Journal of Small Business Management 2004 42(2), pp.

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Market Orientation, Innovativeness, Product Innovation, and Performance in Small Firms*

by Frans J. H. M. Verhees and Matthew T. G. Meulenberg

Most research on market orientation, innovation and performance is related to big enterprises and small and medium-sized enterprises (SMEs). In this study a model is developed to investigate the combined effect of market orientation and innovativeness on product innovation and company performance, for small rms. A specic feature of our research is that we use an objective measure for product innovation in contrast to the self-reported measures commonly used in research on innovation. To test our model data from 152 rose growers were used. This studys results show that the owners innovativeness permeates all variables in the model and has a positive inuence on market orientation, innovation, and performance. An interesting research result is also that customer market intelligence inuences product innovation positively or negatively, depending on whether the innovativeness of the owner in the new product domain is weak or strong.

It is accepted widely that market orientation has a positive inuence on the performance of rms (Deshpand 1999; Jaworski and Kohli 1993; Narver and Slater 1990). This relationship not only has been established rmly for large companies but also has been found in research on small and medium-sized enterprises (SMEs) (Pelham 2000). In analyzing the relationship between market orientation and performance, innovation has been identied as an

instrumental variable. In this context, elaborate theories and frameworks about the relationship between market orientation and innovation have been proposed ( Jaworski, Kohli, and Sahay 2000; Connor 1999; Slater and Narver 1998, 1999; Han, Kim, and Srivastava 1998; Hurley and Hult 1998; Atuahene-Gima 1996; Slater and Narver 1995). They focus in particular on large rms and only to a lesser extent on small rms. However, it is doubtful whether the type

*The authors gratefully acknowledge the support of E. van der Ham and Peter Ruygrok of the Product Board for Horticulture and M. Hack of the Agricultural Economics Research Institute for their help in providing the data. Ir. Verhees is assistant professor of marketing at Wageningen University. His research interests include market orientation, innovation, small business management, and e-commerce. Dr. ir. Meulenberg (1931) is retired professor of marketing and consumer behavior at Wageningen University. His research interests are distribution and consumer behavior.

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of relationship between market orientation and innovation being ascertained for large rms can be generalized to small rms, because innovation in small rms is different from innovation in large rms (Audretsch 2001; Tether 1998; Eden, Levitas, and Martinez 1997; Van Dijk et al. 1997; Cohen and Klepper 1992; Acs and Audretsch 1988). It is important to ll up that gap in our knowledge about small rms because of the importance of innovation and small businesses for todays economy (Robbins et al. 2000). This study contributes to this matter by developing and testing a model of the relationship among market orientation, innovativeness, product innovation, and performance in small rms. In this context, the small rm is dened as one that is run and is controlled under the direct supervision of the owner. This article is structured as follows. First, the concepts and notions on market orientation and innovation relevant to this research are reviewed. Second, market orientation and innovation for small rms are specied, and a model is proposed that expresses the relationship among market orientation, innovation, and performance in small rms. Hypotheses on these relationships are presented. This studys model is tested on a specic type of small rm: rose growers in The Netherlands. Finally, managerial implications of the results are discussed, and suggestions for further research are made.

Conceptual Framework
Market Orientation
Two seminal articles, those of Narver and Slater (1990) and of Kohli and Jaworski (1990), coined the concept of market orientation in the early 1990s. Narver and Slater (1990) represent the cultural perspective on market orientation. They dene market orientation as the organization culture that most effectively and efciently creates the necessary behaviors for the creation of

superior value for buyers and, thus, continuous superior performance for the business (p. 21). They state that market orientation consists of three behavioral components: customer orientation, competitor orientation, and interfunctional coordination. Continuous innovation is implicit in each of these components (Narver and Slater 1999), and the two decision criteria are long-term focus and protability. Kohli and Jaworski (1990) represent the behavioral perspective on market orientation. They introduced market intelligence rather than customer focus as the central element of market orientation because in their view market intelligence is a much wider concept 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 (p. 3). Although many other studies about market orientation have been reported, most authors either adopt the denition of Kohli and Jaworski (1990) or of Narver and Slater (1990) (Atuahene-Gima 1996; Pelham and Wilson 1996) or use them as a starting point (Deng and Dart 1994). In this study Kohli and Jaworskis (1990) denition of market orientation is used: Market orientation is the organizationwide generation of market intelligence, dissemination of the intelligence across departments and organization-wide responsiveness to it (p. 6). Responsiveness reects the extent to which companies adjust their marketing policies to market intelligence. The narrow interpretation of responsiveness is the adaptation of offerings to expressed customer needs and market structures. This reactive response is labeled market driven by Jaworski, Kohli, and Sahay (2000) and customerled by Slater and Narver (1999, 1998). However, being market-oriented means that companies also try to understand and to respond to customers latent and future needs (Slater and Narver 1999,

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1998). Jaworski, Kohli, and Sahay (2000) elaborate on this by suggesting that market-oriented companies can drive markets by manipulating the structure of the market and the behavior of market players. Product innovation can be the most appropriate response to market intelligence. Therefore, focusing on the relationship between market orientation and product innovation, responsiveness to innovation is narrowed down to the component of responsiveness most relevant to this analysis.

Innovation
The term innovation has acquired various meanings over the years (Zaltman, Duncan, and Holbeck 1973): the process of developing a new item, the new item itself, and the process of adopting the new item. This research focuses on new products being new to the company because product innovations by small rms are often product modications based on new types of inputs. Innovation can be researched at various levels: the sectorial, regional, rm, and project level. During the past decades, research identifying how rms successfully can be innovative has ourished. At the rm level, research has focused on differences in rm structure, culture, and management to explain differences in innovative success (see, for example, Zaltman, Duncan, and Holbeck 1973; Burns and Stalker 1961). Christensen (1997) distinguishes between sustaining and disruptive technological change. He explains why rms that are successful innovators based on sustaining technologies ignore crucial innovations based on disruptive technologies. Sustaining technologies improve the performance of established products, along the dimensions of performance that mainstream customers in major markets historically have valued. Disruptive technologies have a new value proposition that a few and commonly new customers

value. Elaborating Christensens (1997) argument, Meeus and Oerlemans (2000) conclude that in turbulent markets a focus on continuous innovation (adaptation) is a better innovation policy than inertia and gradual innovation (selection) and vice versa. In this study, innovation is investigated at the rm level because of the desire to understand the impact of management characteristics on the level of innovation in the small rm. At the project level, where innovation projects are the objects of study, three studies have provided important insights: the SAPPHO studies (Rothwell 1972), the NewProd project (Cooper 1980, 1979), and the Stanford Innovation Project (Maidique and Zirger 1984). In each study, understanding customers consistently came up as an important factor for successful new product development projects.

Small Firms
There is no widely accepted statistical demarcation of a small rm. The number of employees might dene a small rm. In Europe the demarcation between small and medium-sized rms ranges, across countries, between 5 and 50 employees (Nooteboom 1994). The importance of small rms is illustrated by the fact that in the European Union about 34 percent of the workforce is working in rms with less than 10 employees (European Commission 2000). The authors will refrain from debate about the appropriate denition of a small rm and will lay down a definition that ts the purpose of this study: A small rm is a rm that is run and is controlled under the direct supervision of the owner. A farm is a case in point. Actually, small rms are a subset of SMEs. Rothwell and Dodgson (1994, p. 310) list advantages and disadvantages of SMEs and large rms as far as innovation is concerned. They concluded that SMEs advantages are mainly behav-

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ioral, such as entrepreneurial dynamism, internal exibility, and responsiveness to changing circumstances, while those of large rms are primarily material, such as nancial and technological resources. A discussion of the differences between small rms and medium-sized and large rms, which seems particularly relevant for innovative behavior, will be provided. Compared to large rms, small rms are nonbureaucratic and more exible; the owner is the decision-maker (Carson et al. 1995; Nooteboom 1994). Private and business motives and goals of managers are more intertwined in small rms than in medium-sized or large rms (Carland et al. 1984). Information systems in small rms relatively are simple. Information is based on secondary data or on direct, formal and informal, external contacts of the owner (Smeltzer, Fann, and Nikolaisen 1988). The owner of a small rm is often a craftsman with specic operational capabilities (Nooteboom 1994), but small rms perform various activities with less expertise than large rms (Freel 2000) because they have little room for functional specialists (Carson et al. 1995). For example, small rms rarely have the legal expertise to acquire patents, nor can they build and defend trademarks (Eden, Levintas, and Martinez 1997, p. 63). Small size limits the possibilities to capture fully the gains of innovation (Cohen and Klepper 1992). Also, small rms limited access to nance for venture capital is a hotly debated barrier to innovation (Freel 2000; Carson et al. 1995). Sometimes, small rms develop competencies in networks; this fact underlines the importance of networks for small rms (Carson et al. 1995). However, while

large rms have the resources and strategic management capabilities to conceive and to develop future new core competencies, (networks of) small rms rarely are equipped for such a fundamental long-term planning process (Shrader, Mulford, and Blackburn 1989). Finally, it is important to notice that various small rms operate in niche markets that are not served by large rms (Eden, Levitas, and Martinez 1997; Christensen 1997; Carson 1985).

Market Orientation in Small Firms

The specic resources and capabilities of small rms have consequences for market orientation as dened by Kohli and Jaworski (1990).1 In small rms, resources for market intelligence generation are scarce, and there is no room for a marketing specialist. In fact, market intelligence is based mostly on secondary data (from trade journals, sector research, conferences, and professional magazines) or on personal contacts (with suppliers, customers, or bank employees) (Smeltzer, Fann, and Nikolaisen 1988). When small rms sell a differentiated product in a local or regional market, they can use market intelligence more effectively. Advances in information technology (IT) will be helpful in this respect. Intelligence about suppliers and colleagues is very useful for small rms in order to innovate processes, products, and services. The dissemination of market intelligence is not a relevant issue in small rms where the owner makes the major decisions. However, the dissemination of market intelligence to other people in the rm might increase employee motivation. In fact, Ruekert (1992) showed

Note that we do not propose that small rms are less market oriented than large rms. Research suggests that small rms can be just as market oriented as large rms. Moreover, Pelham and Wilson (1996) and Slater and Narver (1996) report about small rms that are highly market oriented.

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that market orientation is related positively to job satisfaction. Small rms run by the owner can respond with alacrity and exibly to market intelligence because decisionmaking is nonbureaucratic and because the decision-maker is able to oversee the whole production and marketing process (Carson et al. 1995; Nooteboom 1994). On the other hand, their responsiveness is constrained by limited nancial and technical resources.

Innovation in Small Firms

Innovation in small rms has been discussed extensively in the literature on entrepreneurship. The term entrepreneur has been applied among others to the person who creates new combinations. . . . who sees how to fulll currently unsatised needs or perceives a more efcient means of doing what is already being done (Schumpeter 1934, quoted by Kamien and Schwartz 1982, p. 8). No generally accepted denition of an entrepreneur exists. Cunningham and Lischerons (1991) denition of an entrepreneur as one who creates, manages, and assumes the risk of a new venture embraces the total innovative process. The term entrepreneurship has been applied among others to the identication and exploitation of an opportunity and to the development of a niche in the market (Cunningham and Lischeron 1991). However, Lumpkin and Dess (1996) contrast between entrepreneurship and entrepreneurial orientation. In their view, entrepreneurship refers to the content of entrepreneurial decisionswhat is undertakenwhile entrepreneurial orientation refers to key entrepreneurial processeshow new ventures are undertaken. Lumpkin and Dess (1996) identify ve dimensions in entrepreneurial orientation: (1) autonomy; (2) risk taking; (3) proactiveness; (4) competitive aggressiveness; and (5) innovativeness. This study focuses on innovativeness as the entrepreneurial

dimension being relevant for this research. Innovativeness is dened as . . . the notion of openness to new ideas as an aspect of a rms culture (Hurley and Hult 1998, p. 44). In a small rm, innovativeness implies a willingness of the owner to learn about and to adopt innovations, both in the input and output markets. High innovativeness of a small rm does not mean that the owner is innovative in all domains. Kirton (1976) shows that each individual has a preferred style of creativity and decisionmaking, which can vary from adaptive to innovative. Adaptors have a preference for doing things better within the generally accepted theories, policies, and viewpoints. Innovators prefer to do things differently. Innovators turn a blind eye to accepted thoughts to reconstruct the problem and to solve the new problem. Buttner and Gryskiewicz (1993) nd that founders of a company with an adaptive style of decision-making are more likely to continue the business as time passes than founders with a more innovative style of decision-making. Domain-specic innovativeness of small rms captures the innovativeness of the owner for a particular domain of interest (Gatignon and Robertson 1985). Some domains can capture the attention of owners with an adaptor style of decision-making, and other domains can attract owners with an innovator style of decision-making. Limited resources and capabilities, as discussed, prevent small rms in many industries from conducting in-house research and development activities. Many innovations by small rms are based on off-the-shelf technologies, concepts, and/or resources offered by supplying industries. As a result, new inputs are a very important source of innovations for small rms. Networks of small rms can establish collective research and development (R&D) programs as a basis for product innovation of network

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members. Cooperative competencies (Sivadas and Dwyer 2000) of participating rms seem important for the success of such programs. Small rms that produce differentiated products also can innovate individually by adapting products to the needs of the target group of customers.

The Model
This studys model aims at explaining innovation and its impact on market performance for small rms. The model focuses on market orientation and innovativenessa dimension of entrepreneurial orientationas explanatory variables. They are core concepts in two streams of research that are relevant for innovation in small rms: marketing and entrepreneurship. On the basis of this model, hypotheses are formulated. In the model, market orientation as conceived by Kohli and Jaworski (1990) is adapted to the analysis of the relationships among market orientation, innovation, and performance in small rms as follows: (1) Customer intelligence is used as a representation of market intelligence; (2) Information dissemination is not included since information collection, strategy planning, and decision-making is integrated in one person, the owner; and (3) Response is rened to innovation because of the research objective. Since the available alternatives on the input side greatly inuence the small enterprises innovation responsiveness, supplier intelligence is included as a separate variable. Owners innovativeness seems to be an essential element of entrepreneurial orientation for innovation in small rms. It is expected that the innovativeness of the owner permeates all variables of the model. A distinction is made between innovativeness as a general characteristic, which reects the values of the owner, and domain-specic innovativeness, which also reects the owners interest in a specic domain. It is

expected that in small rms market orientation moderates the relationship between innovativeness in the new product domain and product innovation. Following Slater and Narver (1995) it is assumed that product innovation mediates the relation between customer market intelligence and company performance. Two market-related performance criteria are used: (1) product assortment attractiveness, a weighted average of rm assortment and market prices of the respective products in the assortmentthis measure expresses the market attractiveness of the chosen assortment; and (2) relative product price, a price premium on the average market price, which a rm is able to realizethis is a measure of doing better or worse than other companies in product quality and service. Our model as specied in Figure 1 can be expressed in the following recursive model: CMInt = f (Inn) SInt = f (Inn) DSInn = f (Inn) PInn = f (CMInt, CMInt DSInn, SInt, SInt DSInn, DSInn) RPP = f (Inn, CMInt) PAA = f (CMInt, PInn) (1) (2) (3)

(4) (5) (6)

Hypotheses
The following hypotheses are proposed with respect to the relationships between the variables in our model. It should be stressed that the model and hypotheses are specied for small rms. The rst hypothesis addresses the relationship between innovativeness and customer market intelligence in small rms. Innovativeness, being an element of entrepreneurial orientation, is expected to stimulate customer market intelligence because customer information is a key resource for innovation (Hartman, Tower, and Sebora 1994). Kohli and Jaworski (1990) argue that the

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Figure 1 Customer Market Intelligence and Innovation in Small Firms: The Model
H9

H1

Customer Market Intelligence (CMInt) Domain Specific Innovativeness (DSInn) Supplier Intelligence (SInt)

H8 H10 H3 H6

Relative Product Price (RPP) Product Assortment Attractiveness (PAA) H11

Innovativeness (Inn)

H5 H7 H4

Product Innovation (PInn)

H2

more positive the senior managers attitude towards change, the greater the market orientation of the organization (p. 9).2 This is supported by the strong correlation between entrepreneurial orientation and market orientation reported by Miles and Arnold (1991) and Slater and Narver (2000). Homburg and Pesser (2000) identied innovativeness as a basic organizational value supporting market orientation. It is expected that this relationship also holds for small rms. Keeping in mind that customer market intelligence is the core element of market orientation of small rms it is hypothesized that H1: Innovativeness is related positively to customer market intelligence.

In small rms innovation rarely equates formal R&D: Most are not creators but users of technology and so a prime concern is that of effective technology transfer (Bessant 1999, p. 134). Disadvantages of scale dictate that small enterprises must have easy and affordable access to external sources of aid and information to surmount inevitable shortfalls in internal resources and skills (Freel 2000, p. 63). Owners of small rms with an entrepreneurial orientation will use their suppliers as a valuable source of technological and marketing information because suppliers often are willing and are able to help their customers. As a result, various suppliers have expert power vis-vis small enterprises. Therefore, the following hypothesis is proposed.

In their empirical work Jaworski and Kohli (1993) do not test this proposition directly. They argue that new products, services and programs often run a high risk of failure and hypothesize that top managements risk aversion is an antecedent to market intelligence generation. This hypothesis is not supported by their empirical results.

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H2: Innovativeness is related positively to supplier intelligence. In the marketing literature, market intelligence is expected to improve a rms capacity to innovate (see, for example, Hurley and Hult 1998; Li and Calantone 1998; Grunert et al. 1997; Slater and Narver 1995; Day 1994). Companies are able to detect the unlled needs of customers through customer market intelligence and are expected to respond to that intelligence. Some evidence for a positive relationship between market orientation and innovation exists. Han, Kim, Srivastava (1998) nd that customer orientation (but not competitor orientation and interfunctional coordination) is related positively to the number of innovations implemented. The following hypothesis is proposed. H3: Customer market is related positively innovation. intelligence to product

tions. This is in particular the case when suppliers inputs have a substantial inuence on the product characteristics of the small rmfor example, seeds as an input of farms. In reality, small rms rarely scan for new technological opportunities or articulate their needs (Bessant 1999). Suppliers may take a more active role in stimulating innovation by trying to inuence the small rms innovation decision. In Rogers (1995) terminology such rms are called change agents. Change-agent contact stimulates the adoption of innovations, which offers support for the following hypothesis: H4: Supplier intelligence is related positively to product innovation. Domain-specic innovativeness, which is dened as a willingness of the owner to learn about and adopt innovations in a specic domain, is related positively to innovation in that domain. The question is how a market orientation and an entrepreneurial orientation together affect innovation in a specic domain. If market orientation is interpreted as the adaptation of product offerings to expressed customer needs (for example, Christensen 1997) and if the value of traditional market research tools for really innovative products is limited, market oriented rms are notoriously lacking in foresight (Hamel and Prahalad 1994, p. 99). Consequently, market orientation of these rms is not reinforcing the entrepreneurial orientation innovativeness in its inuence on innovation. For small rms this type of market orientation may be the only option because they do not have the resources to drive markets (Connor 1999). Consequently, a market orientation may slow down innovation in small rms whose manager is highly innovative in a specic domain until the need for this new product shows up in small rms customer market intelligence. In the reverse, rms

Technological change initiated through R&D is considered to be the key technology-push source of innovation (see, for example, Kamien and Schwarz 1982, p. 36). It has been argued in this study that in small enterprises R&D often is substituted by external contacts. Through supplier intelligence, companies are able to detect new technologies and other types of input necessary for innovation (Carson et al. 1995, p. 126). For example, Rama (1996) shows that upstream industries are important sources for innovation, especially for commodity-type industries. Case studies for the food industry support the idea that a link to suppliers is important for process innovations and that a link with retailers is important for product innovation (Traill and Grunert 1997). However, if small rms are too small to initiate product innovations, the retailers may cooperate with the suppliers of the small rms to initiate product innova-

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that lag behind in innovativeness in a specic domain are stimulated by customer market intelligence to adopt an innovation because customers are able to express their needs for less innovative products, often being modications of existing products. This argument also holds for supplier intelligence, even though suppliers to small rms have an interest in promoting innovation by their client rm because many suppliers to small rms also lack detailed information about fundamentally new innovations. This leads to the following set of hypotheses: H5: Domain specic innovativeness is related positively to product innovation. H6: Customer market intelligence inhibits product innovation in small rms with highly innovative owners and stimulates product innovation in small rms with less innovative owners. H7: Supplier intelligence inhibits product innovation in small rms with highly innovative owners and stimulates product innovation in small rms with less innovative owners. It is expected that customer market intelligence is instrumental in achieving better service and product quality, which result in a higher price for the products. Pelham and Wilson (1996) nd that market orientation is the only variable in their model that signicantly inuences the level of relative product quality. This studys model only includes relative product price to capture the extent of service and quality differentiation. Narver and Slaters (1990) and Pelham and Wilsons (1996) ndings that market orientation is associated signicantly with a differentiation strategy offers support for a positive relationship

between customer market intelligence and relative product price. It is expected that this relationship also holds for small rms: H8: Customer market intelligence is related positively to relative product price. Small rms cannot maintain a differentiated market position based on superior quality and service (and consequently a higher relative product price) in the long run without being innovative, because colleagues will copy a successful marketing policy, and this will level out high relative prices. Therefore, in order to maintain high relative prices a small rm needs to innovate continuously on all aspects of its marketing policy, new products, better quality, and service but also distribution methods. Therefore, it is expected that general innovativeness of the owner will inuence the relative price of the products. H9: Innovativeness is related positively to relative product price. While a positive relationship between market orientation and performance/ marketing effectiveness has been reported widely ( Jaworski and Kohli 1993; Narver and Slater 1990); Pelham (2000) established this relationship for SMEs as well. Atuahene-Gima (1996) found a positive relationship between market orientation and product advantage, which refers to the benets that customers get from the new product. Foregoing ndings suggest a positive relation between customer market intelligence and product assortment attractiveness, in terms of average market price received. H10: Customer market intelligence is related positively to product assortment attractiveness.

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Firms try to make new products that are more attractive than existing products and thus may realize a price premium. Moreover, at the beginning of the product life cycle new products are not available widely yet, and competition is low, which enhances the price level of new products (excluding the case of temporary low penetration prices). However, high prices of new products attract competition, leading toward lower prices. Prices will decrease further since the new product will become mature and eventually will become obsolete because of new products entering the market. Foregoing arguments lead to the following hypothesis: H11: Product innovation positively to product attractiveness. is related assortment

Research Design
This studys hypotheses are tested by data on rose-growing rms in The Netherlands. The Dutch rose-growing industry consists of specialized family rms, realizing an average annual turnover of approximately Euro450,000. Average tillage areas are approximately 11,500 m2 of heated glasshouse per rm. Roses are sold through auctions. The Dutch ower industry is a dynamic industry with an international focus. Actually, it is a main player in the global ower trade (Porter 1990) and does not receive any support from the European Unions Common Agricultural Policy. Foregoing characteristics of the industry suggest that Dutch rose-growing rms are suited for testing these hypotheses.

Method
Measures
Archival data were used when available to overcome cognitive biases, but as most studies in this eld of research, this study relies heavily on perceptual measures. Multi-item scales were used because they have a higher reliability

than single-item scales (see, for example, Kerlinger 1985). The use of multi-item scales as a measurement methodology has a long history in psychology (see, for example, Cronbach and Meehl 1955; Thurstone 1934) and is accepted widely in the marketing literature (see, for example, Bearden, Netemeyer, and Mobley 1993; Bruner and Hensel 1992). Most concepts in this model can be measured by existing measures, which consist of a large number of items to assure their reliability and face validity. The straightforward use of these existing measures would result in a lengthy questionnaire, which puts a heavy load on respondents and threatens to reduce the quality of the data. A trade-off was made in this study between the length of the questionnaire and the number of items per measure by reducing the number of items per measure and by testing the reliability and validity of the reduced measures. Construct measures and Cronbachs alphas are shown in the Appendix. Summated scores are used for subsequent analyses. The measure of customer market intelligence in small rms is a multi-item measure that includes customer market intelligence elements from general measures of market orientation. More specically, items from Narver and Slaters (1990) customer-orientation element, Jaworski and Kohlis (1993) informationgeneration element, and Ruekerts (1992) obtains-and-uses-informationfrom-customers element were evaluated. Most items required adaptation to small rms based on discussions with owners of small rms. Twenty-six items to measure customer market intelligence were included in a pretest questionnaire along with 18 items that measure other elements of market orientation. Principal component analysis with oblique rotation was used to select suitable items for the customer market intelligence measure. Only items that loaded higher than 0.6 on the hypothesized component

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and lower than 0.3 on other components were selected. Four items were selected for use in the model. To judge the validity of the four-item measure, correlation analyses were performed. Subsequently, the four-item measure of customer market intelligence was correlated highly with the sum of the 40 remaining market orientation items (0.67; p < 0.01) and with the sum of the 26 items that measure customer market intelligence (0.67; p < 0.01). Moreover, 38 of the 40 remaining market orientation items were (p < 0.05) correlated signicantly with the four-item measure of customer market intelligence. This studys measure for the owners innovativeness is based on Leavitt and Waltons (1975) scale for innovativeness. Two dimensions have been identied in Leavitt and Waltons (1975) scale for innovativeness (see Joseph and Vyas 1984), one with positively formulated items labeled as the openness dimension and one with negatively formulated items labeled as the cautiousness dimension. In the original scale, the sum of the items from the cautiousness dimension were subtracted from the sum of the items from the openness dimension. This study only used items from the openness dimension in the model, because summating items from two dimensions in one measure is questionable from a measurement perspective (see Steenkamp and van Trijp 1991) and reduces its reliability. Additionally, many items from the openness dimension that were considered ambiguous by owners during face-to-face interviewseven after the wording had been adapted for use in small rmswere discarded. Eventually, four items for innovativeness were included in the questionnaire. One item was discarded during a reliability assessment to ensure better measurement properties. Goldsmith and Hofackers (1991) scale for domain-specic innovativeness is applied. The six original items were

applied to the domain of rose varieties and were included in the questionnaire. During the interviews, owners of small rms found no ambiguous items. Three negatively formulated items were discarded during a reliability assessment to ensure better measurement properties. Further analyses showed that, as expected, these items are correlated negatively with the sum scores of the items that eventually were used. However, the correlation was weak (-0.32; p < 0.01, -0.29; p < 0.01; -0.39; p < 0.01) compared to the correlation of the items that eventually were used (0.93; p < 0.01, 0.89; p < 0.01; 0.84; p < 0.01). The meaning of supplier intelligence was discussed with rose growers during interviews. Information from suppliers of rose plants was considered relevant for deciding which roses to grow. So supplier information in this research was focused on information from suppliers of rose plants. They were asked what information they would like to receive from their suppliers of roses and what information they already received. The answers were categorized into information about the quality (such as shelf life), growth characteristics (such as production, colors, and susceptibility to diseases), and market potential of varieties. One item per category was generated and was included in the questionnaire. One general item regarding the breadth of contact between the owner and the supplier also was included in the questionnaire but later was discarded during reliability assessment to ensure better measurement properties. Product innovation in the rose industry is determined to a large extent by new varieties grown. In contrast to many other studies on innovation, an objective measure of innovation is usedthe weighted average age of the varieties of roses grown. Age was dened as the number of days between the rst of January 1997 (the month of the survey)

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and a varietys date of registration in The Netherlands. A negative sign was included for an easier interpretation of the results. A = - Ai * M i i =1 where A = The average age of the rose varieties grown by a certain grower weighted by area; Ai = The number of days between the rst of January 1997 and a varieties date of registration in The Netherlands (the survey was executed in January 1997); Mi = The area in square meters of a certain variety i grown by a rose grower; and n = The number of varieties that a grower grows. An owners perception of rm performance was determined during face-toface interviews, and potential items for the measure were generated. Four elements were identied: relative product price (RPP) (relative to the average price for a specic variety); product assortment attractiveness (PAA); job satisfaction; and overall performance and protability. PAA and RPP were used as measures of performance in the model. RPP was measured using self-reported information, which is common in this kind of research (see for example Narver and Slater 1990; Pelham and Wilson 1996; Pelham 2000). Two items for RPP were included in the questionnaire. PAA was calculated as a weighted (by area) average of Dutch annual average prices of different varieties of roses (Association of Dutch Flower Auctions), grown by the respective rm. This performance measure provides an objective measure for annual average market value of the roses in a growers product portfolio.
n n

Data
A written questionnaire mailed to 980 rose growers was used to estimate the parameters in the model; 491 rose growers returned the questionnaire. This high response rate was achieved because the questionnaire was attached to a poll of the Dutch Product Board for Horticulture that is considered mandatory by most Dutch rose growers. For this studys analyses, only growers of large-headed roses were used, leaving 306 questionnaires. For 152 growers, information was available about all the variables in the model, including variables that require information about the kind and area of varieties grown. These 152 growers were used in these analyses. To test for nonresponse bias, respondents with missing values were compared with those without missing values on company size (total area of roses) and the variables in the model. There were no signicant differences between the two groups.

M i,
i =1

(1)

Methodology
First, ordinary least-squares (OLS) regression was applied to estimate the coefcients in the system of equations. OLS is an appropriate technique for this model because it is a recursive model. However, if the error terms in the different equations of this model are correlated and if the explanatory variables in each equation are not identical, seemingly unrelated regression (SUR) may give more efcient estimates (Zellner 1962). As suggested by Breusch and Pagan (1980), the LaGrange multiplier statistic was used to test whether the error terms in this system of equations are correlated and consequently whether SUR is a more appropriate technique than OLS.

Results
The LaGrange Multiplier statistic on the error terms in this system of equations after OLS regression analyses showed that the error terms were corre-

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lated signicantly, and hence SUR was used to obtain the nal parameter estimates. The beta coefcients for the parameters in this model are presented in Table 1. These results conrm H1 and H2, stating that innovativeness positively affects customer market intelligence and supplier intelligence. Also, domainspecic innovativeness is affected positively by innovativeness. Domain-specic innovativeness, supplier intelligence, and customer market intelligence are signicant explanatory variables for innovation in the model, which supports H3, H4, and H5.

H6, which states that customer market intelligence inhibits product innovation by owners of small rms that are highly innovative in the new product domain but stimulates product innovation by owners of small rms that are less innovative in the new product domain, is substantiated. To provide more insight into this nonlinear relation, the sample was divided into three groups with low, medium, and high scores on domainspecic innovativeness. Beta coefcients for the relationship between customer market intelligence and product innovation in the low, medium, and high domain-specic inno-

Table 1 Beta Coefcients from the (Seemingly Unrelated) Regression Analyses for Testing the Relations in the Model
Independent Variables CMInta I CMInt CMInt* DSInn Sint Sint * DSInn DSInn Pinn RPP PAA OPP n R2 0.40** Sintb 0.34** Dependent Variables DSInnc 0.48** 0.57** -1.10** 0.48** -0.73* 1.61** Pinnd RPPe 0.25** 0.18* PAAf

0.17*

0.23**

152 0.16

152 0.12

152 0.23

152 0.26

152 0.13

152 0.07

*p < 0.05, two-tailed. **p < 0.01, two-tailed. a customer market intelligence. b supplier intelligence. c domain specic (rose varieties) innovativeness. d product innovation. e relative product price. f product assortment attractiveness.

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Table 2 Beta Coefcients from the Regression Analyses for Testing the Moderator Effects of DSInn in the Model
Independent Variables Group CMInt Sint n R2 Dependent Variable Is Product Innovation Low DSInn 0.23* 0.31* 51 0.18 Medium DSInn -0.03 -0.23 53 0.06 High DSInn -0.24 -0.08 47 0.06

*Coefcient is signicantly different p < 0.05 two-tailed from the coefcient in the high DSInn group.

vativeness group show a smooth curvilinear relationship. The coefcient for customer market intelligence in the low domain-specic innovativeness group is signicantly different from the high domain-specic innovativeness group ( p < 0.05). The pattern in the beta coefcients for the relationship between supplier intelligence and product innovation is similar. The coefcient for supplier intelligence in the low domain-specic innovativeness group is signicantly different from the high domain-specic innovativeness group (p < 0.10). The coefcient for supplier intelligence in the medium domainspecic innovativeness group is not signicantly different from either the high or the low domain-specic innovativeness groups. These results offer support for H7. H8, stating that customer market intelligence is related positively to relative product price is supported in addition to H9, stating that innovativeness is related positively to relative product price. H10, stating that customer market intelligence is related positively to product assortment attractiveness also is supported,

which suggests that customer market intelligence contributes to the selection of generic products. H11, stating that product innovation is related positively to product assortment attractiveness is supported, which suggests that product innovation contributes to market success.

Discussion
This studys results conrm that, in line with the growing amount of evidence about the positive impact of market orientation on company performance, customer market intelligence is related positively to company performance of small rms. Customer market intelligence probably is helpful to perform better in terms of quality, service, or timing, which results in better RPP. Consequently, customer market intelligence about the augmented product such as intelligence about quality and service requirements offers opportunities to become a preferred supplier. Future research should elaborate on how small rms differentiate their products based on customer market intelligence. Our results also show that for small rms in markets with relatively

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homogeneous products, a market orientation is helpful in the selection of an attractive product assortment. It conrms the value of market information about the generic product for small rms. The observed role of customer market intelligence in the relationship between domain-specic innovativeness and product innovation offers an explanation for the debate about whether market orientation stimulates or inhibits innovation. Kohli and Jaworski (1990) cite several authors who found that the adoption of the marketing concept inhibits organizations from developing truly breakthrough innovations and AtuaheneGima (1996) even found that market orientation had a negative effect on product newness. This studys results show that market orientation may do both, depending on the innovativeness of the company in the product domain. Owners of a small rm with a highly innovative entrepreneurial orientation who are keen, perhaps too keen, on new products are mitigated by customer market intelligence. Owners who are less innovative in a specic domain are stimulated to innovate by customer market intelligence. Grunert et al. (1997) suggest that product innovation is stimulated by a rms enthusiasm for the product and a focus on the market. This studys results elaborate on this view by specifying the relationship between a rms interest in the product, market orientation, and product innovation. The role of supplier intelligence is similar to customer market intelligence in the relationship between domainspecic innovativeness and product innovation. Supplier intelligence stimulates product innovation if a company is less inclined to innovate but inhibits product innovation if a company is very keen on new products. This offers some tentative support for the authors view that suppliers of small rms have a role in the (downstream) market orientation of small rms.

Innovativeness of the owner, one dimension of an entrepreneurial orientation, appears to be an important characteristic of a small rm because it is correlated highly with performance, as measured in these analyses, and it permeates all variables in the model. This result is in accordance with research ndings from the past, which stress the entrepreneurial skills of farmers as the decisive variable in the success or failure of a farm business (Zachariasse 1974). Moreover, the effect of customer market intelligence on innovation depends on the owners innovativeness in a specic domain. Exploring other dimensions of entrepreneurial orientation seems worthwhile to increase our understanding further of the impact of customer market intelligence for owners of small rms with different entrepreneurial orientations. For example, the relationship between customer market intelligence and product innovation also may be moderated by risk taking. Also Kirtons (1994) theory on adopters and innovators suggests a different relationship between customer market intelligence and product innovation depending on the mode of entrepreneurial decisionmaking (see, for example, Foxall and Bhate 1993). There appears to be some overlap between Kirtons work on adaptors and innovators and the literature on market orientation and learning organizations as well (see, for example, Slater and Narver 1995). It will be necessary to test this model for other innovations and type of small rms in order to be able to generalize the established relationships. The interactive impact of entrepreneurial orientation and market orientation on the adoption of innovations based on disruptive technology seems particularly interesting in this respect.

Managerial Implications
These results suggest that providing a small rm owner with customer market

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intelligence stimulates a more considered decision-making process. This may slow down product innovation when the owner is highly innovative in the product domain. However, providing less innovative small rm owners with customer market intelligence may speed up product innovation, since it brings the new product and its opportunities to the attention of the owner. Irrespective of the newness of the assortment, customer market intelligence contributes to the selection of an assortment of higher valued products. Both the innovativeness of the owner and customer market intelligence are instrumental for above average prices in small rms. This studys results show that customer market intelligence provides value to customers through product innovation by small rms. Keeping in mind that small rms largely depend on secondary data for customer market intelligence, an effective infrastructure for conducting collective market research is important for product innovation and the competitiveness of small rms. Customer market intelligence about the newest products that are accessible for small rms will stimulate the production of new products that offer value to customers. To stretch the value of collective customer market intelligence, entrepreneurs should be trained in making effective use of such data (Smallbone and North 1999). These results demonstrate the value of a mixed population of small rm owners with respect to innovativeness and market orientation. Small rm owners, who are highly innovative in a specic domain, may adopt innovations without clear information about its market acceptance. Market-oriented small rms copy the successful innovations once customer market intelligence becomes available. Moreover, customer market intelligence stimulates small rms that would otherwise lag behind in innovation. Consequently, the innovativeness of

small rm owners is a crucial asset, which stakeholders of an industry such as governments and suppliers should cherish. Restrictions on innovativeness, via legislation, or conservative nancing may propel entrepreneurial owners of small rms out of an industry, which will deteriorate its competitive position.

Appendix
Measures of Research Constructs Customer Market Reliability: 0.76 Intelligence 1. Ik vraag mijn klanten met regelmaat of ze tevreden zijn. [I ask my customers regularly whether they are satised.] 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 correspond with what my customers want (in addition to the information provided by the price).] 3. Ik heb informatie over klanten, concurrenten, consumenten en belangrijke maatschappelijke ontwikkelingen. [I have information on customers, competitors and important social developments.] 4. Ik weet waar en bij wie mijn klanten hun rozen afzetten. [I know where and to whom my customers sell their roses.] Supplier Intelligence Reliability: 0.91

1. Ik ontvang veel informatie van veredelaars of leveranciers van plantmateriaal over de kwaliteiten van variteiten. [I receive a lot of information from breeders or suppliers of plant material on the qualities of varieties.] 2. Ik ontvang veel informatie van veredelaars of leveranciers van plantmateriaal over specieke kenmerken van variteiten.

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[I receive a lot of information from breeders and suppliers of plant material on specic characteristics of varieties.] 3. Ik ontvang veel informatie van veredelaars of leveranciers van plantmateriaal over de marktontwikkelingen van variteiten.] [I receive a lot of information from breeders and suppliers of plant material on market developments of varieties.] Innovativeness Reliability: 0.84

[On average, I have received a lower price for my roses than the average price for a particular variety.] 2. Ik ontvang voor rozen van een bepaalde variteit een hogere prijs dan collegae. [For roses of a particular variety I receive a higher price than colleagues do.]

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