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

134–154

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 innova-
tiveness on product innovation and company performance, for small firms. A spe-
cific 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 study’s
results show that the owner’s innovativeness permeates all variables in the model and
has a positive influence on market orientation, innovation, and performance. An
interesting research result is also that customer market intelligence influences
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 ori- instrumental variable. In this context,

entation has a positive influence on the elaborate theories and frameworks about
performance of firms (Deshpandé 1999; the relationship between market orienta-
Jaworski and Kohli 1993; Narver and tion and innovation have been proposed
Slater 1990). This relationship not only ( Jaworski, Kohli, and Sahay 2000;
has been established firmly for large Connor 1999; Slater and Narver 1998,
companies but also has been found in 1999; Han, Kim, and Srivastava 1998;
research on small and medium-sized Hurley and Hult 1998; Atuahene-Gima
enterprises (SMEs) (Pelham 2000). In 1996; Slater and Narver 1995). They
analyzing the relationship between focus in particular on large firms and
market orientation and performance, only to a lesser extent on small firms.
innovation has been identified as an 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 inter-
ests 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.

134 JOURNAL OF SMALL BUSINESS MANAGEMENT

of relationship between market orienta- superior value for buyers and, thus,
tion and innovation being ascertained for continuous superior performance for the
large firms can be generalized to small business” (p. 21). They state that market
firms, because innovation in small firms orientation consists of three behavioral
is different from innovation in large firms components: customer orientation, com-
(Audretsch 2001; Tether 1998; Eden, petitor orientation, and interfunctional
Levitas, and Martinez 1997; Van Dijk et coordination. Continuous innovation is
al. 1997; Cohen and Klepper 1992; Acs implicit in each of these components
and Audretsch 1988). It is important to (Narver and Slater 1999), and the two
fill up that gap in our knowledge about decision criteria are long-term focus and
small firms because of the importance of profitability. Kohli and Jaworski (1990)
innovation and small businesses for represent the behavioral perspective on
today’s economy (Robbins et al. 2000). market orientation. They introduced
This study contributes to this matter by market intelligence rather than customer
developing and testing a model of the focus as the central element of market
relationship among market orientation, orientation because in their view
innovativeness, product innovation, and market intelligence is a much wider
performance in small firms. In this concept than customer focus: “It includes
context, the small firm is defined as one consideration of exogenous market
that is run and is controlled under the factors that affect customer needs and
direct supervision of the owner. This preferences and current as well as future
article is structured as follows. First, the needs of customers” (p. 3). Although
concepts and notions on market orienta- many other studies about market orien-
tion and innovation relevant to this tation have been reported, most authors
research are reviewed. Second, market either adopt the definition of Kohli and
orientation and innovation for small Jaworski (1990) or of Narver and Slater
firms are specified, and a model is pro- (1990) (Atuahene-Gima 1996; Pelham
posed that expresses the relationship and Wilson 1996) or use them as a start-
among market orientation, innovation, ing point (Deng and Dart 1994). In this
and performance in small firms. study Kohli and Jaworski’s (1990) defini-
Hypotheses on these relationships are tion of market orientation is used:
presented. This study’s model is tested “Market orientation is the organization-
on a specific type of small firm: rose wide generation of market intelligence,
growers in The Netherlands. Finally, dissemination of the intelligence across
managerial implications of the results are departments and organization-wide
discussed, and suggestions for further responsiveness to it” (p. 6).
research are made. Responsiveness reflects the extent to
which companies adjust their marketing
Conceptual Framework policies to market intelligence. The
Market Orientation narrow interpretation of responsiveness
Two seminal articles, those of Narver is the adaptation of offerings to ex-
and Slater (1990) and of Kohli and pressed customer needs and market
Jaworski (1990), coined the concept of structures. This reactive response is
market orientation in the early 1990s. labeled “market driven” by Jaworski,
Narver and Slater (1990) represent the Kohli, and Sahay (2000) and “customer-
cultural perspective on market orienta- led” by Slater and Narver (1999, 1998).
tion. They define market orientation However, being market-oriented means
as “the organization culture that most that companies also try to understand
effectively and efficiently creates the and to respond to customers’ latent and
necessary behaviors for the creation of future needs (Slater and Narver 1999,

VERHEES AND MEULENBERG 135

1998). Jaworski, Kohli, and Sahay (2000) value. Elaborating Christensen’s (1997)
elaborate on this by suggesting that argument, Meeus and Oerlemans (2000)
market-oriented companies can “drive conclude that in turbulent markets a
markets” by manipulating the structure focus on continuous innovation (adapta-
of the market and the behavior of market tion) is a better innovation policy than
players. Product innovation can be the inertia and gradual innovation (selec-
most appropriate response to market tion) and vice versa. In this study, inno-
intelligence. Therefore, focusing on the vation is investigated at the firm level
relationship between market orientation because of the desire to understand
and product innovation, responsiveness the impact of management character-
to innovation is narrowed down to the istics on the level of innovation in the
component of responsiveness most rele- small firm.
vant to this analysis. At the project level, where innovation
projects are the objects of study, three
Innovation studies have provided important insights:
The term innovation has acquired the SAPPHO studies (Rothwell 1972), the
various meanings over the years NewProd project (Cooper 1980, 1979),
(Zaltman, Duncan, and Holbeck 1973): and the Stanford Innovation Project
the process of developing a new item, (Maidique and Zirger 1984). In each
the new item itself, and the process of study, understanding customers consis-
adopting the new item. This research tently came up as an important factor for
focuses on new products being “new to successful new product development
the company” because product innova- projects.
tions by small firms are often product
modifications based on new types of Small Firms
inputs. There is no widely accepted statistical
Innovation can be researched at demarcation of a small firm. The number
various levels: the sectorial, regional, of employees might define a small firm.
firm, and project level. During the past In Europe the demarcation between
decades, research identifying how firms small and medium-sized firms ranges,
successfully can be innovative has flour- across countries, between 5 and 50
ished. At the firm level, research has employees (Nooteboom 1994). The
focused on differences in firm structure, importance of small firms is illustrated
culture, and management to explain dif- by the fact that in the European Union
ferences in innovative success (see, for about 34 percent of the workforce is
example, Zaltman, Duncan, and Holbeck working in firms with less than 10
1973; Burns and Stalker 1961). Chris- employees (European Commission
tensen (1997) distinguishes between sus- 2000). The authors will refrain from
taining and disruptive technological debate about the appropriate definition
change. He explains why firms that are of a small firm and will lay down a def-
successful innovators based on sustain- inition that fits the purpose of this study:
ing technologies ignore crucial innova- A small firm is a firm that is run and is
tions based on disruptive technologies. controlled under the direct supervision
Sustaining technologies improve the per- of the owner. A farm is a case in point.
formance of established products, along Actually, small firms are a subset of
the dimensions of performance that SMEs. Rothwell and Dodgson (1994,
mainstream customers in major markets p. 310) list advantages and disadvantages
historically have valued. Disruptive tech- of SMEs and large firms as far as inno-
nologies have a new value proposition vation is concerned. They concluded
that a few and commonly new customers that SMEs advantages are mainly behav-

136 JOURNAL OF SMALL BUSINESS MANAGEMENT

ioral, such as entrepreneurial dynamism, large firms have the resources and strate-
internal flexibility, and responsiveness gic management capabilities to conceive
to changing circumstances, while those and to develop future new core compe-
of large firms are primarily material, tencies, (networks of) small firms rarely
such as financial and technological are equipped for such a fundamental
resources. A discussion of the differences long-term planning process (Shrader,
between small firms and medium-sized Mulford, and Blackburn 1989). Finally, it
and large firms, which seems particularly is important to notice that various small
relevant for innovative behavior, will be firms operate in niche markets that are
provided. not served by large firms (Eden, Levitas,
Compared to large firms, small firms and Martinez 1997; Christensen 1997;
are nonbureaucratic and more flexible; Carson 1985).
the owner is the decision-maker (Carson
et al. 1995; Nooteboom 1994). Private Market Orientation in Small Firms
and business motives and goals of man- The specific resources and capabilities
agers are more intertwined in small firms of small firms have consequences for
than in medium-sized or large firms market orientation as defined by Kohli
(Carland et al. 1984). Information and Jaworski (1990).1 In small firms,
systems in small firms relatively are resources for market intelligence genera-
simple. Information is based on second- tion are scarce, and there is no room for
ary data or on direct, formal and infor- a marketing specialist. In fact, market
mal, external contacts of the owner intelligence is based mostly on second-
(Smeltzer, Fann, and Nikolaisen 1988). ary data (from trade journals, sector
The owner of a small firm is often a research, conferences, and professional
craftsman with specific operational capa- magazines) or on personal contacts (with
bilities (Nooteboom 1994), but small suppliers, customers, or bank employ-
firms perform various activities with less ees) (Smeltzer, Fann, and Nikolaisen
expertise than large firms (Freel 2000) 1988).
because they have little room for func- When small firms sell a differentiated
tional specialists (Carson et al. 1995). For product in a local or regional market,
example, small firms rarely have the legal they can use market intelligence more
expertise to acquire patents, nor can they effectively. Advances in information tech-
build and defend trademarks (Eden, nology (IT) will be helpful in this
Levintas, and Martinez 1997, p. 63). Small respect. Intelligence about suppliers and
size limits the possibilities to capture colleagues is very useful for small firms
fully the gains of innovation (Cohen and in order to innovate processes, products,
Klepper 1992). Also, small firms’ limited and services.
access to finance for venture capital is a The dissemination of market intelli-
hotly debated barrier to innovation gence is not a relevant issue in small
(Freel 2000; Carson et al. 1995). Some- firms where the owner makes the major
times, small firms develop competencies decisions. However, the dissemination of
in networks; this fact underlines the market intelligence to other people in
importance of networks for small firms the firm might increase employee moti-
(Carson et al. 1995). However, while vation. In fact, Ruekert (1992) showed

1
Note that we do not propose that small firms are less market oriented than large firms.
Research suggests that small firms can be just as market oriented as large firms. Moreover,
Pelham and Wilson (1996) and Slater and Narver (1996) report about small firms that are
highly market oriented.

VERHEES AND MEULENBERG 137

that market orientation is related posi- dimension being relevant for this
tively to job satisfaction. research.
Small firms run by the owner can Innovativeness is defined as “. . . the
respond with alacrity and flexibly to notion of openness to new ideas as an
market intelligence because decision- aspect of a firm’s culture” (Hurley and
making is nonbureaucratic and because Hult 1998, p. 44). In a small firm, inno-
the decision-maker is able to oversee the vativeness implies a willingness of the
whole production and marketing process owner to learn about and to adopt inno-
(Carson et al. 1995; Nooteboom 1994). vations, both in the input and output
On the other hand, their responsiveness markets. High innovativeness of a small
is constrained by limited financial and firm does not mean that the owner is
technical resources. innovative in all domains. Kirton (1976)
shows that each individual has a pre-
Innovation in Small Firms ferred style of creativity and decision-
Innovation in small firms has been making, which can vary from adaptive to
discussed extensively in the literature on innovative. Adaptors have a preference
entrepreneurship. The term entrepreneur for doing things better within the gener-
has been applied among others to the ally accepted theories, policies, and view-
“person who creates new combinations. points. Innovators prefer to do things
. . . who sees how to fulfill currently differently. Innovators turn a blind eye to
unsatisfied needs or perceives a more accepted thoughts to reconstruct the
efficient means of doing what is already problem and to solve the new problem.
being done” (Schumpeter 1934, quoted Buttner and Gryskiewicz (1993) find that
by Kamien and Schwartz 1982, p. 8). founders of a company with an adaptive
No generally accepted definition of an style of decision-making are more likely
entrepreneur exists. Cunningham and to continue the business as time passes
Lischeron’s (1991) definition of an than founders with a more innovative
entrepreneur as one who creates, style of decision-making.
manages, and assumes the risk of a new Domain-specific innovativeness of
venture embraces the total innovative small firms captures the innovativeness
process. The term entrepreneurship has of the owner for a particular domain of
been applied among others to the iden- interest (Gatignon and Robertson 1985).
tification and exploitation of an op- Some domains can capture the atten-
portunity and to the development of a tion of owners with an adaptor style of
niche in the market (Cunningham and decision-making, and other domains can
Lischeron 1991). However, Lumpkin and attract owners with an innovator style of
Dess (1996) contrast between entrepre- decision-making.
neurship and entrepreneurial orienta- Limited resources and capabilities, as
tion. In their view, entrepreneurship discussed, prevent small firms in many
refers to the content of entrepreneurial industries from conducting in-house
decisions—what is undertaken—while research and development activities.
entrepreneurial orientation refers to key Many innovations by small firms are
entrepreneurial processes—how new based on off-the-shelf technologies, con-
ventures are undertaken. Lumpkin and cepts, and/or resources offered by sup-
Dess (1996) identify five dimensions in plying industries. As a result, new inputs
entrepreneurial orientation: (1) auton- are a very important source of innova-
omy; (2) risk taking; (3) proactiveness; tions for small firms. Networks of small
(4) competitive aggressiveness; and (5) firms can establish collective research
innovativeness. This study focuses on and development (R&D) programs as a
innovativeness as the entrepreneurial basis for product innovation of network

138 JOURNAL OF SMALL BUSINESS MANAGEMENT

members. Cooperative competencies expected that in small firms market
(Sivadas and Dwyer 2000) of participat- orientation moderates the relationship
ing firms seem important for the success between innovativeness in the new
of such programs. Small firms that product domain and product innovation.
produce differentiated products also can Following Slater and Narver (1995) it
innovate individually by adapting prod- is assumed that product innovation medi-
ucts to the needs of the target group of ates the relation between customer
customers. market intelligence and company per-
formance. Two market-related perform-
The Model ance criteria are used: (1) product
This study’s model aims at explaining assortment attractiveness, a weighted
innovation and its impact on market average of firm assortment and market
performance for small firms. The model prices of the respective products in the
focuses on market orientation and inno- assortment—this measure expresses the
vativeness—a dimension of entrepre- market attractiveness of the chosen
neurial orientation—as explanatory assortment; and (2) relative product
variables. They are core concepts in two price, a price premium on the average
streams of research that are relevant for market price, which a firm is able to
innovation in small firms: marketing and realize—this is a measure of doing better
entrepreneurship. On the basis of this or worse than other companies in
model, hypotheses are formulated. product quality and service.
In the model, market orientation as Our model as specified in Figure 1 can
conceived by Kohli and Jaworski (1990) be expressed in the following recursive
is adapted to the analysis of the rela- model:
tionships among market orientation,
innovation, and performance in small CMInt = f (Inn) (1)
firms as follows: (1) Customer intelli- SInt = f (Inn) (2)
gence is used as a representation of DSInn = f (Inn) (3)
market intelligence; (2) Information dis- PInn = f (CMInt, CMInt ¥
semination is not included since infor- DSInn, SInt, SInt ¥
mation collection, strategy planning, and DSInn, DSInn) (4)
decision-making is integrated in one RPP = f (Inn, CMInt) (5)
person, the owner; and (3) Response is PAA = f (CMInt, PInn) (6)
refined to innovation because of the
research objective. Since the available Hypotheses
alternatives on the input side greatly The following hypotheses are pro-
influence the small enterprise’s innova- posed with respect to the relationships
tion responsiveness, supplier intelligence between the variables in our model. It
is included as a separate variable. should be stressed that the model and
Owners’ innovativeness seems to be hypotheses are specified for small firms.
an essential element of entrepreneurial The first hypothesis addresses the
orientation for innovation in small firms. relationship between innovativeness and
It is expected that the innovativeness of customer market intelligence in small
the owner permeates all variables of the firms. Innovativeness, being an element
model. A distinction is made between of entrepreneurial orientation, is
innovativeness as a general characteris- expected to stimulate customer market
tic, which reflects the values of the intelligence because customer informa-
owner, and domain-specific innovative- tion is a key resource for innovation
ness, which also reflects the owner’s (Hartman, Tower, and Sebora 1994).
interest in a specific domain. It is Kohli and Jaworski (1990) argue that “the

VERHEES AND MEULENBERG 139

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

H9 Relative Product
H8 Price (RPP)
Customer Market
H1 Intelligence H10
H3 Product
(CMInt)
Assortment
H6 Attractiveness
Domain Specific Product (PAA)
Innovativeness H11
Innovativeness H5 Innovation
(Inn)
(DSInn) (PInn)
H7

Supplier H4
H2 Intelligence
(SInt)

more positive the senior manager’s atti- In small firms innovation rarely equates
tude towards change, the greater the formal R&D: “Most are not creators but
market orientation of the organization” users of technology and so a prime
(p. 9).2 This is supported by the strong concern is that of effective technology
correlation between entrepreneurial ori- transfer” (Bessant 1999, p. 134). “Dis-
entation and market orientation reported advantages of scale dictate that small
by Miles and Arnold (1991) and Slater enterprises must have easy and affordable
and Narver (2000). Homburg and access to external sources of aid and infor-
Pflesser (2000) identified innovativeness mation to surmount inevitable shortfalls
as a basic organizational value support- in internal resources and skills” (Freel
ing market orientation. It is expected that 2000, p. 63). Owners of small firms with an
this relationship also holds for small entrepreneurial orientation will use their
firms. Keeping in mind that customer suppliers as a valuable source of tech-
market intelligence is the core element nological and marketing information be-
of market orientation of small firms it is cause suppliers often are willing and are
hypothesized that able to help their customers. As a result,
various suppliers have expert power vis-à-
H1: Innovativeness is related positively vis small enterprises. Therefore, the fol-
to customer market intelligence. lowing hypothesis is proposed.

2
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 hypoth-
esize that top management’s risk aversion is an antecedent to market intelligence generation.
This hypothesis is not supported by their empirical results.

140 JOURNAL OF SMALL BUSINESS MANAGEMENT

H2: Innovativeness is related positively tions. This is in particular the case when
to supplier intelligence. suppliers’ inputs have a substantial influ-
ence on the product characteristics of the
In the marketing literature, market small firm—for example, seeds as an
intelligence is expected to improve a input of farms.
firm’s capacity to innovate (see, for In reality, small firms rarely scan for
example, Hurley and Hult 1998; Li and new technological opportunities or artic-
Calantone 1998; Grunert et al. 1997; ulate their needs (Bessant 1999). Suppli-
Slater and Narver 1995; Day 1994). Com- ers may take a more active role in
panies are able to detect the unfilled stimulating innovation by trying to influ-
needs of customers through customer ence the small firm’s innovation decision.
market intelligence and are expected to In Rogers’ (1995) terminology such firms
respond to that intelligence. Some evi- are called “change agents.” Change-agent
dence for a positive relationship between contact stimulates the adoption of inno-
market orientation and innovation exists. vations, which offers support for the fol-
Han, Kim, Srivastava (1998) find that lowing hypothesis:
customer orientation (but not competitor
orientation and interfunctional co- H4: Supplier intelligence is related posi-
ordination) is related positively to the tively to product innovation.
number of innovations implemented.
The following hypothesis is proposed. Domain-specific innovativeness,
which is defined as a willingness of the
H3: Customer market intelligence owner to learn about and adopt innova-
is related positively to product tions in a specific domain, is related pos-
innovation. itively to innovation in that domain. The
question is how a market orientation and
Technological change initiated an entrepreneurial orientation together
through R&D is considered to be the key affect innovation in a specific domain.
technology-push source of innovation If market orientation is interpreted as
(see, for example, Kamien and Schwarz the adaptation of product offerings to
1982, p. 36). It has been argued in this expressed customer needs (for example,
study that in small enterprises R&D often Christensen 1997) and if the value of tra-
is substituted by external contacts. ditional market research tools for really
Through supplier intelligence, compa- innovative products is limited, market
nies are able to detect new technologies oriented firms are “notoriously lacking in
and other types of input necessary for foresight” (Hamel and Prahalad 1994,
innovation (Carson et al. 1995, p. 126). p. 99). Consequently, market orientation
For example, Rama (1996) shows that of these firms is not reinforcing the
upstream industries are important entrepreneurial orientation innovative-
sources for innovation, especially for ness in its influence on innovation. For
commodity-type industries. Case studies small firms this type of market orienta-
for the food industry support the idea tion may be the only option because they
that a link to suppliers is important for do not have the resources to drive
process innovations and that a link markets (Connor 1999). Consequently, a
with retailers is important for product market orientation may slow down inno-
innovation (Traill and Grunert 1997). vation in small firms whose manager is
However, if small firms are too small to highly innovative in a specific domain
initiate product innovations, the retailers until the need for this new product
may cooperate with the suppliers of the shows up in small firm’s customer
small firms to initiate product innova- market intelligence. In the reverse, firms

VERHEES AND MEULENBERG 141

that lag behind in innovativeness in a between customer market intelligence
specific domain are stimulated by cus- and relative product price. It is expected
tomer market intelligence to adopt an that this relationship also holds for small
innovation because customers are able to firms:
express their needs for less innovative
products, often being modifications of H8: Customer market intelligence is
existing products. This argument also related positively to relative product
holds for supplier intelligence, even price.
though suppliers to small firms have an
interest in promoting innovation by their Small firms cannot maintain a dif-
client firm because many suppliers to ferentiated market position based on
small firms also lack detailed information superior quality and service (and
about fundamentally new innovations. consequently a higher relative product
This leads to the following set of price) in the long run without being
hypotheses: innovative, because colleagues will copy
a successful marketing policy, and this
H5: Domain specific innovativeness will level out high relative prices. There-
is related positively to product fore, in order to maintain high relative
innovation. prices a small firm needs to innovate
continuously on all aspects of its mar-
H6: Customer market intelligence keting policy, new products, better
inhibits product innovation in small quality, and service but also distribution
firms with highly innovative owners methods. Therefore, it is expected that
and stimulates product innovation in general innovativeness of the owner
small firms with less innovative will influence the relative price of the
owners. products.

H7: Supplier intelligence inhibits H9: Innovativeness is related positively

product innovation in small firms to relative product price.
with highly innovative owners and
stimulates product innovation in While a positive relationship between
small firms with less innovative market orientation and performance/
owners. marketing effectiveness has been
reported widely ( Jaworski and Kohli
It is expected that customer market 1993; Narver and Slater 1990); Pelham
intelligence is instrumental in achieving (2000) established this relationship for
better service and product quality, which SMEs as well. Atuahene-Gima (1996)
result in a higher price for the products. found a positive relationship between
Pelham and Wilson (1996) find that market orientation and product advan-
market orientation is the only variable in tage, which refers to the benefits that
their model that significantly influences customers get from the new product.
the level of relative product quality. This Foregoing findings suggest a positive
study’s model only includes relative relation between customer market intel-
product price to capture the extent of ligence and product assortment attrac-
service and quality differentiation. tiveness, in terms of average market price
Narver and Slater’s (1990) and Pelham received.
and Wilson’s (1996) findings that market
orientation is associated significantly H10: Customer market intelligence is
with a differentiation strategy offers related positively to product assort-
support for a positive relationship ment attractiveness.

142 JOURNAL OF SMALL BUSINESS MANAGEMENT

 Firms try to make new products than single-item scales (see, for example,
that are more attractive than existing Kerlinger 1985). The use of multi-item
products and thus may realize a price scales as a measurement methodology
premium. Moreover, at the beginning of has a long history in psychology (see, for
the product life cycle new products are example, Cronbach and Meehl 1955;
not available widely yet, and competition Thurstone 1934) and is accepted widely
is low, which enhances the price level of in the marketing literature (see, for
new products (excluding the case of tem- example, Bearden, Netemeyer, and
porary low penetration prices). However, Mobley 1993; Bruner and Hensel 1992).
high prices of new products attract com- Most concepts in this model can be
petition, leading toward lower prices. measured by existing measures, which
Prices will decrease further since the consist of a large number of items to
new product will become mature and assure their reliability and face validity.
eventually will become obsolete because The straightforward use of these existing
of new products entering the market. measures would result in a lengthy ques-
Foregoing arguments lead to the follow- tionnaire, which puts a heavy load on
ing hypothesis: respondents and threatens to reduce the
quality of the data. A trade-off was made
H11: Product innovation is related in this study between the length of the
positively to product assortment questionnaire and the number of items
attractiveness. per measure by reducing the number of
items per measure and by testing the reli-
Research Design ability and validity of the reduced meas-
This study’s hypotheses are tested ures. Construct measures and Cronbach’s
by data on rose-growing firms in The alphas are shown in the Appendix. Sum-
Netherlands. The Dutch rose-growing mated scores are used for subsequent
industry consists of specialized family analyses.
firms, realizing an average annual The measure of customer market
turnover of approximately Euro450,000. intelligence in small firms is a multi-item
Average tillage areas are approximately measure that includes customer market
11,500 m2 of heated glasshouse per intelligence elements from general meas-
firm. Roses are sold through auctions. ures of market orientation. More specifi-
The Dutch flower industry is a dynamic cally, items from Narver and Slater’s
industry with an international focus. (1990) customer-orientation element,
Actually, it is a main player in the global Jaworski and Kohli’s (1993) information-
flower trade (Porter 1990) and does not generation element, and Ruekert’s
receive any support from the European (1992) “obtains-and-uses-information-
Union’s Common Agricultural Policy. from-customers” element were evaluated.
Foregoing characteristics of the industry Most items required adaptation to small
suggest that Dutch rose-growing firms firms based on discussions with owners
are suited for testing these hypotheses. of small firms. Twenty-six items to
measure customer market intelligence
Method were included in a pretest questionnaire
Measures along with 18 items that measure other
Archival data were used when avail- elements of market orientation. Principal
able to overcome cognitive biases, but component analysis with oblique rota-
as most studies in this field of research, tion was used to select suitable items
this study relies heavily on perceptual for the customer market intelligence
measures. Multi-item scales were used measure. Only items that loaded higher
because they have a higher reliability than 0.6 on the hypothesized component

VERHEES AND MEULENBERG 143

and lower than 0.3 on other components applied to the domain of rose varieties
were selected. Four items were selected and were included in the questionnaire.
for use in the model. To judge the valid- During the interviews, owners of small
ity of the four-item measure, correlation firms found no ambiguous items. Three
analyses were performed. Subsequently, negatively formulated items were dis-
the four-item measure of customer carded during a reliability assessment to
market intelligence was correlated highly ensure better measurement properties.
with the sum of the 40 remaining market Further analyses showed that, as
orientation items (0.67; p < 0.01) and expected, these items are correlated neg-
with the sum of the 26 items that atively with the sum scores of the items
measure customer market intelligence that eventually were used. However, the
(0.67; p < 0.01). Moreover, 38 of the 40 correlation was weak (-0.32; p < 0.01,
remaining market orientation items were -0.29; p < 0.01; -0.39; p < 0.01) com-
(p < 0.05) correlated significantly with pared to the correlation of the items that
the four-item measure of customer eventually were used (0.93; p < 0.01,
market intelligence. 0.89; p < 0.01; 0.84; p < 0.01).
This study’s measure for the owner’s The meaning of supplier intelligence
innovativeness is based on Leavitt and was discussed with rose growers during
Walton’s (1975) scale for innovativeness. interviews. Information from suppliers of
Two dimensions have been identified in rose plants was considered relevant for
Leavitt and Walton’s (1975) scale for deciding which roses to grow. So sup-
innovativeness (see Joseph and Vyas plier information in this research was
1984), one with positively formulated focused on information from suppliers of
items labeled as the openness dimension rose plants. They were asked what infor-
and one with negatively formulated mation they would like to receive from
items labeled as the cautiousness dimen- their suppliers of roses and what infor-
sion. In the original scale, the sum of the mation they already received. The
items from the cautiousness dimension answers were categorized into informa-
were subtracted from the sum of the tion about the quality (such as “shelf
items from the openness dimension. This life”), growth characteristics (such as
study only used items from the open- production, colors, and susceptibility to
ness dimension in the model, because diseases), and market potential of
summating items from two dimensions varieties. One item per category was
in one measure is questionable from generated and was included in the
a measurement perspective (see questionnaire. One general item regard-
Steenkamp and van Trijp 1991) and ing the breadth of contact between
reduces its reliability. Additionally, many the owner and the supplier also was
items from the openness dimension that included in the questionnaire but later
were considered ambiguous by owners was discarded during reliability assess-
during face-to-face interviews—even ment to ensure better measurement
after the wording had been adapted for properties.
use in small firms—were discarded. Product innovation in the rose indus-
Eventually, four items for innovativeness try is determined to a large extent by
were included in the questionnaire. One new varieties grown. In contrast to many
item was discarded during a reliability other studies on innovation, an objective
assessment to ensure better measure- measure of innovation is used—the
ment properties. weighted average age of the varieties of
Goldsmith and Hofacker’s (1991) scale roses grown. Age was defined as the
for domain-specific innovativeness is number of days between the first of
applied. The six original items were January 1997 (the month of the survey)

144 JOURNAL OF SMALL BUSINESS MANAGEMENT

and a variety’s date of registration in Data
The Netherlands. A negative sign was A written questionnaire mailed to 980
included for an easier interpretation of rose growers was used to estimate the
the results. parameters in the model; 491 rose
growers returned the questionnaire. This
n n high response rate was achieved because
A = - Ê Â Ai * M i ˆ Â M i, (1) the questionnaire was attached to a poll
Ë i =1 ¯ i =1 of the Dutch Product Board for Horti-
culture that is considered mandatory by
where most Dutch rose growers. For this study’s
analyses, only growers of large-headed
A = The average age of the rose vari- roses were used, leaving 306 question-
eties grown by a certain grower naires. For 152 growers, information was
weighted by area; available about all the variables in the
Ai = The number of days between the model, including variables that require
first of January 1997 and a varieties information about the kind and area of
date of registration in The Nether- varieties grown. These 152 growers were
lands (the survey was executed in used in these analyses. To test for non-
January 1997); response bias, respondents with missing
Mi = The area in square meters of a values were compared with those
certain variety “i” grown by a rose without missing values on company size
grower; and (total area of roses) and the variables in
n = The number of varieties that a the model. There were no significant dif-
grower grows. ferences between the two groups.

An owner’s perception of firm per- Methodology

formance was determined during face-to- First, ordinary least-squares (OLS)
face interviews, and potential items for regression was applied to estimate the
the measure were generated. Four ele- coefficients in the system of equations.
ments were identified: relative product OLS is an appropriate technique for this
price (RPP) (relative to the average price model because it is a recursive model.
for a specific variety); product assort- However, if the error terms in the differ-
ment attractiveness (PAA); job satisfac- ent equations of this model are corre-
tion; and overall performance and lated and if the explanatory variables in
profitability. PAA and RPP were used as each equation are not identical, seem-
measures of performance in the model. ingly unrelated regression (SUR) may
RPP was measured using self-reported give more efficient estimates (Zellner
information, which is common in this 1962). As suggested by Breusch and
kind of research (see for example Narver Pagan (1980), the LaGrange multiplier
and Slater 1990; Pelham and Wilson statistic was used to test whether the
1996; Pelham 2000). Two items for RPP error terms in this system of equations
were included in the questionnaire. PAA are correlated and consequently whether
was calculated as a weighted (by area) SUR is a more appropriate technique
average of Dutch annual average prices than OLS.
of different varieties of roses (Associa-
tion of Dutch Flower Auctions), grown Results
by the respective firm. This performance The LaGrange Multiplier statistic on
measure provides an objective measure the error terms in this system of equa-
for annual average market value of the tions after OLS regression analyses
roses in a grower’s product portfolio. showed that the error terms were corre-

VERHEES AND MEULENBERG 145

lated significantly, and hence SUR was H6, which states that customer market
used to obtain the final parameter intelligence inhibits product innovation
estimates. by owners of small firms that are highly
The beta coefficients for the parame- innovative in the new product domain
ters in this model are presented in Table but stimulates product innovation by
1. These results confirm H1 and H2, owners of small firms that are less inno-
stating that innovativeness positively vative in the new product domain, is
affects customer market intelligence and substantiated. To provide more insight
supplier intelligence. Also, domain- into this nonlinear relation, the sample
specific innovativeness is affected posi- was divided into three groups with low,
tively by innovativeness. Domain-specific medium, and high scores on domain-
innovativeness, supplier intelligence, and specific innovativeness.
customer market intelligence are signifi- Beta coefficients for the relationship
cant explanatory variables for innovation between customer market intelligence
in the model, which supports H3, H4, and product innovation in the low,
and H5. medium, and high domain-specific inno-

Table 1
Beta Coefficients from the (Seemingly Unrelated)
Regression Analyses for Testing the Relations in the Model
Independent Dependent Variables
Variables
CMInta Sintb DSInnc Pinnd RPPe PAAf

I 0.40** 0.34** 0.48** 0.25**

CMInt 0.57** 0.18* 0.17*
CMInt* DSInn -1.10**
Sint 0.48**
Sint * DSInn -0.73*
DSInn 1.61**
Pinn 0.23**
RPP
PAA
OPP
n 152 152 152 152 152 152
R2 0.16 0.12 0.23 0.26 0.13 0.07

*p < 0.05, two-tailed.

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

146 JOURNAL OF SMALL BUSINESS MANAGEMENT

 Table 2
Beta Coefficients from the Regression Analyses for Testing
the Moderator Effects of DSInn in the Model
Independent Dependent Variable Is Product Innovation
Variables
Group Low DSInn Medium DSInn High DSInn

CMInt 0.23* -0.03 -0.24

Sint 0.31* -0.23 -0.08
n 51 53 47
R2 0.18 0.06 0.06

*Coefficient is significantly different p < 0.05 two-tailed from the coefficient in the
high DSInn group.

vativeness group show a smooth curvi- which suggests that customer market
linear relationship. The coefficient for intelligence contributes to the selection
customer market intelligence in the low of generic products. H11, stating that
domain-specific innovativeness group is product innovation is related positively
significantly different from the high to product assortment attractiveness is
domain-specific innovativeness group supported, which suggests that product
( p < 0.05). innovation contributes to market success.
The pattern in the beta coefficients for
the relationship between supplier intelli- Discussion
gence and product innovation is similar. This study’s results confirm that, in
The coefficient for supplier intelligence line with the growing amount of evi-
in the low domain-specific innovative- dence about the positive impact of
ness group is significantly different from market orientation on company per-
the high domain-specific innovativeness formance, customer market intelligence
group (p < 0.10). The coefficient for sup- is related positively to company per-
plier intelligence in the medium domain- formance of small firms. Customer
specific innovativeness group is not market intelligence probably is helpful to
significantly different from either the perform better in terms of quality,
high or the low domain-specific innova- service, or timing, which results in better
tiveness groups. These results offer RPP. Consequently, customer market
support for H7. intelligence about the augmented
H8, stating that customer market intel- product such as intelligence about
ligence is related positively to relative quality and service requirements offers
product price is supported in addition to opportunities to become a preferred sup-
H9, stating that innovativeness is related plier. Future research should elaborate
positively to relative product price. H10, on how small firms differentiate their
stating that customer market intelligence products based on customer market
is related positively to product assort- intelligence. Our results also show that
ment attractiveness also is supported, for small firms in markets with relatively

VERHEES AND MEULENBERG 147

homogeneous products, a market orien- Innovativeness of the owner, one
tation is helpful in the selection of an dimension of an entrepreneurial orienta-
attractive product assortment. It confirms tion, appears to be an important charac-
the value of market information about teristic of a small firm because it is
the generic product for small firms. correlated highly with performance, as
The observed role of customer market measured in these analyses, and it per-
intelligence in the relationship between meates all variables in the model. This
domain-specific innovativeness and result is in accordance with research
product innovation offers an explanation findings from the past, which stress the
for the debate about whether market ori- entrepreneurial skills of farmers as the
entation stimulates or inhibits innova- decisive variable in the success or failure
tion. Kohli and Jaworski (1990) cite of a farm business (Zachariasse 1974).
several authors who found that the adop- Moreover, the effect of customer market
tion of the marketing concept inhibits intelligence on innovation depends on
organizations from developing truly the owner’s innovativeness in a specific
breakthrough innovations and Atuahene- domain. Exploring other dimensions of
Gima (1996) even found that market ori- entrepreneurial orientation seems worth-
entation had a negative effect on product while to increase our understanding
newness. This study’s results show that further of the impact of customer market
market orientation may do both, depend- intelligence for owners of small firms
ing on the innovativeness of the with different entrepreneurial orienta-
company in the product domain. Owners tions. For example, the relationship
of a small firm with a highly innovative between customer market intelligence
entrepreneurial orientation who are and product innovation also may be
keen, perhaps too keen, on new prod- moderated by risk taking. Also Kirton’s
ucts are mitigated by customer market (1994) theory on adopters and innova-
intelligence. Owners who are less inno- tors suggests a different relationship
vative in a specific domain are stimulated between customer market intelligence
to innovate by customer market intelli- and product innovation depending on
gence. Grunert et al. (1997) suggest that the mode of entrepreneurial decision-
product innovation is stimulated by a making (see, for example, Foxall and
firm’s enthusiasm for the product and a Bhate 1993). There appears to be some
focus on the market. This study’s results overlap between Kirton’s work on adap-
elaborate on this view by specifying the tors and innovators and the literature on
relationship between a firm’s interest in market orientation and learning organi-
the product, market orientation, and zations as well (see, for example, Slater
product innovation. and Narver 1995).
The role of supplier intelligence is It will be necessary to test this model
similar to customer market intelligence for other innovations and type of small
in the relationship between domain- firms in order to be able to generalize
specific innovativeness and product the established relationships. The inter-
innovation. Supplier intelligence stimu- active impact of entrepreneurial orienta-
lates product innovation if a company is tion and market orientation on the
less inclined to innovate but inhibits adoption of innovations based on dis-
product innovation if a company is very ruptive technology seems particularly
keen on new products. This offers some interesting in this respect.
tentative support for the authors’ view
that suppliers of small firms have a role Managerial Implications
in the (downstream) market orientation These results suggest that providing a
of small firms. small firm owner with customer market

148 JOURNAL OF SMALL BUSINESS MANAGEMENT

intelligence stimulates a more considered small firm owners is a crucial asset,
decision-making process. This may slow which stakeholders of an industry such
down product innovation when the as governments and suppliers should
owner is highly innovative in the product cherish. Restrictions on innovativeness,
domain. However, providing less innova- via legislation, or conservative financing
tive small firm owners with customer may propel entrepreneurial owners of
market intelligence may speed up small firms out of an industry, which will
product innovation, since it brings the deteriorate its competitive position.
new product and its opportunities to the
attention of the owner.
Irrespective of the newness of the Appendix
assortment, customer market intelligence Measures of Research Constructs
contributes to the selection of an assort- Customer Market Reliability: 0.76
ment of higher valued products. Both the Intelligence
innovativeness of the owner and cus-
1. Ik vraag mijn klanten met regelmaat
tomer market intelligence are instrumen-
of ze tevreden zijn.
tal for above average prices in small
[I ask my customers regularly whether
firms.
they are satisfied.]
This study’s results show that cus-
2. Ik ga regelmatig na of mijn rozen nog
tomer market intelligence provides value
aansluiten bij wat mijn klanten willen
to customers through product innovation
(dus aanvullend op de informatie die
by small firms. Keeping in mind that
de prijs biedt).
small firms largely depend on secondary
[I regularly check whether my roses
data for customer market intelligence, an
correspond with what my customers
effective infrastructure for conducting
want (in addition to the information
collective market research is important
provided by the price).]
for product innovation and the competi-
3. Ik heb informatie over klanten,
tiveness of small firms. Customer market
concurrenten, consumenten en
intelligence about the newest products
belangrijke maatschappelijke
that are accessible for small firms will
ontwikkelingen.
stimulate the production of new products
[I have information on customers,
that offer value to customers. To stretch
competitors and important social
the value of collective customer market
developments.]
intelligence, entrepreneurs should be
4. Ik weet waar en bij wie mijn klanten
trained in making effective use of such
hun rozen afzetten.
data (Smallbone and North 1999).
[I know where and to whom my cus-
These results demonstrate the value of
tomers sell their roses.]
a mixed population of small firm owners
with respect to innovativeness and
Supplier Intelligence Reliability: 0.91
market orientation. Small firm owners,
who are highly innovative in a specific 1. Ik ontvang veel informatie van verede-
domain, may adopt innovations without laars of leveranciers van plantmateriaal
clear information about its market over de kwaliteiten van variëteiten.
acceptance. Market-oriented small firms [I receive a lot of information from
copy the successful innovations once breeders or suppliers of plant material
customer market intelligence becomes on the qualities of varieties.]
available. Moreover, customer market 2. Ik ontvang veel informatie van vere-
intelligence stimulates small firms that delaars of leveranciers van plantmate-
would otherwise lag behind in innova- riaal over specifieke kenmerken van
tion. Consequently, the innovativeness of variëteiten.

VERHEES AND MEULENBERG 149

 [I receive a lot of information from [On average, I have received a lower
breeders and suppliers of plant mate- price for my roses than the average
rial on specific characteristics of price for a particular variety.]
varieties.] 2. Ik ontvang voor rozen van een
3. Ik ontvang veel informatie van vere- bepaalde variëteit een hogere prijs
delaars of leveranciers van plantmate- dan collegae.
riaal over de marktontwikkelingen [For roses of a particular variety I
van variëteiten.] receive a higher price than colleagues
[I receive a lot of information from do.]
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