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Market Orientation, Product Innovation and Market Performance: the Case of Small Independent Companies Frans Verhees1 2 Abstract In this study a measure of market orientation that is applicable to small independent companies is proposed and applied to study the impact of market orientation on innovations in small independent companies. Our research shows that our measure of market orientation is applicable to small independent companies and that an attitudinal component and a behavioural component of market orientation can be distinguished. Path analyses show that the behavioural component of market orientation has a positive impact on product innovation and market performance. The attitudinal component of market orientation only has an impact on product innovation and market performance through its impact on the behavioural component of market orientation. In our sample, product innovation is only partly responsible for the positive effect of market orientated behaviour on market performance. Market performance is operationalised as the average market prices for the product. 1.

Introduction

Both market orientation and innovation have been identified as crucial success factors in companies (Day, 1994; Hunt and Morgan, 1995; 1996). A positive impact of market orientation and innovation on company performance has been found in many industries and under a wide range of market characteristics. Research on market orientation is focused in particular on large companies. However, market orientation is expected to be important for small companies as well as large companies. Research in this field for small firms is relevant because small companies are widely represented in important industries like retailing, services and agriculture. Our study focuses on market orientation in small independent companies, which are defined as firms, such as family farms, which can be controlled by the entrepreneur through direct supervision. Research has shown the importance of market orientation for the success of product innovations (Cooper, 1975; 1979; Slater and Narver, 1994; Pelham and Wilson, 1996; Atuahene-Gima, 1996; Gatignon and Xuereb, 1997). A market orientation may stimulate innovations and increase the performance of innovations. In this paper we focus on innovations in small independent companies that do not have the capacity for R&D as opposed to innovations in medium sized and large companies. We therefore will review briefly the literature on market orientation and propose a measure of market orientation that is applicable to small independent companies. A 1

address of the author: Department of Marketing & Consumer Research, Hollandseweg 1, 6706 KN, Wageningen, The Netherlands. Telephone: +31 (0)317 485041. Telefax: +31 (0)317 484361 E-mail: [email protected] 2

The author gratefully acknowledges the support of E. van der Ham from the Foundation for Horticultural Market Research, M. Hack of the Agricultural Economics Research Institute, and Peter Ruygrok of the product board for horticulture for their help in providing the data. The author especially acknowledges the helpful comments of professor Meulenberg and two annonymous reviewers of TSL. 1

conceptual framework for analysing the impact of market orientation on innovation in small independent companies is developed and applied to specialised horticultural firms. The main contributions of this study are twofold: First, the theory on market orientation is extended to small independent companies. Secondly, the impact of market orientation on innovations in small independent companies is investigated. Our article is structured as follows. In the next section the mainstream research on market orientation is reviewed and a measure of market orientation in small independent companies is proposed. Section 3 presents the conceptual framework and the model for analysing the relationship between market orientation and product innovation in small independent firms. Some hypotheses are presented. In sections 4 - 7 our model and related hypotheses are tested for specialised growers of roses. Section 8 gives the managerial implications of these results and finally, in section 9, we present our suggestions for further research. 2.

Market orientation, a review and proposal for small independent companies

An application of the market orientation concept to small independent companies should profit from the body of knowledge which has been built up on the concept and use of this concept in general. The three measures of market orientation that we discuss ( Narver and Slater, 1990; Jaworski and Kohli, 1993; Ruekert, 1992) all have in common that they try to measure the “core” market orientation concept. However, we discuss the differences that exist in how they conceptualise and measure the “core” market orientation concept. For that reason it is important to review definitions of market orientation, and elements included in measures of market orientation. After having done this we are in a position to propose a measure of market orientation that is applicable to small independent companies. 2.1

Definitions of market orientation

Two seminal articles, those of Narver and Slater (1990) respectively of Kohli and Jaworski (1990) have coined the concept of market orientation in the beginning of the nineties. According to Narver and Slater (1990), market orientation consists of three behavioural components, customer orientation, competitor orientation, and interfunctional coordination, and two decision criteria, long-term focus and profitability. They define customer orientation as ‘the sufficient understanding of one’s target buyers to be able to create superior value for them continuously’. Competitor orientation means that ‘the seller understands the short-term strengths and weaknesses and long-term capabilities and strategies of both the key current and the key potential competitors’. The third behavioural component, interfunctional co-ordination, means ‘the co-ordinated utilisation of company resources in creating superior value for target customers’. Kohli and Jaworski (1990) acknowledge the importance of customer focus but in their definition market intelligence is at the centre of market orientation: ‘market orientation is the organisation wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organisation wide responsiveness to it.’ They introduce market intelligence instead of customer focus since in their view market intelligence is much broader than customer focus. ‘It includes consideration of exogenous market factors that affect customer needs and preferences and current as well as future needs of customers’. In another study on market orientation, Ruekert (1992) refers to Narver and Slater (1990) and Kohli and Jaworski (1990) and borrows aspects from both definitions but focuses on strategy as a tool to implement

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market orientation in the definition: ‘market orientation in a business unit is the degree to which the business unit: (1) obtains and uses information from customers; (2) develops a strategy which will meet customer needs; and (3) implements that strategy by being responsive to customer needs and wants’. A company’s strategy is a particularly interesting perspective to explore the intentions of management before they are realised. Although many other studies with measures of market orientation have been reported (Deng en Dart, 1994; Pelham and Wilson, 1996; Atuahene-Gima, 1996) most authors either adapt the reviewed measures of market orientation or use them as a starting point. Therefore, we will look closer at the elements of the ‘classic’ measures of market orientation (Narver and Slater, 1990; Jaworski and Kohli, 1993;1993; and Ruekert, 1992) to find out whether these measures cover the same construct. Measures of market orientation have been discussed and compared for several purposes. Tuominen and Moller (1996) identify and compare schools of thought in market orientation research. Jaworski and Kohli (1996) review the state-of-the-art and offer a roadmap for future research in market orientation research. Okzkowski and Farrel (1998) apply a technique for discriminating between similar measures of constructs on Kohli, Jaworski and Kumar’s (1993) and Narver and Slater’s (1990) measure of market orientation. Finally, we make a reference to some influential authors on market orientation theory for those who want to learn more about how market orientation effects a business (Webster, 1988; 1992; Day, 1994a; 1994b; Day and Wensley, 1983; Kotler 1991). 2.2

Elements of market orientation: a classification

Before we use items from different measures of market orientation to develop a new measure of market orientation we have to be sure that they cover the same construct. The objective is to select relevant items from the ‘classic’ measures of market orientation for a measure of market orientation that is applicable in small independent companies. To this purpose we will classify the items in the reviewed ‘classic’ measures of market orientation. First, we will review the elements of market orientation identified in the ‘classic’ measures of market orientation and propose a classification scheme. Secondly, we assign the items in the ‘classic’ measures of market orientation to the identified classes. The elements of market orientation are clear in Narver and Slater’s (1990) definition: customer orientation, competitor orientation, interfunctional co-ordination, long-term focus and profitability. They consider the first three elements of equal conceptual importance. In 1995 Narver and Slater incorporate their two decision criteria -long term focus and profitability- in their behavior elements by suggesting that “the three behavioral elements of market orientation -customer orientation, competitor orientation, and cross-functional coordination- are long term in vision and profit driven“. Kohli and Jaworski (1990) identify three elements in market orientation, in line with their definition: intelligence generation, intelligence dissemination and responsiveness. They consider profitability a consequence of market orientation. Ruekert (1992) identifies three elements of market orientation in his measure of market orientation: use of information, development of a market oriented strategy, and implementation of a market oriented strategy. We suggest that elements in the ‘classic’ measures of market orientation either refer to an object or a process important for market orientation. In the ‘classic’ measures of market orientation (Narver and Slater, 1990; Jaworski and Kohli, 1993; Ruekert, 1992) we identify two objects important for market orientation: 1. the customer (Explicit in Narver and Slater, 1990, implicit in other ‘classic’ measures) and

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2. the competitor (Explicit in Narver and Slater, 1990, implicit in other ‘classic’ measures) and three groups of related processes important for market orientation: 1. processes that increase the amount of market knowledge that is available in a company (i.e. intelligence generation (Jaworski and Kohli, 1993) and use of information (Ruekert, 1992)); 2. processes that co-ordinate efforts in a company (i.e. intelligence dissemination (Jaworski and Kohli, 1993), interfunctional co-ordination (Narver and Slater, 1990), and strategy development (Ruekert, 1992)) and 3. processes that have an impact on the market (i.e. implementation of a market oriented strategy (Ruekert, 1992) and responsiveness (Jaworski and Kohli, 1993)). We can now assign the items from the ‘classic’ measures of market orientation to the objects and processes important for market orientation characterised by these items. The result is shown in Table 1. As an example: Narver and Slater (1990) ask their respondents to rate items on a 7-point Likert scale with a 1 indicating that the business unit does not engage in the practice at all and a 7 indicating that it engages in it to a very great extent. One item from the co-ordination element is phrased: “All of our managers understand how everyone in the company can contribute to creating customer value”. In our opinion, besides the co-ordination element, this item also reflects the customer element. Consequently, this item is counted in the cells that are underlined in table 1. From Table 1 we can learn that besides customer orientation, competitor orientation, and interfunctional co-ordination, items in the measure for market orientation from Narver and Slater (1990) also have processes that increase knowledge and processes that have an impact on the market as processes of interest. The latter processes are central elements in Jaworski and Kohli’s (1993) measure. Items in Kohli and Jaworki’s measure, on the other hand, have items that have the customer or the competitor as the object of interest where the latter objects of interest are central elements in Narver and Slater’s (1990) measure. Similar arguments hold for Ruekert’s measure. We conclude from this analysis that although the ‘classic’ measures of market orientation focus on different elements, they cover the same construct. Other elements of market orientation may be important to adequately measure a company’s market orientation. Van Bruggen and Smidts (1995) suggest that a distinction between various groups of customers should be made. With respect to the importance of specific customer groups it seems relevant to consider the degree of transformation in the marketing channel by channel members between the company and the customer group. The further a company’s product is transformed or augmented with services by channel members between the company and the customer group the less important this customer group is for a company’s market orientation. In other words, a customer group in a company’s marketing channel is only relevant for a company’s market orientation if the company is able to respond to this customer group. Also, the more a customer group in a company’s marketing channel transforms or augments the product, the more important this customer group becomes for the company. Consider, for example, the difference between a grower of fresh fruit and a grower of canned fruit. The first grower is able to respond to the needs and wants of wholesalers (logistics), retailers (visible quality) and the final customer (taste). For the latter grower, the processor is the most important customer group for his market orientation because he is less able to respond to wholesalers, retailers and the final customer. The inclusion of an extra

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customer group in a measure of market orientation should be weighted against the extra burden on the respondent (Bruggen and Smidts, 1995). Table 1: Number of items in a measure of market orientation that refer to an object (e.g. customer or competitor) and a process (e.g. intelligence generation, co-ordination or responsiveness) related to market orientation Measure Elements no. of Object of Process of interest that items interest Cust Comp Increase Co-ordiImpact on omer etitor knowledge Nate effort market Narver Customer 6 6 1 2 2 1 and Slater orientation (1990) Competitor 4 1 4 1 1 1 orientation Interfunctional 5 3 3 2 5 0 co-ordination Kohli and Intelligence 6 4 1 6 0 0 Jaworski Generation (1990) Intelligence 5 3 1 0 5 0 dissemination Responsiveness 9 5 2 0 3 9 Ruekert Use of 9 8 1 9 1 4 information (1992) Development of 8 2 1 3 8 1 a market oriented strategy Implementation 6 6 0 5 0 6 of a market oriented strategy Bisp, Harmsen and Grunert (1996) suggest distinguishing between attitudes and behaviour in market orientation measures. Besides company behaviour market orientation is sometimes regarded as a way of thinking or a set of beliefs about doing business. Hence, market orientation is about developing both a set of attitudes and a set of practices that aim to maximise the company’s adaptability to the market (Avlonitis and Gounaris, 1997). Attitudes are usually presumed to precede behaviour and a gap between attitude and behaviour can give important information on the likelihood of being able to change behaviour. In this respect, with an attitudinal component of market orientation in addition to a behavioural component of market orientation we are better able to detect the early stages of adopting a market orientation. 2.3

Characteristics of small independent companies with respect to market orientation

Characteristics of small independents make some of the elements and items in the ‘classic’ measures of market orientation less relevant or applicable. Therefore, we will first make a comparison between small independent companies and large or medium sized companies with respect to a measure of market orientation. To structure our discussion we will use the objects and processes important for market orientation. Afterwards, we will

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discuss the consequences of these differences for a measure of market orientation applicable to small independent companies. With respect to a measure of market orientation the following differences between small independent companies and large companies are important. First, in large companies there is more specialisation than in small independent companies where one manager performs many or all managerial tasks, himself. Second, small companies have less financial resources than large companies. This often means that a small company only operates in one market segment or that the company does not segment its market. In this respect, a distinction between companies that produce homogenous products and companies that produce heterogeneous products seems relevant. Finally, large companies have more financial means to build (marketing) competencies than small companies. Now we will discuss the consequences of these characteristics for our measure of market orientation for small independent companies. Market orientation objects: customers and competitors With respect to the objects included in a measure of market orientation a distinction between producers of homogenous and heterogeneous products is relevant. A heterogeneous product offers opportunities for market segmentation and monopolistic competition. In this situation, the company is able to tailor make his product to the specific needs of one customer or a group of customers. Carson et al. (1995) argue that small companies quite often have a narrow customer base and customers are usually concentrated in a local market. Customers and (potential) competitors in these specific market segments are the objects of interest in their market orientation. Further they argue that ”such marketing advantages allow the SME to be insulated against direct competition from large organizations by focussing on exploiting market niches, perhaps targeting a specific sector of the market”. Also Nooteboom (1994) argues that a small company’s personal and close relation with the customer results in a capacity to customise. Large companies have resources to serve more market segments and therefore have a wider scope with respect to their (potential) customers and competitors. A homogeneous product offers a company little, if any, opportunities to respond to specific needs of customer groups. Usually, a small independent company only makes long term decisions about which homogeneous product to produce. Afterwards, a small independent company is often a price taker. For a small producer of a homogenous product all potential producers of this product are competitors. However in a market with perfect competition a nearby competitor is often considered a colleague. Consequently, in a market with perfect competition the market is usually monitored by detecting trends in total supply and demand to predict future prices. Only large companies in a market with oligopolistic tendencies may have use for more elaborate market information. Processes that increase the amount of market knowledge that is available in a company In small companies, financial resources and marketing research capabilities are limited. Therefore, market intelligence generation is mostly based on secondary data, procured and/or generated in co-operation with colleagues or based on personal contacts with customers. Large companies may try to gain a competitive advantage by generating market intelligence themselves that is unique or better up-to-date. Processes that co-ordinate efforts in a company The co-ordination element of market orientation does not seem to be an issue in small independent companies. By definition, one person is able to control the organisational activities in a small independent company, which seems to guarantee co-ordination.

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Processes that have an impact on the market Responsiveness reflects the extent to which companies are willing and able to adapt their offer to customer wants and needs. The willingness to change has a cultural perspective in large companies while it is often a personal characteristic of the manager/owner in a small independent company. Furthermore, different barriers for responsiveness may exist in large and small companies. Small companies are more flexible than large companies. For example, it is harder for large companies to switch between suppliers because not every supplier is able to immediately supply the required quantities. On the other hand, large organisations have more financial resources available to respond to customer needs. Furthermore, in large companies, with more customer groups, responsiveness is a more continuous process that offers them the opportunity to build competencies for responsiveness. Based on our previous discussion we argue that it is necessary to adapt a measure of market orientation for small independent companies to the product and market characteristics of the companies in our sample. An important distinction should be made between producers of homogeneous products and producers of heterogeneous products. 2.4 A proposal for a measure of market orientation, applicable to small independent companies One objective of this study is to develop a market orientation measure for small independent companies. To our knowledge, Pelham and Wilson’s (1996) article is the only study where a measure of market orientation was applied to small companies. They applied a 9 item measure for market orientation that was based on Narver and Slater’s (1990) measure to small companies with an average number of 21.5 employees. Nevertheless, the items in their measure were not suitable for the small independent companies in our sample. Our measure in principle should be based on elements of market orientation measures in general. Different authors have different conceptualisations of market orientation. Kohli and Jaworski (1990) focus on information, Narver and Slater (1990) on creating value and Ruekert (1992) on strategy. To rule out the possibility that we miss the most appropriate and fruitful conceptualisation for small independent companies, we include all conceptualisations in our analysis. Here we will propose a measure of market orientation applicable to small independent companies using the previous classification on elements of market orientation and our discussion on characteristics of small independent companies. First, with respect to the object of interest in our market orientation measure for small independent companies, it seems relevant to consider all relevant customer groups. Therefore, besides items that have direct customers as the object of interest, items are generated that have end users as the object of interest. Second, when the competitor is the object of interest in an item we specifically refer to foreign competitors. National ‘competitors’ are considered to be colleagues. The latter decision was also based on depth interviews with company managers from our sample. Third, items in the intelligence generation element that refer to sophisticated methods are adapted to include more common methods of intelligence generation for the respondents. For example, Jaworski and Kohli’s (1993) item phrased “In this organisation, we do a lot of in-house market research” is rephrased as “I thoughtfully read messages from public organisations on market developments”.

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Fourth, besides items that reflect intelligence generation by customer visits and acquisition of public information new items are generated about a manager’s attitude towards the co-operative generation of market intelligence that is publicly available. Fifth, the co-ordination and intelligence dissemination elements respectively from Narver and Slater’s (1990) measure and Jaworski and Kohli’s (1993) measure of market orientation are not valid for small independent companies. Sixth, considering our second research objective (i.e. the impact of market orientation on product innovation) items in the responsiveness element of market orientation related to product innovation are not included in our measure of market orientation. We want to study whether market oriented companies respond to the market with product innovations. Therefore, responsiveness through product innovations is included in our model as a separate concept and not in our measure of market orientation. As an example, one of Jaworki and Kohli’s (1993) items phrased “We periodically review our product development efforts to ensure that they are in line with what customers want”, was excluded. Finally, during depth interviews with small company managers we could make a distinction between their attitude towards the before mentioned elements of market orientation and behaviour in line with these elements. Therefore, as suggested by Bisp, Harmsen and Grunert (1996) we distinguish between attitudes and behaviour in our market orientation measure. New items for the attitudinal component of market orientation are based on items from the ‘classic’ measures of market orientation. We expect that attitude and behaviour are the two common factors that explain most of the variation in the items of our measure. In other words, if a manager has a positive attitude towards market orientation he will have a positive attitude towards all the elements of market orientation. The same holds for behaviour, only the company’s characteristics or the environment may inhibit the expression of behaviour. In summary, our measure of market orientation for small independent firms includes elements from measures of market orientation in general. Nevertheless, elements are adapted to the context of small independent companies. In addition, an end user element is included and in addition to every (behavioural) element of market orientation an attitudinal component is included. Items in the general measures of market orientation are used as a starting point. 3. The influence of market orientation on product innovations: the conceptual framework and model Having established a measure for market orientation we are in a position to measure the relationship between market orientation and innovation in small independent companies. In the literature, one set of arguments suggests that focusing on changing markets gives rise to fresh ideas and sensitises organisations to the needs for developing innovative solutions. A counter argument suggests that focusing on customers and competitors imposes mental blinkers and discourages frame-breaking innovations (Jaworski and Kohli, 1996). Empirical research on this issue is scant. Various models about the relationship between market orientation and innovation have been proposed (Traill and Grunert, 1997). Atuahene-Gima (1996) examined the impact of market orientation on innovation characteristics using Ruekert’s (1992) measure for market orientation. Many studies that focus on factors discriminating between successful and unsuccessful innovations conclude that market orientation is one of the main contributing factors to innovation success (Cooper, 1975; 1979). We want to investigate whether this is also the case for small independents that have not differentiated their product in the market.

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In our model we will focus on product innovation because in marketing the conventional meaning of the term innovation largely is product-related. Moreover, research in this field is still needed because the success rate of new products is low and has improved minimally over the past decade (Wind and Mahajan, 1997). Before proposing a model to investigate the relationship between market orientation and innovation some specific aspects of this relationship in companies will be discussed. First, we look at the tools a manager has available to shape the final product. Then we will look at the decision process of a manager in a small independent company. A manager can change the output of a company by changing the type and quality of inputs used: the raw material, the capacities of the workers, and the process technology. Furthermore he can take precautions to inhibit random components (strikes, weather, diseases etc.). The importance of each category depends to a large extent on the type of business. In a law firm human skills and competencies determine to a large extent the output of the firm. In arable farming, the random component is large through weather influences. In greenhouses the ‘raw material’ (seeds and breeds) is crucial for the output. In other companies, like a goldsmith, the output is only modestly shaped by the input. Here the creativity of the worker to a large extent determines the output. In many small independent companies, product innovation is closely related to one of the input categories that shape the output. We argue that innovations in the type and quality of inputs used can be taken as a measure for product innovation in the case of producers supplying a homogeneous product to the market. Note, however, that the possibilities to change the output depend to a large extent on whether a homogenous or heterogeneous product is produced. In small independent companies the manager/owner is responsible for the decisions to change the type and quality of inputs that influence the output. He has to decide what raw materials and which production technology to use, what skills to develop and how to react on or inhibit the random component. For small independent companies management information systems to support these decisions are often too expensive. Therefore, small independent companies have less information than large or medium sized companies, for example, about market developments in other countries. Moreover, besides being responsible for managerial decisions a manager in a small company is often closely involved with the daily routines in his company. He may even provide some of the labour in the production process, which further reduces his time for managerial tasks. The amount, subject and sources of market information that a manager in a small independent company uses in decision making seem different depending on personal, company and business characteristics. Important is whether a manager is truly interested in the market and whether he actually searches for market information. If market information is well interpreted and combined with the knowledge and experience in the company it should result in products that are tuned to market needs. Marketing theory states that this should contribute to market performance. Figure 1 shows the framework we just described.

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Figure 1: A framework for the relationship between market orientation, product innovation and market performance Based on this framework we propose a model and some hypotheses. The model and hypotheses are developed specifically for small independent companies defined as firms, simple enough for the entrepreneur to control personally the organisational activities through direct supervision. Figure 2 summarises our model. Hypotheses about the relations in our model are elaborated hereafter. Attitudinal component of M.O. H5

Company size H4

Behavioural component of M.O.

H6

Product innovation

H1

H2

Market performance

H7 H3

Figure 2: Hypothesised relations between market orientation, product innovation and market performance Slater and Narver (1994; 1995) suggest that innovation and new product success are intermediates for the relation between market orientation and business performance. However, to establish this link market orientation should stimulate innovation and innovation should increase company performance. A positive relation between innovation and company performance has been demonstrated in many studies but a relation between market orientation and innovation has not been established, yet. We argued that small independent companies can innovate their product by adopting input innovations that are closely related to the quality of the final product. Our hypotheses on the relation between market orientation and product innovation are therefore based upon the literature about the adoption of innovations. Rogers (1995) states that early adopters have more social participation, are more highly interconnected in the personal networks of their system, have more change agent contact, have greater exposure to interpersonal

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communication channels and engage in more active information gathering. Note that many of these characteristics can be measured by the behavioural component of market orientation. For example, an important process in market orientation is information generation. Therefore, we expect that companies that behave in line with a market orientation are more likely early adopters and a positive relation between the behavioural component of market orientation and product innovation is expected. This line of reasoning leads to the following hypothesis. H1:

The behavioural component of market orientation is positively related to product innovation

Kotler (1991) reports that returns on innovation account for 50% or more of corporate revenues. To recover the development costs new products should be superior to older products. Therefore, we expect that the market performance of new products is higher than for older products. From this we pose the next hypothesis. H2:

There is a positive relation between product innovation and market performance

In line with the literature, we expect that market oriented behaviour, with its focus on satisfying customers and increasing value (Houston, 1986; Webster, 1988; Pelham and Wilson, 1995), has a positive effect on the market performance of a company’s products. We believe that a manager who is well informed about the market through market intelligence is better able to choose products that perform well in the market than a manager who is less well informed (Houston, 1986; Shapiro, 1988). We test the following hypothesis. H3:

There is a positive relation between the behavioural component of market orientation and market performance

A positive relation is hypothesised between company size and the behavioural component of market orientation. First, in a relatively large independent company there is more division of labour. Therefore, a manager/owner is less involved with production and has more time to perform marketing tasks like market intelligence acquisition. Secondly, with higher turnovers the overhead costs of marketing are spread over more volume and therefore the marketing costs per unit decline. This makes market oriented behaviour more efficient. Finally, relatively large small independents operate in the market as individuals and they are therefore known by their customers. Some customers will keep these suppliers informed about what they want because this is in the customers’ interest too. This makes the supplier more market oriented. In line with these arguments we test the next hypothesis. H4:

Firm size is positively related to the behavioural component of market orientation.

In the literature there is a debate on the direction of causality between attitude and behaviour and support has been found for a causal relation from attitude to behaviour as well as the other way round. Here we will discuss why in our study only the relation from attitude to behaviour is considered to be relevant. When companies have a positive market oriented attitude they are more likely to behave market oriented than when they have a less positive market oriented attitude. Although there are several reasons why a positive market oriented attitude does not result in market oriented behaviour there is no reason to believe that the relation between attitude and behaviour is negative. A positive market oriented attitude may

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also result from market oriented behaviour. Behaviourists believe that a positive attitude increases when past behaviour is rewarded and decreases if past behaviour is punished. The most important reward for market oriented behaviour is a positive impact on a company’s performance. So, there is a time lag between the adoption of market orientated behaviour and the increase in market performance. Since in this study we only have cross section data we only include the causal relation from the attitudinal component of market orientation to the behavioural component of market orientation in our model. Consequently, we test the next hypothesis. H5:

The attitudinal component of market orientation is positively related to the behavioural component of market orientation

We have no reasons to believe that there is a direct relation between the attitudinal component of market orientation and product innovation in small independent companies. Therefore, we expect that the positive impact of the attitudinal component of market orientation on product innovation via the behavioural component of market orientation is stronger than the direct impact of the attitudinal component of market orientation on product innovation. This line of reasoning leads to the following hypothesis. H6:

A positive effect of the attitudinal component of market orientation on product innovation is a result of the positive relation between the attitudinal component of market orientation and the behavioural component of market orientation

In small companies, characterised by a lack of formal co-ordinating systems, the attitudinal component of market orientation could have an effect on market performance by providing cohesiveness and focus in strategies and tactics (Pelham and Wilson, 1996). For small independent companies where the entrepreneur personally controls the organisational activities, cohesiveness and focus are hardly ever a problem. Therefore, we expect that a positive effect of the attitudinal component of market orientation on market performance is a result of the positive relation between the attitudinal component of market orientation and the behavioural component of market orientation. To support these arguments, we test the following hypothesis. H7:

A positive effect of the attitudinal component of market orientation on market performance is a result of the positive relation between the attitudinal component of market orientation and the behavioural component of market orientation

4. The sample To test our hypotheses we used a sample of entrepreneurs that operate in a single sector, namely the growers of roses in The Netherlands. Environmental characteristics that might influence the relations in our model are therefore constant. All growers of roses in the Netherlands are small independent companies. Product quality in the rose sector is, to a large extent, determined by the varieties grown. Therefore, innovations in varieties are an important source of product innovation for growers of roses and the time of adoption of a rose variety is an indication of a company’s product innovativeness. Objective figures about the age of a variety and the price of each variety are available.

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In December 1996, a questionnaire was mailed to approximately 1000 growers of roses in the Netherlands. 557 questionnaires were returned with 358 questionnaires left after list-wise deletion of questionnaires with missing values. Unless indicated otherwise, percentages in this section of our paper are based on our questionnaire. For these estimates 538 questionnaires without missing values on this part were used. These 538 respondents represent 75% of the total area of roses in the Netherlands. The average turnover per grower is approximately 830 thousand guilders (415,000 US dollars). Firm size ranges from 500 square meter per grower to 100,000 square meters. On average a company has 7 full time employees. Three different classifications of roses can be distinguished: big head roses, small head roses and spray roses. These categories held market shares of respectively 43, 52 and 5 % in 1996 (Association of Dutch Flower Auctions, 1996). In the past 10 years the total turnover of roses increased at a slow rate. The market share of big head roses has increased from 36 % in 1992 while market shares of small head roses and spray roses decreased. In 1996, the turnover of spray roses and large roses increased while the turnover of small roses remained equal. Approximately 170 different varieties of big head roses, 130 varieties of roses with small flowers and 40 varieties of spray roses are sold in The Netherlands (Association of Dutch Flower Auctions, 1996). The 10 most common varieties account for 48 % of the turnover for big head roses, 58 % of the small head roses and 77 % of the spray roses in 1996 (Association of Dutch Flower Auctions, 1996). Most growers (40%) grow only one variety, 34 % grows two varieties, 15% grows three varieties and only 11% grows four varieties or more. When more varieties are grown, a combination of varieties from different categories is common. Approximately 30 % of the growers of big head roses only grows big head roses, 35 % of the growers of small head roses only grows small head roses, and 5 % of the growers of spray roses only grows spray roses. Product innovation is important for roses. In 1996, 24 percent of the turnover of big head roses was generated by varieties introduced after 1993 (less than three years ago). In comparison, Wind, Mahajan and Bayless (1990) found that 25 % of current sales were derived from new products introduced in the last 3 years and Hultink and Robben (1995) found that products introduced in the past 5 years generated 41 % of company’s sales. These results are in line with the rose sector although new products are more important for big head roses and spray roses than for small head roses. In general, roses are grown for 7 years (Pancras and Benninga, 1988). Every year the rose grower has to decide whether to continue with the current plants, continue with the same variety but new plants or grow a new variety. This choice is crucial for a company’s performance. Managerial experts in the sector have argued that 10% of the differences in revenues between companies can be contributed to the differences in the average prices of the varieties grown (Benninga and Duys, 1996). An accurate prediction of the expected prices for the choice alternatives is a crucial parameter in this decision process. From this section we conclude that our sample is suitable to extent the theory on market orientation to small independent companies and to test our conceptual framework. We will build on this description of our sample when we discuss our results. Note that this an important conclusion for the generalisation of our results. 5. Methodology 5.1

Development of a market orientation measure for small independent companies

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A pre-test was conducted with the market orientation scale to remove ambiguous or otherwise difficult to answer questions. The items were administered in person to company executives. Based on their comments some items were deleted or modified until none of the items raised any concern while the respondents completed the scale. Eventually 44 items were included in the survey. Based on the empirical results, subscales for market orientation will be developed that have appropriate scale properties with respect to uni-dimensionality and reliability. Factor analysis (principal axes factoring) and confirmatory factor analysis (LISREL) will be used to test the measurement properties of the scale as suggested by Steenkamp and Van Trijp (1991). Factor scores will be used to test the hypothesised relations in subsequent path analyses using ordinary least squares regression. 5.2

Operationalisation of the model

In addition to the scores on the 44 market orientation items respondents gave areas and names of each rose variety they grew on December 31, 1996. From other databases (Association of Dutch Flower Auctions, 1996) we received average year prices for each variety and the dates when varieties were formally introduced in The Netherlands. In our model product innovation was operationalised as the weighted average age of a grower’s roses. Age was defined as the number of days between January 1ste 1996 and a varieties date of registration in the Netherlands. This indicator for product innovation was calculated as follows.

A =

n ∑ A *M i i i =1

where: = A Ai

=

Mi n

= =

n ∑ M i i =1

The average age of the rose varieties grown by a certain grower weighted by area The number of days between January 1ste 1996 and a varieties date of registration in the Netherlands The area in square meters of a certain variety i grown by a rose grower The number of varieties a grower grows

Market performance was operationalised as the weighted year annual price of a grower’s rose varieties and calculated as follows.

P=

n ∑ p *M i i i =1

where: P = pi

=

n ∑ M i i =1

The average annual price of the rose varieties grown by a certain grower weighted by area The average annual price of variety i sold at an auction in The Netherlands

Company size was operationalised as the total area of roses grown by a rose grower.

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The operationalizations of product innovation, market performance and company size do not use the same measurement methodology as the measure of market orientation. Consequently, shared method variance does not contribute to an overestimation of the effects of market orientation. Separate regression analyses for each category of roses (e.g. big head roses and small head roses) are necessary because prices and production costs are different for each category. Regression analyses for spray roses were not included because too little observations were available in this category. 5.3

Test of our hypotheses

Path analyses were conducted using OLS regression analyses (Dillon and Goldstein, 1984) to test our hypotheses and to determine the direct and indirect effect of the attitudinal component of market orientation on product innovation and market performance. 6. Results 6.1

Development and reliability of the market orientation measure

Exploratory factor analyses on the 44 market orientation items resulted in a two factor solution. After oblique rotation, items with loadings above 0.4 were selected for further analyses. Both factors had interpretations in line with our expectations. These were: an attitudinal component of market orientation and a behavioural component of market orientation. Items with the competitor as the main object of interest were not significant on the first factor nor on the second factor but four items had significant (>0.4) loadings on the third factor that we did not include in our final solution. The decision to select the two-factor solution was supported by the scree test criterion (Hair et. al, 1992). Moreover, the third factor explained only 3 percent of the variance, which is below the 5 percent suggested as a cut off point (Hair et. al, 1992). Consequently, there was no quantitative basis to extract three factors although the items with significant loadings made a solid interpretation possible. Items with the customer as the object of interest, and increasing the amount of market knowledge that is available in a company as the process of interest had significant loadings on the factor for the behavioural component of market orientation. Items with end user orientation, and customer orientation, as object of interest and increasing the amount of market knowledge that is available in a company as the process of interest had significant loadings on ‘the attitudinal component of market orientation’ factor. Subsequent, factor analyses with the significant items on each factor showed that neither the attitudinal component of market orientation nor the behavioural component of market orientation was a uni-dimensional construct. Confirmatory factor analysis showed that groups of items with the same process or object of interest had high positive standardised residuals among each other and large negative standardised residuals with other items, indicating a separate factor for these items (Steenkamp and van Trijp, 1991). To continue our analyses with uni-dimensional constructs for the attitudinal component of market orientation and the behavioural component of market orientation we subsequently deleted one of the items that had high positive standardised residuals. This procedure resulted in a 5 items measure for the attitudinal

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component of market orientation and a 4 item measure for the behavioural component of market orientation. These items are shown in Appendix 1. In the scale for the behavioural component of market orientation two items are items from Narver and Slater’s customer orientation element of market orientation adapted to small independent companies. One item is developed in this study to include the use of publicly available information and the last item was generated during depth interviews with the managers of small independent companies. Compared to Narver and Slaters’ (1990) measure and Jaworski and Kohli’s (1993) measure of market orientation these items are a combination of the customer orientation element (Narver and Slater, 1990) and the information generation element (Jaworski and Kohli, 1993), translated to the context of small independent companies. A competitor orientation element and an end user orientation element could not be preserved in the behavioural component of market orientation. These elements appear to be distinct constructs for small independent companies. Note that these elements were excluded from further analyses because they explained little variance in our first factor analysis on the 44 items selected to measure market orientation. However, if we would have tested our measure on a sample of small independent companies from several industries we may have captured more variance with these elements. For now, we leave this for future research. All items in the attitudinal component of market orientation were newly generated although some clearly resemble items in Narver and Slater’s measure. Items in this construct were related to more elements of market orientation than items in the behavioural component of market orientation. Items reflect the attitude towards elements of a market orientation like an end-user orientation, a customer orientation, and intelligence generation. A competitor orientation and responsiveness were preserved as minor elements in one item of the measure for the attitudinal component of market orientation. Confirmatory factor analyses showed that these final measures were uni-dimensional. Construct reliabilities for the behavioural component of market orientation and the attitudinal component of market orientation were 0.82 and 0.94, respectively, using the formulas as suggested by Hair et al. (1992). Factor scores were calculated and used for subsequent analyses. 6.2

Test of the hypotheses

To test our hypotheses separate regression analyses were conducted for companies with large flowers and companies with small flowers. The results are shown in Table 2. The significant coefficients for the behavioural component of market orientation in regression analyses 4 and 5 support Hypothesis 1 that the behavioural component of market orientation is positively related to product innovation. Note that product innovation was operationalised as the number of days between January 1, 1996 and the date the variety was introduced in The Netherlands. As expected, the coefficients for the attitudinal component of market orientation were not significant which result does not contradict with Hypothesis 6. Note that these results are not influenced by a common methodology bias, which explains the relatively low R2. Hypothesis 2 states that there is a positive relation between product innovation and market performance which is based on our expectation that the market performance of new products is higher than the market performance of older products. Hypothesis 2 is supported by the negative coefficients of A l and A s in regression analyses 5 and 6. Hypothesis 3 that the behavioural component of market orientation is positively related to market performance is supported by the positive coefficient for the behavioural component of market orientation in regression analyses 5 and 6. As expected the coefficients for the 16

attitudinal component of market orientation were not significant which is moderate support for Hypothesis 7. The significant positive coefficients for company size in regression analyses 1 and 2 support Hypotheses 4 that company size is positively related to the behavioural component of market orientation. Hypothesis 5 that the attitudinal component of market orientation is positively related to the behavioural component of market orientation is supported by the significant positive coefficients for the attitudinal component of market orientation in regression analyses 1 and 2.

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Table 2:

regression analysis C.S. MOAT MOBE Al As n R2 F

Results of the regression analyses Dependent variables MOBEl MOBEs Al As 1 2 3 4 0.13 ** 0.27 ***

238 0.10 13.36 ***

0.16 *** 0.22 ***

257 0.08 11.39 ***

n.s. -0.16 **

235 0.025 2.98 **

n.s. -0.14 **

257 0.02 2.36 *

Pl

Ps 5

n.s. 0.13 ** -0.26 *** 238 0.10 9.10 ***

6 n.s. 0.12 * -0.18 *** 257 0.05 4.73 ***

* = significant at the 0.10 level ** = significant at the 0.05 level *** = significant at the 0.01 level

where: C.S. = Ps = Pl

=

MOAT = MOBE = = Al As

=

The total area of roses grown by a grower The average price weighted by area of the varieties with small flowers grown by a rose grower The average price weighted by area of the varieties with large flowers grown by a rose grower The growers score on the attitudinal component of market orientation The growers score on the behavioural component of market orientation The average age weighted by area of the varieties with large flowers grown by a rose grower The average age weighted by area of the varieties with small flowers grown by a rose grower

Using path analyses (Dillon and Goldstein, 1984), the effect of the attitudinal component of market orientation on product innovation and market performance is decomposed into a direct effect and an indirect effect. Together these effects are called the total effect. The results of a path analyses on our model are shown in Table 3 and 4. The numbers in these tables are equivalent to regression weights (Dillon and Goldstein, 1984). Table 3:Decomposition of the impact of the attitudinal component of market orientation on market performance (P) and product innovation (A) Pl Ps Al As Direct effect of MOAT 0.0583 0.0864 -0.0592 0.0451 Indirect effect of MOAT via MOBE 0.0425 -0.0394 0.0307 -0.0297 Total effect of MOAT 0.1007 0.0471 -0.0285 0.0153 Unanalysed effects of MOAT 0.0019 -0.0233 -0.0029 -0.0041 Total correlation 0.1026 0.0238 0.0313 0.0113 The negative indirect effect of MOAT on A l and A s supports Hypothesis 6 that a positive attitude towards market orientation stimulates product innovation via the positive relation between the attitudinal component of market orientation and the behavioural component of market orientation. Nevertheless, the total effect of the attitudinal component of

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market orientation on the average age of the varieties grown is positive which indicates that the attitudinal component of market orientation does not stimulate product innovation. The indirect effect of the attitudinal component of market orientation on market performance (P) is positive which supports Hypothesis 7 that a positive effect of the attitudinal component of market orientation on market performance is a result of the positive relation between the attitudinal component of market orientation and the behavioural component of market orientation. Nevertheless, the direct effect of MOAT on P is positive for growers of roses with large flowers and negative for growers of roses with small flowers. We also decomposed the effect of the behavioural component of market orientation on market performance into a direct effect and an indirect effect (via product innovation). Table 4:

Decomposition of the impact of the behavioural component of market orientation on market performance (P) Pl Ps Direct effect of MOBE 0.1209 0.1176 Indirect effect of MOBE via product innovation + 0.0366 + 0.0250 Total effect of MOBE 0.1575 0.1426 Spurious effect of MOBE + 0.0310 -0.0137 Total correlation 0.1885 0.1289 The direct effect of the behavioural component of market orientation on market performance is much bigger than the indirect effect. This suggests that innovative behaviour is only a minor explanation for the positive effect of a market orientation on market performance. 7.

Conclusions

Our research shows that the market orientation concept is also applicable to small independent companies and that the behavioural component of market orientation stimulates product innovation. The attitudinal component of market orientation only stimulates product innovation through its impact on the behavioural component of market orientation. Product Innovation is only partly responsible for the positive effect of market oriented behaviour on market performance. Other reasons for the positive effect of market oriented behaviour on market performance were not included in the model. 8.

Managerial implications

Companies that show market oriented behaviour appear to be more innovative than less market oriented companies. Breeders of new varieties can stimulate the adoption of new varieties by providing market oriented growers with market intelligence about these new varieties. For example, show growers consumer research that indicates that the new variety has potential. A positive attitude towards market orientation does not have a direct impact on product innovation. Gaining information about the market to learn about the market is what distinguishes the innovators from the rest not the attitude towards market orientation. Our results suggest that a market orientation can contribute to the performance of a small independent company producing relatively homogeneous products.

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9.

Discussion and suggestions for further research

Although several elements of market orientation were distinguished only two dimensions, the attitudinal component of market orientation and the behavioural component of market orientation were used in our analyses. In future research, it is interesting to see whether different relations exist between elements of market orientation and company characteristics. Besides the adoption of new varieties innovations in other fields of interest might have an impact on the final product. For example, innovations in packaging, or a revolution in quality based on process innovations. Innovations in services for example, in logistics, crediting, and information are interesting as well. Information about these innovations was not captured in the questionnaire although they could further elaborate the relation between market orientation and product innovation. Although important, market performance is only partly responsible for the success of a company. Market orientation can influence other determinants of market performance as well. Market performance was operationalised as the annual average price. Market oriented companies may receive higher than average prices because their offer is better in line with demand. For example, some customers pay a premium for a superior, constant or guaranteed quality. Furthermore, a market oriented company can earn a better than average price by tailoring his offer for specific customers. Also, companies may focus on costs and be successful. In subsequent studies several measures of company performance should be included to determine the positive effect of market orientation on performance. R2- values in our analyses were low. To improve the accuracy of our model other relevant explanatory variables should be included. For example, risk attitude may be an important variable to explain a company’s time of adoption for new varieties. This also increases the possibility that relations between elements of market orientation, innovation and market performance show up in our analyses.

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Appendix 1 (To the respondents, items were administered in Dutch) The behavioural component of market orientation 1. Ik vraag mijn klanten met regelmaat of ze tevreden zijn (I regularly ask my customers whether they are satisfied) 2. Ik ga regelmatig na of mijn rozen nog aansluiten bij wat mijn klanten willen (dus aanvullend op de informatie die de prijs biedt) (I regularly check whether my roses still meet my customers’ wants (Additional to the information provided by the price)) 3. Gemiddeld hoe vaak per jaar woont U bijeenkomsten bij waar trends en ontwikkelingen in de markt besproken worden ? (On average, how many meetings do you attend where trends and developments in the market are discussed 4. Ik weet welke klanten (zoals exporteurs handelaren en bloemisten) mijn rozen kopen (I know which customers (like exporters, traders and flower shops) buy my roses) The attitudinal component of market orientation 1. Ik ben geïnteresseerd in de mening van consumenten over bloemisterijproducten (I am interested in customers’ opinions about florists’ products) 2. Ik vind het belangrijk om te weten hoe mijn rozen door mijn klanten beoordeeld worden (I think it is important to know how my roses are rated by my customers) 3. De rozensector (alle telers samen) zou de kwaliteit van het product zoals dat aan de consument verkocht wordt regelmatig moeten controleren (The rose sector (all growers together) should regularly check the quality of the product that is sold to the consumer.) 4. Het is belangrijk om voortdurend op de hoogte te zijn van ontwikkelingen in de markt (It is important to continuously be aware of developments in the market. 5. Tuinbouwbedrijven moeten zich zo ontwikkelen dat ze klanten meer waar voor hun geld kunnen bieden dan concurrenten (Horticultural companies should develop in such a way that they are able to offer customers more value-for-money than competitors do.)

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