2. Mediators of the MO–performance relationship In order to explain how MO culture leads to organizational performance Zhou et al. (2008) make an important distinction between MO culture and MO behaviors. They view MO behaviors as mediators providing a necessary link between MO culture and organizational performance. These behaviors or practices help to translate aspects of MO culture into processes and practices that facilitate better organizational performance. The conceptual framework in Fig. 1 identifies two such potential mediators—Innovation and Quality practices. 3.2.1. Mediating role of innovation It is well known that innovation plays a vital role in the success of organizations (Deshpandé et al., 1993; Jaworski and Kohli, 1993,
1996; Slater and Narver, 1995). Considerable research also supports the meditational role of innovation in determining organizational performance (Atuahene-Gima, 1996; Han et al., 1998; Langerak et al., 2007; Lukas and Ferrell, 2000). Intuitively, one would expect innovation related processes and behaviors resulting from an MO based culture to provide a significant competitive edge to organizations in terms of performance dimensions such as product development and market development.
3.2.2. Mediating role of quality practices Zhou et al. (2008) consider product quality to be a crucial aspect of MO behavior since it provides a major competitive advantage to an organization. The marketing literature also suggests that product and service quality are instrumental in generating customer satisfaction and retention which are key dimensions of organizational performance and possible precursors to financial performance (Anderson et al., 1994; Rust et al., 1995). Fig. 1 recognizes the mediational role of quality but uses the term “Quality Practices” instead of Product/ Service Quality since the term is generally more inclusive and can also incorporate quality related processes such as Total Quality Management (TQM). It should be noted that the two mediators proposed previously, Innovation and Quality practices, are quite distinct from aspects of organizational culture such as innovativeness (part of entrepreneurial proclivity) and quality context. In keeping with Zhou et al. (2008), these mediators can be viewed as behavioral counterparts of corresponding organizational culture elements.
3.3. Environmental moderators of the MO–Performance relationship The literature suggests four major environmental moderators of the MO–Performance relationship. These are market turbulence (rate of change in the composition of customers and their preferences), technological change, competitive intensity (how viciously the firms in the industry compete with each other), and market growth. While several researchers have examined these moderators, findings have often been mixed (Jaworski and Kohli, 1993; Olavarrieta and Friedmann, 2008; Slater and Narver, 1994). Generally one would expect that if a firm is able to adapt more easily to customer preferences, leverage new technologies effectively to meet customer needs, monitor and meet competitive threats quickly, and find means to remain profitable even under slow market growth conditions then it would be successful in the long term. Consequently, firms that are able to maintain a high level of MO even under adverse conditions should generally meet with higher levels of success. A high MO–Performance relationship is therefore likely to be facilitated by higher levels of market and technological turbulence, higher competitive intensity, and lower market growth since firms with higher MO are more likely to be rewarded in such circumstances. Despite the limited number of studies these moderators have been incorporated in Fig. 1 due to their intuitive appeal and high potential significance for SMEs. SMEs may have some unique advantages in facing environmental threats in terms of their closer contact with customers, nimbleness and innovativeness, focus on niche markets, output flexibility, etc. in spite of their limited resources and market access as compared to larger firms.
4. Application of conceptual model to SMEs This section identifies significant research studies dealing with MO in the SME context and provides the reader with a general idea of how these findings fit into the conceptual framework.
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Table 1 Selected studies on the MO–Performance relationship in SMEs. Study
Sample
MO Scale(s)
Performance measures
MO–Performance relationship
Appiah-Adu (1997)
110 manufacturing firms in the U.K. with between 10 and 50 employees 101 manufacturing and service firms in the U.K. with between 50 and 200 employees 147 entrepreneur led firms
Narver and Slater (1990), Jaworski and Kohli (1993) Deshpandé et al. (1993) customer orientation scale
Sales growth, new product success rate, return on investment (Subjective) Sales growth, new product success rate, return on investment (Subjective)
Positive
Morris and Paul (1987)
Change in profits compared to three years ago (Subjective) Change in sales and profits over past 3 years (Subjective)
Appiah-Adu and Singh (1998) Becherer and Maurer (1997) Becherer et al. (2003) Demirbag et al. (2006) Horng and Chen (1998) Kara et al. (2005)
Keskin (2006) Ngai et al. (1998)
Pelham and Wilson (1996) Pelham (1997a)
Pelham (1997b)
Pelham (1999)
Pelham (2000)
Salavou (2002) Armario et al. (2008)
215 small businesses with median sales of $3.5 M and a median of 22 employees 141 Turkish textile firms with between 10 and 100 employees. 76 firm-members in the National Association of Small and Medium Enterprises of Taiwan 153 small and medium size businesses in New York, Maryland, and Pennsylvania 157 Turkish firms with less than 250 employees 73 textile and garment companies with 90% having less than 500 employees 68 Michigan firms with an average of 23 employees. 160 industrial manufacturing firms with sales between $20 M and $100 M 160 industrial manufacturing firms with sales between $20 M and $100 M 229 industrial manufacturing firms with sales between $20 M and $100 M 235 industrial manufacturing firms with sales between $12 M and $200 M 61 Greek food and beverage firms with fewer than 250 employees 112 agricultural, consumer goods, and industrial goods companies with more than 20 employees and annual sales greater than 1.5 m euros.
Morris and Paul (1987)
Jaworski and Kohli (1993)
Positive relationship between customer orientation and Performance No significant relationship Positive
Financial, nonfinancial, efficiency (Subjective) Business performance (Subjective)
No direct relationship, indirect positive relationship Positive
Jaworski and Kohli (1993)
Sales, revenue growth, market share, return on investment (Subjective)
Positive
Ruekert (1992)
Overall success, market share, growth rate, profitability (Subjective) Growth/share, profitability (Subjective)
No direct relationship, indirect positive relationship Positive except for last year's profitability Positive except for growth/share
Narver and Slater (1990), Jaworski and Kohli (1993)
New product success, growth/share, profitability, relative product quality (Subjective) Firm effectiveness, market position/share, profitability/cash flow (Subjective)
Narver and Slater (1990), Jaworski and Kohli (1993)
Firm effectiveness, growth/share, profitability (Subjective)
Narver and Slater (1990), Jaworski and Kohli (1993) Narver and Slater (1990), Jaworski and Kohli (1993)
Marketing sales effectiveness, growth/share, profitability (Subjective); index of sales growth (Objective) Growth/share, profitability, marketing/sales effectiveness (Subjective)
Ruekert (1992)
Average ROA from 1995–1997 (Objective)
Positive
Jaworski and Kohli (1993)
Scale comprised of sales, profits, sales growth, and profits growth & the rate of success of new products in foreign markets. (subjective)
Positive relationship between MO and export performance
Narver and Slater (1990), Jaworski and Kohli (1993)
Narver and Slater (1990)
Narver and Slater (1990), Jaworski and Kohli (1993)
4.1. The MO–Performance relationship and mediators in SMEs Table 1 provides a summary of sixteen recent studies that have examined the MO–Performance relationship in the SME context. Thirteen of the sixteen studies support a direct and positive relationship between MO (or its components) and performance. Generally, the MO–Performance correlations in these studies range from .20 to .44 (Pelham and Wilson, 1996; Pelham, 1999). This is consistent with the correlation of 0.26 found by Ellis (2006) in the general MO literature based on a meta-analysis of 56 studies. Only three studies, those by Becherer and Maurer (1997), Demirbag et al. (2006) and Keskin (2006) did not find a direct positive relationship between MO and firm performance. However, two of these studies (Demirbag et al., 2006; Keskin, 2006), in fact, did find evidence for an indirect positive relationship between MO and performance when the analysis included mediating variables. Hence, in effect, fifteen of the sixteen studies support a positive relationship (direct or indirect) between MO and performance. Interestingly, the positive relationship between MO and performance among SMEs appears to hold across a wide variety of contexts and measurement methods for both MO and performance. Table 1 also shows the MO scales and the performance measures from these
Positive
Direct positive relationship for firm effectiveness; indirect positive relationship for growth/share Positive
Positive
studies. Firm size across studies ranges from 10 to 250 employees and the studies feature a variety of industries with many studies spanning multiple industries. This lends considerable credence to the overall strength and robustness of the MO–Performance relationship. There is also some evidence in the SME research for the mediating role of both Innovation and Quality practices in the MO–Performance relationship. The ability to introduce unique products and the conjunction of MO and product innovation have been found to contribute to superior performance in SMEs (Avlonitis and Salavou, 2007; Salavou, 2002). Akman and Yilmaz (2008) find that the customer orientation component of MO impacts the innovative capability of SMEs. Low et al. (2007) report a positive correlation between MO and innovation, and between innovation and firm performance. Laforet's (2008, 2009) findings support the broad hypothesis that size, strategic orientation, and market orientation associate with innovation in SMEs. Verhees and Meulenberg (2004) find support for product innovation as a mediator between MO and company performance for smaller firms. With respect to quality practices, Demirbag et al. (2006) find that TQM implementation mediates the MO–Performance relationship in SMEs. Reasons exist to believe that the MO–Performance relationship might be generally stronger in SMEs as compared to larger firms.
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Table 2 Differences between SMEs and larger organizations with respect to MO in conceptual framework. Construct category in framework
Findings with respect to SMEs
Key references to support findings
Organizational structure antecedents
SMEs are more likely to have simpler organizational structures. SMEs and less likely to use formal planning procedures. SMEs will tend to have more personal contact with their customers and are more likely to emphasize customer-based performance measures. Ability to focus on the market is a key success factor for SMEs. SMEs tend to compete in a narrow market niche, which could facilitate intelligence generation. SMEs smaller size should facilitate intelligence dissemination. Incompatible information systems within SMEs could impede information dissemination. SMEs tend to be more innovative and also have a greater “propensity for action” than larger firms. Entrepreneurial orientation of SMEs has a synergistic relationship with MO. Innovativeness of owner is a key element of entrepreneurial orientation for smaller firms and positively affects MO. SMEs seem to have the same or a lower level of MO than larger organizations. Flexibility, adaptability, and closeness to the customer are attributes that might facilitate a higher degree of MO in SMEs. Ability to introduce new products is a key factor in the success of SMEs. Conjunction between MO and product innovation improves performance of SMEs MO impacts the innovative capability of SMEs. Innovation acts as a mediator between MO and SME performance.
Intuitive reasoning Coviello et al. (2000) Coviello et al. (2000)
Organizational culture antecedents
Market Orientation
Mediators
Environmental moderators
MO–Performance relationship
Size, strategic orientation, and market orientation of SMEs broadly associate with innovation in SMEs, although there are differences between small and medium firms. TQM implementation (which is related to Quality Practices) mediates the MO–Performance relationship in SMEs. SMEs have greater output flexibility which should help in times of market turbulence. Findings with respect to the moderating effects of environmental variables have been inconclusive although they do appear to impact the MO–Performance relationship in SMEs. Quicker response times of SMEs and/or the complacency of larger firms could be factors determining the moderating effects of environmental variables. Many studies have examined the MO–Performance relationship in SMEs. Most studies have found a direct and positive relationship between MO and Performance. The MO–Performance correlation in these studies has ranged between 0.20 and 0.44. Flexibility, adaptability, and closeness to the customer of SMEs could provide the basis for a stronger MO
Pelham (1999) argues that smaller firms can “leverage their potential advantages of flexibility, adaptability, and closeness to their customer base into superior, individualized service” (p.34). Since SMEs typically have fewer strengths, one possibility is that they might be better at identifying and leveraging those strengths as compared to larger firms. In spite of these intuitive arguments, few studies have directly compared the MO–Performance relationship in larger organizations and SMEs. In one study examining the MO–Performance relationship in the hospital industry, Raju et al. (2000) find the relationship to be significantly stronger for smaller hospitals than for larger hospitals. It would be interesting to find out if this relationship holds in other industries. 4.2. Antecedents of MO With respect to structural variables, SMEs by nature tend to have simpler organizational structures. Coviello et al. (2000) also find that SMEs are less likely to use formal procedures for planning purposes. With respect to organizational culture, SMEs typically tend to have more personal contact with their customers and also tend to
Ghosh et al. (2001) Carroll (1984) Intuitive reasoning Levy and Powell (1998) Chen and Hambrick (1995) Li et al. (2008) Verhees and Meulenberg (2004) Liu (1995), Becherer et al. (2003), Pelham (2000), Raju et al. (2000) Pelham (1999) Avlonitis and Salavou (2007) Salavou (2002) Akman and Yilmaz (2008) Low et al. (2007), Verhees and Meulenberg (2004) Laforet (2008, 2009)
Demirbag et al. (2006) Fiegenbaum and Karnani (1991) Appiah-Adu (1997), Becherer and Maurer (1997), Low et al. (2007) Chen and Hambrick (1995), Hannan and Freeman (1984) See Table 1 for major references.
Pelham and Wilson (1996), Pelham (1999) Pelham (1999)
emphasize customer-based performance measures (Coviello et al., 2000). If this is the case, employees should have an economic incentive to align their actions with customer needs and this should improve the market focus aspect of SMEs. The ability to identify and focus on the market is seen to be a key success factor contributing to superior performance among SMEs (Ghosh et al., 2001). In relation to organizational learning, the fact that SMEs often compete in a narrow market niche (Carroll, 1984) should generally facilitate the intelligence generation function within SMEs. The fact that SMEs generally have fewer employees should favor better information dissemination, although some evidence suggests that their tendency to use multiple incompatible information systems might work against them (Levy and Powell, 1998). In the case of entrepreneurial proclivity, SMEs tend to be more innovative (Acs and Audretsch, 1987; Audretsch, 2002) and also have “a greater propensity for action” than larger firms (Chen and Hambrick, 1995). Li et al. (2008) report evidence for the synergistic relationship between entrepreneurial orientation and MO in Chinese small firms. Verhees and Meulenberg (2004) find that owners' innovativeness seems to be an essential element of entrepreneurial orientation in small firms
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which, in turn, is a major determinant of innovation and performance in these firms. In summary, the structural and cultural antecedents generally favor SMEs having a higher degree of MO than larger firms. Interestingly, some studies indicate that SMEs tend to have either the same or lower levels of MO than larger organizations (Becherer et al., 2003; Liu, 1995; Pelham, 2000; Raju et al., 2000). However, it is important to note that the level of MO in these studies has often not been examined in relation to the presence or absence of specific antecedents. This area therefore represents a major limitation in current SME research. However, this could also present a great opportunity for future research in terms of examining each antecedent with respect to each of the dimensions of MO. There is also a distinct possibility that the current measures of MO are biased toward favoring larger organizations. Indeed, the well known MO scales have all been constructed in the context of larger organizations. Another possible limitation of current MO scales is that the emphasis placed on the individual dimensions of MO might prove to be a disadvantage for SMEs in the sense that they might underestimate the degree of MO for these organizations. Perhaps SMEs view MO as an amalgam of all these dimensions and do not emphasize each of these dimensions separately. As mentioned earlier, SMEs could be different from larger organizations in terms of how they integrate various elements into unique strategic resources. Consequently, for SMEs, having a high level of MO could be as simple as having one senior individual in the organization with an overarching integrative view of all the MO dimensions who is capable of applying this integrative view in the day to day functioning of the company. In contrast, large firms might tend to emphasize each dimension of MO separately and use formal mechanisms for integrating these dimensions into a strategic focus. Measures of MO designed for larger organizations might therefore not be ideally suited for SMEs. 4.3. Impact of environmental moderators The impact of environmental moderators on the MO–performance relationship is equivocal at best. Fiegenbaum and Karnani (1991) find that output flexibility offers a competitive advantage for smaller firms especially in industries characterized by highly fluctuating demand. This output flexibility might encourage SMEs to monitor the market more carefully, thereby strengthening the MO–Performance relationship. In the context of smaller firms in U.K., Appiah-Adu (1997) argues that, when market turbulence or competitive intensity is high, being market oriented would be critical to success and this would strengthen the MO–Performance relationship. On the other hand, when technological turbulence or market growth is high, firms can rely on technology and the growth in demand for their success in lieu of being market oriented and this would weaken the MO–Performance relationship. His research finds partial support for the hypotheses with respect to market turbulence and competitive intensity. Technological turbulence did not affect the MO–performance relationship, and Appiah-Adu suggests that this might be due to the fact that small firms might not have the needed resources to invest in the latest technological advances in times of high technological turbulence. The impact of market growth was in the opposite direction to that predicted, and Appiah-Adu suggests that when market growth is high the multiple choices available to customers in the marketplace could persuade SMEs to remain market oriented in order to compete effectively. Other studies have examined the impact of environmental variables in the SME context but do not provide conclusive evidence regarding their impact (Becherer and Maurer, 1997; Low et al., 2007). In summary, many aspects of the role of environmental moderators with respect to the MO–performance relationship still remain to be explored. Attributes such as the quicker response times of SMEs (Chen and Hambrick, 1995) and/or the
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complacency of larger firms (Hannan and Freeman, 1984) could be factors in how firms respond to the environment, and clarifying these relationships in the context of SMEs could be beneficial. 5. Implications for future research While this paper has provided a basic conceptual framework that could be useful to study MO in the context of SMEs, considerable potential exists for future research to improve the framework and elaborate on the role played by the major constructs. Table 2 summarizes the key findings with respect to SMEs in relation to the construct categories that are part of the conceptual framework. Future testing of this framework with respect to individual constructs would enable us to better understand the role played by MO in SMEs and provide specific recommendations to improve SME performance. Contrasting the results for SMEs vis-à-vis larger organizations using the conceptual framework could also be useful in this regard. With respect to the specific relationships proposed in the conceptual framework, the exploration of the following types of issues would be quite useful: 1. Antecedent variables: How do structural and cultural antecedents impact the MO of SMEs? How can SMEs create an organizational structure that facilitates MO? How can SMEs improve their market focus, organizational learning, entrepreneurial proclivity, and quality context and how would these dimensions impact their MO? 2. Dimensions and measurement of MO: Are the customer orientation, competitor orientation, responsiveness, and interfunctional coordination dimensions of MO influenced selectively by different antecedent variables? Would a separate examination of each component of MO with respect to each antecedent variable be more beneficial? Would it be more appropriate to design specific measures of MO just for SMEs? 3. Mediators: How do Innovation and Quality practices relate to the performance of SMEs? Is the mediating role of Innovation and Quality practices different in SMEs and larger firms? 4. Environmental moderators: Do environmental variables moderate the relationship between MO and performance in the case of SMEs? How can SMEs adjust their business strategy in response to different environmental conditions? 5. Overall MO–Performance relationship: To what degree is SME performance impacted by MO? How is this different from larger firms? Are different dimensions of performance impacted differently by MO? Does the level of MO impact the strategy choice of an SME (Lukas, 1999)? Once differences between larger firms and SMEs have been explored in the context of the conceptual framework presented in this paper, the extension of this research to different types of SMEs could also be useful. Current thinking assumes SMEs to be relatively homogenous when, in fact, there could be considerable variation within the SME category. Research by Laforet (2008, 2009), for example, suggests that medium sized firms may behave differently from smaller firms in terms of their strategic orientation and innovativeness. Finding ways to categorize SMEs into homogeneous clusters and exploring the role of MO within these different clusters could be quite useful especially given the growth in the small business sector of the economy. References Acs Zoltan J, Audretsch David B. Innovation, market structure, and firm size. Rev Econ Stat 1987;69:567–74 [November]. Aiken Michael, Bacharach Samuel B, French J Lawrence. Organizational structure, work processes, and proposal making in administrative bureaucracies. Acad Manage J 1980;23:631–52 [December]. Akman Gulsen, Yilmaz Cengiz. Innovative capability, innovation strategy, and market orientation: an empirical analysis in Turkish software industry. Int J Innov Manag 2008;12(1):69-111.
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