Strategy and MO PDF

A Longitudinal Study of the Impact
of Market Structure, Firm Structure,

Strategy, and Market Orientation
Culture on Dimensions of
Small-Firm Performance
Alfred M. Pelham
Grand Valley State University
David T. Wilson
Pennsylvania State University
The purpose of this article is to determine market orientation's relative impact on small-business performance,
compared to other influences, in an integrated model using
longitudinal data. Contrary to expectations based on the
management literature, the results indicate weak causal
relationships between market environment, small-firm
structure, and small-firm strategy. The results further indicate weak influences of these variables, but strong and
consistent influences of market orientation, on various
measures of small-firm performance. Contrary to expectations based on business policy literature, relative product quality and new product success were not significant
influences on profitability, perhaps due to the significant
influence of market orientation on these variables. In
addition, although increases in growth~share had a significant short-term influence on increases in profitability, high
levels of previous years'firm growth~share had a negative
influence on current profitability. The previous year's level
of firm coordinating systems and market competitive intensity has a significant impact on the level of small-firm
market orientation.
Webster's (1981) survey of CEOs of large firms indicated that the technology culture of industrial firms comJournal of the Academy of Marketing Science.
Volume 24, No. 1, pages 27-43
Copyright 9 1996 by Academy of Marketing Science.
monly gives them a production orientation. Until recently,

the marketing concept was discussed only by academics
and seldom applied in business. Recently, American businesses, seeking to emulate Japanese market success, and
urged on by popular writers such as Peters and Waterman
(1982) and by academic writers such as Day (1990) and
Day and Wensley (1983, 1988), have revived the marketing concept as a business philosophy. The reemergence of
the marketing concept likely motivated Jaworski and
Kohli (1993) and Narver and Slater (1990) to study the impact
on performance from implementation of the marketing
concept philosophy through market-oriented behaviors.
Narver and Slater (1990) define market orientation as
the "organization culture that most effectively and efficiently creates the necessary behaviors for the creation of
superior value for buyers and, thus, superior performance
for the business" (p. 21). The importance of adding market
orientation to an integrated model of determinants of performance is indicated by studies of strategic business units
of large firms, which show market orientation's significant
influence on relative return on assets (Narver and Slater
1990), sales growth, new product success (Slater and
Narver 1994), and "overall performance" (Jaworski and
Kohli 1993). However, their models of performance did
not include important business position variables, strategy
variables, or firm-structure variables, which may diminish
the significance of market orientation's impact on performance.
In this study we seek to measure the impact of these variables as antecedents of market orientation in small firms.
The relationships between strategy, firm structure, industry structure, and firm performance have been exten-
28
JOURNAL OF THE ACADEMY OF MARKETING SCIENCE
WINTER 1996
TABLE 1
Variable Relationships and Theory Source
Industrial Organization
Organization Theory
Business Policy
Market environment--rFirm strategy a'b

Market environment--+Performancec
Market environment--*Firrn structured

Firm structure---~Firm strategye
Firm structure--*Performanceb,f
Firm strategy--*Firrn structureg

Firm strategy--~Performanceb,h
S hare---~Profitability ~
Product quality--~Profitabilityc'J
a. Porter (1979).
b. Park and Mason (1990).
c. Venkatraman and Prescott (1990).
d. Lawrence and Lorsch (1967).
e. Miles and Snow (1978).
f. Hill and Picketing (1986).

g. Grinyer, Yasai-Ardekanii, and A1-Bazzaz (1980)
b. Hambtick (1983).
i. Buzzell (1981); Buzzell and Gale (1987).
j. Jacobsen (1988).
sively studied by management researchers, but primarily

in a large-firm context. The recent empirical studies of the
impact of market orientation sampled large-firm strategic
business units (SBUs). We believe it is important to extend
the study of the impact of market orientation, as well as
other external and internal variables, on small-firm performance because these relationships could be substantially
different from those found in studies of large-firm performance. Small firms are noted for their more cohesive
cultures and simpler organization structures, thus diminishing the coordinating benefits of a strong market orientation culture. Small firms are also noted for their fewer
numbers of product lines and customers, reducing the need
for formal activities designed to gather and process market
information for marketing decision making. On the other
hand, these characteristics of small businesses may enhance the firms' ability to fully exploit a market-oriented
culture.
It could also be argued that other internal firm variables
and external variables have such a significant effect on
small-firm performance that the impact of market orientation is negligible. For instance, undercapitalization and
lack of planning have commonly been cited by small-business
researchers as the most significant influences on success
or failure (Robinson and Pearce 1984). Internal small-firm
structure aspects such as formalization, coordination, and
control systems may be such important determinants of
small-firm success as to render insignificant the impact of
market orientation. On the other hand, because small firms
have been characterized as lacking systematic decision
making, strategic thinking (Robinson 1982; Sexton and
Van Auken 1982), and a long-term orientation (Gilmore
1971), market orientation could be a highly significant
determinant of performance. A market orientation culture
could provide small firms, noted for their ad hoc and
short-term decision-making patterns, with a much needed
firmwide focus for objectives, decisions, and actions.
Despite the potential for a low impact of market orientation on small-business performance, we will provide a
rationale for expectations that market orientation has a
significant influence on small-business new product development, relative product quality, growth/share, and
profitability. We argue that market orientation should be a
significant determinant of performance success for small
businesses because most small firms lack the financial
resources to seek other sources of business success, such

as low-cost producer status, R&D competitive edge, and
staffing to provide adequate planning. An indication of this
possibility comes from Narver and Slater's (1990) results,
which indicate that large SBUs with low-market orientation, but low-cost advantages, outperformed smaller SBUs
with medium levels of market orientation in the same firm,
but not smaller SBUs with high levels of market orientation.
In this article we borrow from the industrial organization (market structure) literature, organization theory (firm
structure) literature, and business policy/strategic management (business position/strategy) literature to provide expected associations between the variables of interest.
Some of the key relationships between these constructs are
provided in Table 1. These management researchers have
debated the direction, the nature, and the extent of
influence of these variables, but there have been few
attempts to integrate all key variables in their models of performance.
We expand on the current body of market orientation
research by considering the importance of market orientation compared to other determinants of small-business
performance in a longitudinal sample. To accomplish this
objective we measure the impact of market orientation's
impact on small-firm business position (relative product
quality, new product success, sales growth/market share),
factoring in the influences of firm strategy, firm structure,
and market environment. We also measure the influence
on small-firm profitability, factoring in business position
variables in addition to the variables mentioned above.
We also investigate the relationship of market orientation to other potential determinants of small-business performance. To accomplish this objective we measure the
influence of the market environment, firm strategy, firm
structure, and performance feedback on small-business
market orientation.
CONCEPTUAL FOUNDATIONS
Market Orientation Influences
on Business Position
Narver and Slater's (1990) theoretical linkage between
market orientation and performance is based on the con-
Pelham, Wilson / SMALL-FIRM PERFORMANCE
cept of sustainable competitive advantage (Aaker 1988;

Day and Wensley 1983, 1988), the ability of a market-oriented firm to create long-term superior value for the firm's
customers. The concept of sustainable competitive advantage provides a strong base for expectation that market
orientation can offer a firm the ability to outperform its
competitors. As noted by Reed and DeFillippi (1990),
activities result in a sustainable competitive advantage
only if (1) the activities are unique, (2) the activities are
difficult to achieve and copy, and (3) there is a causal
ambiguity between the activities and performance. The
cultural norms associated with a strong market-oriented
culture, such as quick response to negative customer satisfaction information, may be difficult to foster. Causal
relationships between certain market-oriented behaviors
(such as sharing market information across functions)
and performance may not be well understood by many
managers.
In addition to the ability of market orientation to provide the firm with a sustainable competitive advantage, we
suggest another basis for expectation of a link between
market orientation and performance, especially in small
firms. This basis rests on the logic of the strong culture
hypothesis (Dennison 1984; Weick 1985). To the degree
that the same pattern of beliefs and norms are shared
throughout a company, a culture is considered to be strong.
Weick (1985) notes that a firm with a strong culture can
provide cohesiveness and focus in strategies and tactics.
Because small firms are characterized by lack of formal
coordinating systems, a strong market-oriented culture
may partially substitute for these systems by providing
focus and discipline to the various small-firm functions in
the implementation of firm strategy.
There is criticism (Barney 1986; Saffold 1988) that the
strong culture hypothesis oversimplifies the complex mix
of firm characteristics that influence performance and that
the strong culture hypothesis ignores the prevalence of
subcultures. Despite this criticism, there is empirical evidence of the positive influence of certain types of strong
corporate cultures (e.g., Dennison 1984; Gordon and
Tomaso 1992). Deshpande', Farley, and Webster (1993)
found that market culture emphasizing competitiveness,
goal achievement, and strategic focus on competitive advantage was associated with higher levels of performance
than were clan, adhocracy, and hierarchy culture types.
However, a strong culture that is not externally oriented,
such as a technical or production orientation, may be
detrimental to performance in some environments. As
indicated by Kets de Vries (1980), the development of
shared meanings can manifest themselves as shared delusions and may reduce the organization's capacity to learn
and adapt~
The market-oriented firm's greater understanding of its
market environment should also reduce the incidence of
new product failures (Cooper 1984). Slater and Narver's
(1994) study of the strategic business units of a large forest
products company found that market orientation (controlling for market environment) significantly influences
new product success.
29
The market-oriented firm's greater understanding of

key customer needs results in products with greater value
to those customers. This value could be delivered by
emphasis on lower costs, which are translated to lower
prices for good-quality products. However, given the limited ability of small firms to pursue a low-cost strategy, this
value may be best delivered through differentiated products for carefully selected market niches. The marketoriented firm's greater understanding of customers and
competitors leads to more effective marketing decision
making, resulting in greater sales growth and market share.
The market-oriented firm's monitoring of customer satisfaction and its reaction to this monitoring information
leads to greater customer retention, which also positively
affects sales growth/market share. Slater and Narver
(1994) found that market orientation (controlling for market environment) significantly influenced sales growth.
Therefore, we contend that market orientation remains a
significant influence on small-firm business position (relative product quality, new product success, and sales
growth/market share) even when the influences of market
structure, firm structure, and firm strategy are included in
an integrated model. Hence
PI: Factoring in the influence of market structure, firm
structure, and firm strategy, a high level of market
orientation in small firms significantly and positively influences relative product quality.
P2: Factoring in the influence of market structure, firm
structure, firm strategy, and relative product quality,
a high level of market orientation in small firms
significantly and positively influences new product
Success.

structure, firm strategy, relative product quality, and
new product success, a high level of market orientation in small firms significantly and positively influences sales growth/market share.
Why Market Orientation Should

Affect Profitability Directly
It is possible that market orientation's influence on
profitability is indirect, through variables that have been
shown to affct profitability: (1) relative product quality
(Phillips, Chang, and Buzzell 1983; Buzzell and
Gale 1987), (2) new product success (Cooper 1984), and
(3) sales growth/market share (Buzzell, Gale, and Sultan
1975; Venkatraman and Prescott 1990). However, we argue that there are direct influences of market orientation
on profitability.
Market orientation should aid the small firm in meeting
two of Rumelt's (1981) criteria for evaluating strategies:
consistency and workability. Strategy consistency and
workability is diminished in many small firms due to low
levels of formal planning, coordination, and control systems. If, within a small firm, behaviors are consistently
guided by norms geared toward satisfying customers, the
result should be greater consistency in decision making
30
JOURNALOF THE ACADEMYOF MARKETINGSCIENCE
within and across functions. Customer satisfaction norms

should also improve interfunctional coordination in the
implementation of strategies, resulting in greater strategy
workability. This greater strategy consistency and workability should reduce costs associated with correcting
problems associated with poor functional coordination and
reduce human resource costs expended to achieve results.
Firms emphasizing activities that seek to understand
customer needs and satisfy those needs should produce.
products with lower defect levels, which should in turn
lead to reduced costs. These market-oriented activities
could aid in the implementation of a strategy designed to
cater to customers in premium priced/high-margin market
segments, where high product quality/service levels are
critical.
Narver and Slater (1990) and Slater and Narver (1994)
provide empirical evidence of the relationship between
market orientation and profitability (relative return on
assets) in large-firm SBUs. Their results indicate that
market orientation, controlling for market environment,
significantly influences return on assets. Hence
structure, firm strategy, and business position, a high
level of market orientation in small firms significantly and positively influences profitability.
Influence of the Internal and External

Environment on Market Orientation
The management literature is mixed on the impact of
decentralization and formalization on organization culture, particularly innovativeness (Miller and Friesen 1984,
p. 158). Formalization may increase the level of certain
types of information processing (Galbraith 1973) and information use (Daft and Lengel 1986), fostering external
information gathering. Jaworski and Kohli (1993) contend
that formalization and centralization are inversely related
to information use (Deshpande' and Zaltman 1982) and
organization responsiveness (Stampfl 1978). Ruekert,
Walker, and Roering (1985) suggest that high levels of
formalization and centralization, together with low levels
of specialization, are likely to be associated with relatively
efficient marketing function performance. However, as
indicated by Walker and Ruekert (1987), the preponderance of evidence supports the contention that centralized,
formalized, and nonspecialized organizations tend to be
more efficient, but less innovative and adaptive than those
with the opposite structural tendencies.
Jaworski and Kohli (1993) argue (per Zaltman,
Duncan, and Holbek 1973) that formalization may negatively affect market orientation if emphasis on rules results
in an organization that is less adaptive to the environment,
but may positively affect market orientation if rules enhance customer satisfaction. They also suggest that formalization, centralization, and departmentalization may
inhibit innovative behavior, but may enhance the
WINTER 1996
implementation stage of innovative behavior. They cite
Deshpande' and Zaltman's (1982) study to suggest the
importance of interdepartmental connectedness in facilitating the dissemination and responsiveness to market
intelligence.
Although they found that interdepartmental connectedness significantly and positively influenced firm market
orientation, they found no influence of formalization, centralization, or departmentalization on market orientation.
However, there may be especially strong relationships
between these structural variables and the prevalence of
market orientation in small firms. Small-business presidents may recognize that increasing low levels of formalization, control systems, and coordinating systems may
improve internal efficiency but cannot positively affect
revenue enhancement without an increased emphasis on
market-oriented behaviors. This recognition is based on
understanding that a market-oriented firm can better use
these structural characteristics to consistently provide high
levels of customer service and value.
We argue that, on balance, because of the typical low
levels of formalization in small businesses, greater formalization and control systems will not significantly reduce
the innovative aspects of a market-oriented culture, but
will positively affect marketing implementation, which
will reinforce market-oriented behaviors. We further argue
that, given the low levels of small-firm control and coordinating systems, greater use of these systems increases
the appreciation of market information gathering and customer satisfaction across functions. Hence
P5: The greater the level of small-firm formalization, the
greater the level of market orientation.
P6: The greater the level of small-firm control systems,
the greater the level of market orientation.
P7: The greater the level of small-firm coordinating
systems, the greater the level of market orientation.
Given the evidence of the impact of decentralization on
innovative behaviors (Walker and Ruekert 1987) and information use (Deshpande' and Zaltman 1982), we contend that decentralization should positively affect the
prevalence of market-oriented behaviors. Decentralization, especially in small firms, should provide employees
across functions and levels with a greater involvement in
activities designed to improve customer satisfaction. Decentralization of decision making in small businesses
should increase market-oriented behaviors, as lower level
managers learn to appreciate the value of market information and spread that information. Hence
P8: The greater the level of small-firm decentralization,
the greater the level of market orientation.
One of the great strengths of small businesses is their
capacity for flexibility and adaptability due to simple
Pelham, Wilson/ SMALL-FIRMPERFORMANCE

organization structure and small capital investment levels.
Small firms have fewer built-in barriers to communication
and a reduced tendency to foster subcultures based on
functional specialty. Consequently, modifying small-firm
structure to accommodate product differences may improve operating efficiencies but will tend to reduce communication. For this reason, we expect a negative influence
on market orientation. Hence
P9: The greater the extent of firm structure based on
product differentiation, the lower the level of market
orientation.
Gupta and Govindarajan (1983) found that greater
managerial willingness to take risks and greater tolerance
for ambiguity contributed to the effectiveness of "build"
strategic business units. Small-firm presidents with those
tendencies should emphasize a strategy of innovation,
including growth through new product development,
which should underscore the need for a firmwide market
orientation. The strategy an organization pursues affects
information processing (Hambrick 1981) and interpretations (Daft and Weick 1984). In a small firm that pursues
a strategy characterized by emphasis on new product introduction and product differentiation, there should be a
recognition of the relationship between new product success and adequate understanding ofunmet customer needs.
This recognition should develop as a result of analysis of
new product successes and failures. Thus, in small firms
that pursue such a strategy, there should be a tendency to
emphasize cultural norms that value firmwide understanding of customer needs and activities that satisfy those
needs. Managers who decide to increase their emphasis on
new product development and product modification will
learn to value environmental scanning activities as a means
of risk reduction.
Conversely, small firms that pursue a low-cost strategy
tend to emphasize an internal orientation based on cost
containment and production efficiencies. Narver and
Slater (1990) found a significant difference between the
market orientation/differentiation strategy correlation
(.45) and the market orientation/low-cost strategy correlation (.28). Although our measures of these strategies are
slightly different than those of Narver and Slater, we would
expect the same kind of relationship in small firms. Hence
31
Although neither Jaworski and Kohli (1993) nor Slater

and Narver (1994) found significant moderating influences of environmental characteristics on the market orientation-performance link, there is still the possibility that
the market environment may significantly affect the level
of market orientation in small firms.
Chatman and Jehn's (1994) study provides evidence of
the variability of cultures across industries. ConsiStent
with industrial organization (IO) theory's suggestion that
the market environment constrains firm strategy (e.g.,
Porter 1979), we would expect that industry dynamism and
competitive intensity would influence the level of a firm's
market orientation. B ourgeois's (1980) results indicate the
importance of industry dynamism on perceived uncertainty. In a turbulent environment, firm success is more
dependent on an adaptation to changing and growing customer needs. Kohli and Jaworski (1990) suggest that, in a
stable environment with a fixed set of customers with
stable preferences, few adjustments to a marketing mix are
necessary to cater to these customers, requiring a lower
level of market orientation. A management perception of
an increasingly dynamic market environment could directly influence the small-firm manager to increase emphasis on externally oriented activities designed to understand
and satisfy customers and designed to monitor competition. Davis, Morris, and Allen's (1991) study of large firms
found that perceived environmental turbulence is positively associated with firm market orientation due to the
firm's desire to reduce uncertainty and due to the effectiveness of market segmentation efforts in such an environment. Hence
Pl1: As market dynamism increases, the level of smallfirm market orientation increases.
Lusch and Laczniak (1987) suggest that organizations
in more competitive environments may be influenced to
be more responsive to the changing needs of the marketplace, and thus be more market oriented. Conversely, as
suggested by Kohli and Jaworski (1990), the stronger the
demand faced by a business, the more that firm can "get
away with" a low level of market orientation. Gordon
(1991) cites the deregulation of the financial services
industry, which created a much more competitive environment and necessitated cultures that were oriented more to
adaptability than stability. Hence
P10: Increases in use of innovation/differentiation

strategy in small firms positively influences the
level of market orientation.
P12: As competitive intensity increases, the level of

small-firm market orientation increases.
We were restricted by the nature of our database in

testing the reverse of this latest hypothesis; namely, that
increases in market orientation influence an emphasis on
an innovation/differentiation strategy. However, this possibility is noted by researchers (Shrivasta 1985), who
suggest that culture shapes strategy.
Figure 1 provides a model illustrating these propositions as well as the relationships between variables suggested by the management literature. Because we are
primarily interested in the significance of the antecedents
and consequences of market orientation, we did not formally present propositions based on the other relationships
32
WINTER 1996
FIGURE 1
An Integrated Model of Determinants of Business Profitability
MARKET ENVIRONMENT
Dynamism
Competitive Intensity
Ii
STRATEGY
Innovation/
Differentiation
<------:..... >
Low Cost
:
:
: P6
ORGANIZATION STRUCTURE
* Centralization
* Formalization
* Coordination
* Control Systems
* Product/Service
Differentiation
: P7
:
P5
MARKET ORIENTATION
* Customer Understanding Orientation

* Customer Satisfaction Orientation
* Competitor Orientation
Business Position Variables
~~>>
RELATIVE PRODUCT QUALITY
J NEW
PRODUCT SUCCESS
>
.l|
~v
PROFITABILITY
Theory: Industrial Organization
Organization Theory
illustrated in Figure 1. However, we did test for these

relationships and will discuss them as they apply to the
various management literatures. As noted in the figure,
relative product quality, new product success, and
growth/share are considered by business policy researchers as business position variables with relationships
to each other and profitability.
PI: :
: :
:
:
:
:
:
I<: :
P2 :
:
:
:
:
:
:
..........
1<<----
< .......... :___
< ................ :
P4
Business Policy
Market Orientation .........
METHOD
Proposition testing was based on examination of parameter significance in models using year-to-year differences in the dependent and independent variables. Because
of the small sample size (and the complexity of some
models) and the potential for multicollinearity, we supple-
Pelham,Wilson/ SMALL-FIRMPERFORMANCE
mented multiple regression models (with all hypothesized
variables) with additional tests of parameter significance
using forward and backward stepwise regression to investigate parameter insignificance. Because of small year-toyear differences in some variables, we also used lagged
variable regression. Variance inflation factor (VIF) analysis (Neter, Wasserman, and Kutner (1985, p. 391) indicated
no significant parameter distortion due to multicollinearity. However, to reduce the impact of multicollinearity, we
mean-centered the data.
We were fortunate that a longitudinal database had been
developed by the Center for Entrepreneurship at Eastern
Michigan University, measuring a broad spectrum of internal firm and external industry variables. In the original
year of data collection, 71 percent of firm presidents contacted by phone agreed to participate in the panel. The
Center's panel is composed of 370 Michigan firms with
average sales of $2.9 million and 21.5 employees (30%
manufacturing, 28% wholesaling, 24% business services,
and 18% construction). However, because we added market orientation (79 respondents) and relative product quality (76 respondents) questions in the midst of their
telephone interview schedule in 1993 and because of our
need for complete responses to all measures for both the
current and previous year, regression models were based
on a respondent base of only 68 firms. A comparison of the
68 firms used in this study with those in the total panel
indicated a similar composition (29% manufacturing, 32%
wholesaling, 26% business services, and 13% construction). The average number of employees in the 68 firms
was 23. The range of firm sizes was fairly narrow (15 to
65), reducing the likelihood of the impact of firm size on
performance. Examination of correlation relationships
verified this supposition.
Construct validity analysis was based on variable responses in 1992 ranging from 145 to 370, thereby providing a sample size sufficient to run LISREL measurement
model analysis for those constructs. Because the 1993
respondent base available for all constructs was only 68
firms, use of LISREL for structural equation modeling was
not possible. Therefore, examination of paths suggested by
the model in Figure 1 was conducted with path analysis
(Duncan 1971) with separate multiple regression models.
Because market orientation and relative product quality
questions were added to the questionnaire in 1993, these
variables reflect a onetime measurement. The lack of longitudinal data on the firm's level of market orientation may
reduce confidence in causal effects of market orientation.
However, we contend that a firm's culture forms over a
long time, and a measure taken once within a 3- to 4-year
period will be representative of the firm's culture. Even in
small firms, which typically have considerably more flexibility than large firms, managers find that employee behavior modification is a slow and difficult process. The small
level of change in structural variables from 1991 to 1993
supports this argument.
Appendix A provides the survey questions for each
variable along with factor analysis (exploratory/varimax
rotation) loadings on the appropriate construct and LISREL measurement model squared multiple correlations (a
33
measure of unidimensional reliability). All measures used

7-point semantic differential or agree/disagree scales with
the exception of formalization, which was a yes/no series
of questions. Each variable is composed of at least three
measures, with the exceptions of new product success (two
measures) and relative product quality (one measure). All
variables are formed by the average score for each firm on
the questions designed to measure that variable. Appendix
B provides the construct means and standard deviations for
the 2 years.
The nine market orientation questions used in this study
are based upon Pelham's (1993) analysis of measures of
market orientation as used by Narver and Slater (1990) and
Jaworski and Kohli (1993). Pelham's study, composed of
160 small-manufacturing-firm presidents and sales managers, found that Narver and Slater's measures achieved
the best reliability and validity scores for small firms and
therefore they were used in this study.
The items measuring the organization structure variable
of product line differentiation (e.g., differences across
product lines'as to required method of production, customers' buying habits, and nature of competition) were drawn
from Miller (1988). The items measuring centralization,
control systems, and formalization came from Miller and
Droge's (1986) study. Centralization is defined as the
extent of decision making at top levels of the organization.
An example of a centralization measure is the organization
level where decisions as to dismissal of a worker are made.
Control systems provide management with tools to evaluate the implementation of plans. An example of a control
systems measure is the extensive use of cost centers for
cost control. Formalization is defined as the extent of
written rules, policies, and procedures. An example of a
formalization measure is the use/nonuse of written job
descriptions. Coordination is defined as systems designed
to increase cross-functional planning and decision making.
An example of coordination is the frequency of decisions
made by departments working together. Data were available for market structure and firm structure variables to
examine the impact of these variables, lagged 2 years.
The dimensions of the market environment incorporated in this study were competitive intensity (the degree
of perceived hostility in the environment stemming from
competition) and dynamism (the degree of change in key
elements of the market structure). Competitive intensity
measures were taken from Khandwalla's (1977) study. An
example of a measure of competitive intensity is the extent
of threat from price competition. Dynamism measures
came from Miller and Droge's (1986) study. An example
of a measure of dynamism is the frequency of change in
customer needs.
Performance measures (business position and profitability) are based on the president's response to questions
assessing whether results were above or below expectations. This type of subjective performance measure, with
an anchor relative to expectations, allows for greater comparability across types of industries and situations, with
varying standards of acceptable performance. Due to the
nature of the sampling frame of small firms, objective
measures of performance were not available due to the
34
reluctance of private firms to divulge this confidential

information. Dess and Robinson (1984) found a strong
correlation between subjective assessments of performance and their objective counterparts. In addition, Venkatraman and Ramanujam (1987) found that informant data
exhibited less method variance than archival data. Researchers are recognizing the multidimensional nature of
business performance and the importance of multiple measures of those dimensions (Venkatraman and Ramanujam
1987). However, Jaworski and Kohli's (1993) study relied
on a single measure of "overall performance." Slater and
Narver's (1994) study relied on single measures of profitability (relative return on assets), sales growth, and new
product success. In our study, new product success is
operationalized as the average of two measures: new product/service development and market development.
Growth/share is operationalized as the average of three
measures: sales growth rate, employment growth rate, and
market share. Profitability is operationalized as the average of five measures: operating profits, profit to sales ratio,
cash flow, return on investment, and return on assets.
Relative product quality had only one measure.
The variable of low-cost strategy is measured by the
degree to which the firm emphasizes (1) pricing below
competitors, (2) continuing, overriding concern for lowest
cost per unit, and (3) products in lower priced market
segments. The variable of innovation/differentiation strategy is measured by the degree to which the firm emphasizes (1) new product development, (2) strict product
quality control procedures, (3) developing and refining
existing products, (4) innovation in manufacturing processes, and (5) products in higher priced market segments.
Coefficient alpha scores for these variables range from
.63 to .88 (see Appendix A). Analysis of factor loadings
and LISREL measurement model squared multiple correlations also indicated reasonably high levels of reliability
and convergent/discriminant validity.
Appendix B provides a correlation matrix for these
variables for both years, which we will discuss in the
Results section of this article. Despite the subjective nature
of many of the respondents' judgments, most of the yearto-year correlations that should be stable were reasonably
high (formalization .67, coordination .59, and control systems .59). Appendix C provides variable means and standard deviations for 1992 (Year 2) and 1993 (Year 3) as well
as the mean differences and their standard deviations from
Year 3 to Year 2 with their standard deviations. Mean
differences and their standard deviations from Year 1
(1991) to Year 3 (1993) are provided for market structure
and firm structure variables. A comparison of the levels of
difference for these time periods in market and firm structure variables indicates the stability of these variables over
time. The largest variable difference is the decrease in
centralization (.90 on a 5-point scale over 3 years), followed by the increase in competitive intensity (.75 on a
7-point scale). The size of standard deviations of the means
and the yearly differences indicates sufficient variation in
variables to test hypotheses.
Beta weights for parameter estimation were computed
from standardized data. Indirect influences were computed
WINTER 1996
using a path analysis method suggested by Duncan (1971),

based on multiplication of beta weights.
RESULTS
Table 2 provides the regression results of model testing
using year-to-year differences (in dependent and independent variables) as well as parameters based on lagged
independent variables. Differences in significance levels
between the first set of parameters and the second set could
be due to the short-term nature of an influence or to small
yearly differences in variables. Appendix B provides the
zero-order correlations between variables, which lends
insight to relationships beyond regression results.
Relationships Between Market Environment,

Organization Structure, and Firm Strategy
We did not include in Table 2 the results of tests for
significance of paths between the market environment,
organization structure, and firm strategy because of the
consistent lack of parameter significance and low model
R2 levels. Stepwise regression and analysis of parameters
in reduced-model results confirmed that parameter insignificance was not due to multicollinearity or parameter
instability due to the small sample size relative to the
number of variables.
The only significant influence on strategy from performance feedback loops revealed by regression analysis was
the significant (p < .05) and negative (-.31) influence of
increases in new product success on low-cost strategy. This
result indicates that positive feedback from new product/market development performance tends to influence
small-firm managers to shift some emphasis from costcutting activities to innovating activities.
Examination of correlation relationships also indicates
that perceptions of the market environment are associated
with organization structure in a manner consistent with
expectations based on the management literature. For instance, perceptions of competitive intensity are positively
related to formalization (.23) and control systems (.26),
whereas perceptions of dynamism are positively related to
coordination (.15). These associations are to be expected
given the natural managerial tendency to attempt to deal
with environmental hostility and uncertainty. This tendency is also reflected by the current-year association
between competitive intensity and low-cost strategy.
When these small-business managers feel threatened, the
response tends to be an emphasis on cost cutting, including
systems to better monitor costs.
Market Environment Influences on

Business Position and Profitability
Contrary to expectations based on IO literature, the
results of this study indicate minimal direct influences of
changes in the market environment on assessments of firm
performance. Market dynamism has no significant impact
35
TABLE 2
Regression Beta Parameters (N = 68)
D e p e n d e n t Variables
Yearly Difference Models a
Relative
Independent Variable
Market
Orientation
Innovation/
differentiation strategy
Low-cost strategy
Decentralization
Formalization
Coordination
Product differentiation
Control systems
Market dynamism
Competitive intensity
Market orientationb
New product success
Relative product qualityI~
Growth/share
Profitability (previous year)
Model R 2
Adjusted R2
Model F
Reduced model R 2
Reduced model F
Product
Quality
L a g g e d Variable M o d e l s
New
Product
Success
Growth/
Share
P r o fita b ility
Market
Orientation
Relative
New
Product
Quality
Product
Success
Growth/
Share
Profitability
(A) e
(B) r
ns
ns
ns
ns
ns
ns
ns
ns
.35**
ns
ns
-.03
-.27*
.24*
ns
ns
ns
ns
ns
ns
ns
ns
ns
~s
ns
ns
ns
ns
ns
ns
ns
ns
ns
.24"
ns
ns
ns
ns
ns
ns
.23*
.32*
ns
ns
ns
ns
ns
ns
ns
.23*
ns
ns
ns
ns
ns
ns
ns
ns
ns
-.27*
ns
ns
ns
ns
-.18"
-.24*
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
-.11
.3 I*
.24*
.24*
ns
ns
.37**
ns
ns
ns
ns
ns
.29*
.31"
.35*
ns
.52**
ns
.44*
ns
ns
ns
ns
ns
ns
ns
ns
ns
ns
-.24*
-.52**
.61'*
.47
.31
3.0**
.32
7.4**
.57*
.25
.13
2.3*
.12
4.5*
.22
.12
1.7
.07
5.03*
.43
.30
4.8**
.32
6.4**
.33
.18
2.2*
.19
4.9*
.55
.44
5.0**
.47
9.2**
.26
.2l
3.4**
.21
4.8*
.22
.03
1.13
.07
5.03*
.51
.40
4.3**
.43
4.7*
ns
.52**
.28
.18
1.4
.20
6.4*
.33
.19
1.8"
.24
6.6*
a. Beta parameters; change in response from 1992 to 1993.

b. Only one year of data.
c. The lagged profitability model was tested with (B) and without (A) the variable of previous year's profitability.
*p < .05. **p < .01.
on any of the performance variables. Increases in competitive intensity only influenced the change in assessment of
new product success (.24; p < .05). The previous year's
level of competitive intensity has no influence on current
levels of business position or profitability. The results from
stepwise regression and reduced models indicated that
multicollinearity or parameter instability from the number
of variables in the model relative to the sample size was
not the cause of insignificant parameters. The minimal
impact of the market environment on strategy selection or
performance is consistent with Prescott's (1986) results.
The insignificant influence of competitive intensity on
growth/share differs from Jaworski and Kohli's (1993)
results. This difference is not merely due to the longitudinal nature of this study compared to the onetime measurement in their study, because we found no significant
same-year correlations between these variables. We suggest that the difference is due to the nature of the sampling
frames of large businesses and small business, where
small-business flexibility/adaptability reduces the impact
of competitive intensity on ability to exploit growth opportunities. However, significant (p < .01) same-year correlations between competitive intensity and profitability (-.25
and -.29) indicate that current-year perceptions of these
two variables are associated.
Organization Structure Influences

on Business Position and Profitability
Contrary to organization theory expectations, smallfirm organization structure has a weak influence on business position and profitability. The only organization
structure variable to significantly (p < .05) influence
change in a performance variable is the negative influence
o f s t r u c t u r a l p r o d u c t d i f f e r e n t i a t i o n ( - . 2 7 ) on
growth/share. In lagged regression, this organization structure variable also negatively affects profitability (-.18).
These results suggest that spreading limited small-firm
resources across too many product lines may have a detrimental effect on growth in current and new markets, as
well as on profitability. The negative influence of product
differentiation structure is consistent with the suggestion
by Ruekert et al. (1985) that low levels of specialization
are likely to be associated with relatively efficient marketing performance.
In lagged variable regression, the previous year's level
of formalization positively influences new product success
(.23) and growth/share (.32). These results are consistent
with the results found in the small-business literature (Robinson and Pearce 1984). This minimal direct impact of
organization structure variables can be explained based on
36
WINTER1996
the typically low levels of formalization, control systems,

and coordination systems in small businesses.
be due to the influence of market orientation on both new

product success and profitability.
Consistent with business policy expectations (e.g.,
Buzzell et al. 1975), an increase in growth/share is a positive (.57) and significant (p < .01) influence on increased
profitability. However, lagged variable regression indicates that, in an integrated model, a high level of
growth/share in the previous year negatively (-.24) influences profitability in the current year. The positive impact
on short-term impact of growth could be due to disproportionate short-term increases in profit margin relative to
expenses. However, over a longer term the small firm must
expand employment as well as increase levels of fixed and
working capital to accommodate that growth.
Jacobsen's (1988) suggestion that share and profitability are influenced by an unobservable third variable, such
as management quality, we used the technique suggested
in his study (vector autoregressive modeling with lagged
dependent and independent variables). When lagged profitability is included in the profitability model, it is a highly
significant (p < .01) influence on current year's profitability (.61). However, unlike his results, the previous year's
level of growth/share becomes a more significant (p < .01)
and negative (-.52) influence on profitability.
Strategy Influences on
Business Position and Profitability
Increasing use of a low-cost strategy significantly (p =
.05) and negatively (-.27) influences the change in new
product success, but significantly and positively (.24) influences change in growth/share. However, the lack of
significant lagged regression parameters for low-cost
strategy in any performance model suggests that increased
use of low-cost strategy has only short-term influences on
small-firm performance, perhaps due to quick imitation by
competitors and the lack of resources to achieve a low-cost
producer status.
Changes in innovation/differentiation strategy have no
significant influence on changes in any performance variable, perhaps due to the length of time necessary for
increased use of this strategy to have an impact on performance. This possibility is bolstered by lagged regression
results indicating that previous high levels of use of this
strategy significantly (.35) influences current growth/share.
Neither strategy significantly influences profitability
directly. The weak influence of strategy on performance
may be due to the inability of small firms, noted by limited
financial resources, to successfully achieve competitive
advantage based only on emphasis on either low costs or
R&D-based differentiation. This result suggests the importance of implementation, rather than strategy selection,
as the key to small-business performance.
Business Position Influence on Profitability

The results of this study also provide mixed support to
business policy arguments for the importance of business
position as a determinant of profitability. Consistent with
business policy expectations, there is a significant (p < .01)
zero-order correlation between perceived relative product
quality and growth/share (.27) and profitability (.42).
However, relative quality is not a significant influence in
any regression model of performance. This inconsistency
between correlation and regression results is probably due
to the addition of independent variables (e.g., market orientation) in the regression models that significantly influence both relative product quality and dependent
performance variables, thus partialing out the influence of
relative product quality. This result is consistent with Jaworski and Kohli's (1993) results (which included market
orientation in the model), but contrary to Phillips et al.'s
(1983) and Buzzell et al.'s (1975) results (which did not
include market orientation in models).
Although an increase in new product success significantly (p = .05) and positively (.44) influences short-term
growth/share, this result is not duplicated in lagged variable regression. New product success effectiveness is not
a significant influence on profitability in the yearly difference model or the lagged model. Again, these results could
Market Orientation Influences

on Business Position and Profitability
Market orientation is the only variable to significantly
(p = .05) influence (.31) the perceived level of relative
product quality in both the yearly difference and lagged
variable models, leading to the acceptance of P1. In stepwise regression, market orientation is the only variable
meeting the criteria to enter the model, resulting in an
R-square level of .07 compared to the R-square level of .22
(adjusted R-square of .12) for the full model with all
variables.
P2 is accepted. Marketing orientation significantly (p =
.05) and positively (.24) influences increases in new product success. In stepwise regression, market orientation is
the only variable meeting the criteria to enter the model,
resulting in an R-square level of .15, compared to the
R-square level of .43 (adjusted R-square of .30) for the full
model. A reduced model with the independent variables of
low-cost strategy, competitive intensity, and market orientation results in an R-square level of .32. Market orientation is also a significant (p < .05) and positive (.35)
influence on current levels of new product success, with
other independent variables lagged one year. The R-square
level for the reduced model of only significant influences
is .43, compared to the R-square of .51 for the full model
(adjusted R-square of .40). This result is consistent with
Slater and Narver's (1994) results, which achieved an
adjusted R-square level of .22. In their model the only other
significant influences other than market orientation are the
relative size of the SBU (positive) and relative cost (positive). In our sample of small firms, these variables would
most likely not have a significant impact.
Pelham,Wilson/ SMALL-FIRMPERFORMANCE
P3 is rejected. Market orientation does not significantly
and directly influence growth/share in the yearly difference or lagged variable models. This result is consistent
with Jaworski and Kohli's (1993) results but is inconsistent
with Slater and Narver's (1994) results. Stepwise regression results indicate that the only variables meeting the .05
significance criterion are new product success and product
differentiation structure, resulting in an R-square level
o f . 19, compared to the R-square level of .33 (adjusted
R-square of .18) for the full model. Thus the impact of
market orientation on growth share is indirect through new
product success. By way of comparison/the R-square
levels of Jaworski and Kohli's market share model (in two
samples) is .06 and .11. Their model did not include
organization structure, strategy, or new product success
variables. Slater and Narver's sales growth model
achieved an adjusted R-square level of .34, reflecting the
significant negative influence of environmental competitive hostility on large-firm SBU sales growth. As indicated
earlier, competitive intensity is not a significant influence
on growth/share in our sample of small firms.
P4 is accepted. Market orientation significantly (p <
.01) and positively (.29) influences increases in profitability for small firms. This result is consistent with Narver
and Slater's (1990) and Slater and Narver's (1994)results.
In stepwise regression, only market orientation and
growth/share meet the criterion of significance (p = .05),
resulting in a model with an R-square of .47, compared to
the full model's R-square level of .55 (adjusted R-square
of .44).
Market orientation also significantly (p < .01) and positively (.52) influences the current year's level of profitability in the model where other independent variables are
lagged one year. In vector autoregressive modeling with
lagged profitability included in the profitability model, it
is important to note that market orientation remains a
highly significant (p < .01) influence on current year's
profitability (.52), regardless of the inclusion of business
position variables and lagged profitability. The reduced
vector autoregressive model with only significant influences achieved an R-square level of .32, compared to the
full model R-square level of .47 (adjusted R-square level
of .31).
By way of comparison, Narver and Slater's (1990)
study of SBUs of a large forest products firm presented
somewhat mixed results for the impact of market orientation on profitability across types of products and size of
business units. Market orientation had a negative impact
on commodity product SBU return on assets but a positive
impact on differentiated SBU profitability. Their profitability model, which included market environment variables and the business position variables of relative cost
and size (but did not include growth/share, firm structure
variables, or strategy variables) achieved an R-square level
of .41. Their 1994 study found a significant impact of
market orientation on return on assets, with an adjusted
R-square level of .34, reflecting the significant influences
of relative size and relative cost.
37
Indirect Influences on Profitability

Although the results of the first differences model indicate no other direct influences on profitability other than
market orientation and growth/share, it is important to look
at the indirect influences on profitability to get a more
complete picture. Using a procedure suggested by Duncan
(1971), using multiplication of beta weights from path
analysis regressions, we can compute indirect influences.
Change in profitability is indirectly influenced by new
product success (.25), structural product differentiation
(-. 15), and low-cost strategy (. 13) through their influence
on growth/share. Profitability is also indirectly influenced
by formalization (.07) through its influence on market
orientation.
Influences on Market Orientation
There is mixed support for acceptance of P5. Increase
in formalization is the only organization structure variable
that has a significant influence (.24; p < .05) on the level
of small-firm market orientation. This influence may be
due to the enhancement of the implementation of customer-satisfaction-oriented activities with increases in formal procedures. However, the previous year's level of
formalization does not have a significant influence on the
level of market orientation.
P6 is rejected because there were no significant influences of control systems on market orientation in either the
first differences model or the lagged model.
There is mixed support for P7. Although increases in
coordination do not significantly influence the level of
market orientation, the previous year's level of coordination does influence the level of market orientation.
P8 is rejected because there were no significant influences of product differentiation structure on market orientation in either the first differences model or the lagged
model.
Because innovation/differentiation strategy does not
significantly influence the level of small-firm market orientation in either the yearly difference model or the lagged
variable model, we reject P10. However, it should be noted
that market orientation is significantly (p < .05) and positively correlated (.26) with the previous year's level of use
of innovation/differentiation strategy. This association is
consistent with Narver and Slater's (1990) finding of a
significant association of market orientation with differentiation strategy.
Because market dynamism has no significant influence
on the level of market orientation in either model, P l l is
rejected.
There is mixed support for P12 because previous year's
level of competitive intensity significantly (p < .01) and
positively (.37) influences the level of market orientation,
but short-term increase in competitive intensity does not
significantly influence market orientation.
Also, it is important to note the influence of performance feedback loops on the level of market orientation.
38
WINTER 1996
Increases in new product success and profitability have a

significant (p < .05) and positive (.31 and .41, respectively)
impact on the level of market orientation. The model with
performance feedback loops has an R-square level of .36,
compared to the model without performance variables
with an R-square level of.25.
prices does not offer the small firm a source of sustainable

competitive advantage because of the relative ease of
copying competitors' price-oriented strategies, the ease of
understanding the impact of pricing on sales, and the
relative inability of the small firm to achieve low-cost
producer status through economies of scale. The lack of
association of low-cost strategy with performance variables further supports this argument. The weak influence
of strategy on profitability underscores the importance of
small-firm strategy implementation compared to strategy
selection.
A high level of market orientation does seem to offer
the small firm a strong source of competitive advantage
and performance viability. Market orientation also is the
only firm variable to significantly affect relative product
quality, which is s i g n i f i c a n t l y a s s o c i a t e d with
growth/share and profitability. Market orientation, coupled with formalization and an innovation/differentiation
strategy, positively affects new product success, which in
turn influences growth/share. Market orientation is the
only firm variable to directly affect increases in small-firm
profitability. Market orientation is the only firm variable,
other than the previous year's level of profitability (which
may reflect managerial competence) to positively influence the current year's level of profitability.
Because of the impact of market orientation on smallfirm performance, it is important that we understand influences on the firm's level of market orientation. Although
short-term changes in organization structure and strategy
may not significantly influence the level of market orientation, high levels of coordination and control systems and
a high level of use of innovation/differentiation strategy
are associated with higher levels of market orientation.
Jaworski and Kohli's (1993) results indicating that presidential leadership and reward systems are important influences on the level of market orientation have especially
strong relevance for presidents of small firms. These
small-firm presidents have a significant ability to directly
influence employee behavior due to the likelihood of daily
interactions with a small number of employees.
DISCUSSION AND CONCLUSIONS

The web of influences suggested by business policy
researchers of two-way influences of industry environment, strategy, and organization structure was not exposed
by the year-to-year changes in the variables of this study,
which was based on small firms. However, as would be
expected, market dynamism is associated with innovation/premium pricing strategy and a firm structure characterized by high levels of product line differentiation and
coordination. Also, as would be expected, competitive
intensity is associated with low-cost strategy and a firm
structure characterized by high levels of formalization and
control systems.
Although the weak direct influence of the market environment on small-firm performance is contrary to the
expectations of IO literature and the documented variance
of objective performance indicators across industries, our
study was limited to small firms with a significant capacity
for adapting to changes in the marketplace. Performance
was measured by presidents' subjective assessment of
company performance relative to expectations. These expectations are influenced (by comparisons of actual results
to projected results, not by across-industry comparisons)
by comparisons to previous firm performance and by
perceptions of performance of other firms in their industry.
In addition, the measures of industry environment characteristics were also based on the presidents' subjective
assessments, which are subject to cognitive biases and
errors in judgment. However, this study's results support
Lado, Boyd, and Wright's (1992) argument that the IO
literature's overemphasis on the influence of the industry
environment overlooks firm idiosyncratic competencies
(such as a market-oriented culture) that can generate a
sustainable competitive advantage.
When a competitive environment is perceived as hostile, some small firms respond by placing more emphasis
on market-oriented activities and behaviors, whereas other
small firms respond by increasing emphasis on cost control
systems and price cutting. This study also suggests that
small firms that shift to a low-cost strategy in response to
competitive pricing pressures may see short-term share
increases, but heavy emphasis on this strategy does not
affect profitability or long-term share performance.
We argue further that market orientation offers small
firms a greater source of sustainable competitive advantage, compared to emphasis on a low-cost strategy. It is
harder for managers to instill market-oriented norms, compared to cost-cutting norms. It is harder to understand the
relationship between market orientation and performance,
compared to low-cost efforts. Competitive pricing is a
necessary condition for firm survival, but emphasis on low
Managerial Implications
Following on the results of Narver and Slater (1990),
which indicated that large businesses may be the least able
to adopt a market orientation, presidents of small firms
have a unique opportunity to seek a competitive advantage
through their efforts to instill a market orientation. Due to
the small number of employees, small-firm presidents are
able to personally reinforce firmwide market-oriented
norms. They also have the opportunity to exploit a simple
and adaptable form of organization with that market
orientation.
Small-firm presidents should enhance formalization in
decision making and implementation, and an innovation/differentiation strategy should improve new product
success directly and indirectly through higher levels of
market orientation. They should be careful not to spread
resources too thin with organization structure modifica-
Pelham, Wilson/ SMALL-FIRMPERFORMANCE

tions designed to accommodate a broadening of the firm's
markets, which can negatively impact profitability through
increased costs and reduced coordinating efficiency. They
should recognize the implications of significant sales
growth in terms of additional investments in working
capital and personnel. Although recognizing the necessity
of cost improvement, cost control, and competitive pricing
for firm survival, small-firm presidents should seek competitive advantages over larger firms in areas allied with
market orientation: innovation, flexibility, coordination, and
increased value added for carefully targeted customer groups.
J
Study Limitations and Research Directions

Our results are generalizable only to small firms. This
study did not hypothesize or test differences in the models
of performance across small and large firms. We suggest
the use of longitudinal data and integrated models in future
market orientation research on both small and large firms
to test for such differences.
Because our study relied on the subjective judgments
of one internal firm critical informant, the measurement of
39
the firm's market orientation and other key variables are

subject to various cognitive biases, such as position bias.
Future market orientation studies should use external and
perhaps more objective sources for judgment of the firm's
level of market orientation, as well as the other variables
under study.
We were only able to measure market orientation in the
last year of the panel. We can only conclude that small
firms with high levels of market orientation are associated
with significant increases in performance and high levels
of performance. Causal implications could be strengthened with multiple years of measurement of this variable.
The small sample size limited confidence in the results,
given the number of parameters estimated in some models.
We discussed how stepwise regression confirmed the nonconfidence of parameters, but future studies using larger
samples would provide more confidence in these results.
Future studies should also use a longer period, which
should provide greater confidence in relationships based
on trends. The 2-year time period may not have been long
enough to adequately capture changes in some of the
variables or establish a direction.
APPENDIX A
Measures of Constructs
Factor
Analysis
Loading
Market Orientation
1. All our functions (not just marketing and sales) are responsive to, and
integrated in, serving target markets. (agree/disagree)
2. Our firm's strategy for competitive advantage is based on our thorough
understanding of our customer needs. (agree/disagree)
3. All our managers understand how the entire business can contribute to
creating customer value. (agree/disagree)
4. Our firm responds (slowly/quickly) to negative customer satisfaction
information throughout the organization.
5. Our firm's market strategies are to a (moderate/great) extent driven by
our understanding of possibilities for creating value for customers.
6. Information on customers, marketing success, and marketing failures
is communicated across functions in the firm. (agree/disagree)
7. How frequently do top managers discuss competitive strengths and
weaknesses? (never/very frequently)
8. How frequently do you take advantage of targeted opportunities to
take advantage of competitors' weaknesses? (never/very frequently)
9. If a major competitor were to launch an intensive campaign targeted
at our customers, we would implement a response immediately. (agree/
disagree)
Performance (1 = much below expectations, 7 = much above expectations)
New product success
1. New product/service development
2. Market development
Growth/share
3. Sales growth rate
4. Employment growth rate
5. Market share
Profitability
6. Operating profits
7 Profit to sales ratio
8. Cash flow from operations
9. Return on investment
10.Return on assets
LISREL
Square
Multiple Correlation
Coefficient
Alpha~Item
Correlation
.92
.81
.52
.88
.53
.51
.87
.70
.41
.88
.67
.27
.94
.64
.40
.87
.58
.33
.85
.79
.66
.92
.77
.49
.88
.54
.39
.83
.74
.85
.85
.43
.91
.80
.68
.73
.71
.50
.58
.81
.87
.82
.93
.91
.69
.70
.64
.92
.85
.72
.71
.75
.72
.66
.70
.88
.79
.74
.72
.87
.86
(continued)
40
WINTER 1996
APPENDIX A Continued
Relative product quality (single measure)

11. Please rate your relative product quality on the following scale:
(1 = low satisfaction, 7 = high satisfaction)
Firm structure
Decentralization (organization level where following decisions made:
0 = board of directors~owner; 1 = CEO/president; 2 = upper level
department manager; 3 = midlevel department manager; 4 =first-line
supervisor; 5 = entry-level employees)
1. Determines number of workers needed
2. Decides whether to hire entry-level worker
3. Dismissal of a worker
Coordination (frequency of activity or process; 1 = never/rarely, 7 =frequently)
5. Are manager committees set up to allow joint decision making
among departments/work groups?
6. Are task forcds set up for collaboration on a specific project?
7. Are product or service decisions concerning production, distribution,
marketing, and R&D strategies made by different departments/work
groups working together?
8. Are capital budget decisions concerning the selection and financing of
long-term investments made by different work groups or departments
working together?
Control systems (extent to which firm uses control systems;
1 = never/rarely, 7 =frequently)
9. Comprehensive management control and information system
10. Cost centers for cost control
11. Profit centers and profit targets
Formalization (1 = yes, 0 = no)
12. Do you hand out information booklets to your employees addressing
such topics as security, working conditions, and so on?
13. A written manual of procedures and fixed rules?
14. Written operating instructions to workers?
15. Written job descriptions?
Product/service differentiation (extent to which there are differences across
your lines with regard to the following; 1 = no difference, 7 = great differences)
16. Customers' buying habits
17. Nature of competition
16. Required method of production or distribution of products/services
Strategy (degree to which your firm emphasized each competitive method
over past 5 years; 1 = not considered, 7 = major constant emphasis)
Low-cost strategy
1. Pricing below competitors
2. Continuing, overriding concern for lowest cost per unit
3. Products in lower priced market segments
Innovation/differentiationstrategy
4. New product development
5. Extremely strict product quality control procedures
6. Developing and refining existing products
7. Innovation in manufacturing process
8. Products in higher priced market segments
Market environment
Dynamism (technical/market turbulence) (frequency of factor change
in industry; 1 = never change, 7 = change very frequently)
1. Production (or distribution) technique/process changes
2. Changes in customers' needs
3. Rate at which products/services become obsolete
4. Nature of competitors' strategies and actions
Competitive intensity (1 = not threatening, 7 = very threatening)
5. The business environment as threatening the survival of your firm
6. Tough price competition threatening
7. Competitors' product quality or novelty
Factor
Analysis
Loading
LISREL
Square
Multiple Correlation
Coefficient
Alpha~Item
Correlation
.80
.81
.79
.63
.66
.62
.87
.83
.85
.94
.71
.59
.56
.56
.52
.70
.69
.69
.40
.68
.80
.42
.70
.57
.83
.82
.38
.53
.33
.63
.51
.59
.52
.73
.59
.73
.81
.63
.35
.49
.35
.40
.59
.67
.69
.60
.74
.75
.74
.40
.53
.58
.77
.66
.63
.75
.72
.83
.50
.65
.40
.32
.27
.54
.32
.52
.80
.43
.41
.31
.44
.31
.35
.72
.71
.62
.71
.41
.45
.28
.34
.68
.79
.26
.35
.25
.25
.70
.64
.69
.70
.66
.50
.69
.70
.55
.72
.70
.71
.65
.66
.69
.64
.69
.51
II ~
II
o
..~
o~
~
"
,.
'
I"
~
~
*o
"~
II
~l'l'l'l'lll'l"
c~
"
I"
"
ILl cn
I'
. . . . .
I'I''I'I"
i' I. . . . .
~ "
"
~.
I. . . . . . . . . . .
i'I'I'I"
41
42
WINTER 1996
APPENDIX C
Means and Standard Deviations of Yearly Differences
1992
Construct
Market orientation
Innovation/differentiation strategy
Low-cost strategy
Formalization
Decentralization
Product differentiation structure
Coordination
Control systems
Dynamism in environment
Competitive intensity
New product success
Relative product quality
Growth/share
Profitability
Difference
1993-1992
1993
Mean
SD
4.50
3.57
0.53
1.65
"3.78
3.26
3.89
3.51
3.97
3.96
1.27
1.25
0.37
0.86
1.52
1.46
1.75
1.10
1.18
0.97
3.89
3.67
1.03
1.24
Mean
5.48
4.51
3.60
0.60
2.53
4.09
3.19
4.46
3.84
4.46
4.23
5.04
4.18
4.20
SD
0.79
1.38
3.60
0.32
1.32
1.23
1.32
1.63
1.00
1.19
1.33
1.42
1.25
1.51
Mean
Difference
1993-1991
SD
.21
.19
.09
.98
.31
-.01
.48
.25
.62
.19
1.26
1.36
0.28
1.30
1.67
1.63
1.51
1.22
1.29
1.39
.21
.38
1.43
1.72
Mean
SD
.05
.90
.22
.22
.28
.08
.75
0.31
1.38
1.76
1.65
1.76
1.50
1.31
NOTE: All scales have points from 1 to 7, with the exception of formalization (0 = no, 1 = yes) and decentralization (0 = low, 5 = high).
ACKNOWLEDGMENTS
The authors thank the Marketing Science Institute for funding
for this study and their constructive comments. The authors also
thank the JAMS reviewers for their comments and suggestions,
which significantly improved earlier versions of this article.
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ABOUT THE AUTHORS

Alfred M. P e l h a m is an assistant professor of marketing at Grand
Valley State University.
David T. Wilson is the Alvin H. Clemens professor of entrepreneurial studies at Pennsylvania State University.

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A Longitudinal Study of the Impact

of Market Structure, Firm Structure,

monly gives them a production orientation. Until recently,

JOURNAL OF THE ACADEMY OF MARKETING SCIENCE

Market environment--rFirm strategy a'b

Market environment--*Firrn structured

Firm strategy--*Firrn structureg

f. Hill and Picketing (1986).

sively studied by management researchers, but primarily

resources to seek other sources of business success, such

Pelham, Wilson / SMALL-FIRM PERFORMANCE

cept of sustainable competitive advantage (Aaker 1988;

The market-oriented firm's greater understanding of

P3: Factoring in the influence of market structure, firm

Why Market Orientation Should

JOURNALOF THE ACADEMYOF MARKETINGSCIENCE

within and across functions. Customer satisfaction norms

Influence of the Internal and External

Pelham, Wilson/ SMALL-FIRMPERFORMANCE

Although neither Jaworski and Kohli (1993) nor Slater

P10: Increases in use of innovation/differentiation

P12: As competitive intensity increases, the level of

We were restricted by the nature of our database in

JOURNALOF THE ACADEMYOF MARKETINGSCIENCE

* Customer Understanding Orientation

RELATIVE PRODUCT QUALITY

illustrated in Figure 1. However, we did test for these

< .......... :___

measure of unidimensional reliability). All measures used

JOURNAL OF THE ACADEMY OF MARKETING SCIENCE

reluctance of private firms to divulge this confidential

using a path analysis method suggested by Duncan (1971),

Relationships Between Market Environment,

Market Environment Influences on

Pelham, Wilson / SMALL-FIRM PERFORMANCE

a. Beta parameters; change in response from 1992 to 1993.

Organization Structure Influences

JOURNALOF THE ACADEMYOF MARKETINGSCIENCE

the typically low levels of formalization, control systems,

be due to the influence of market orientation on both new

Business Position Influence on Profitability

Market Orientation Influences

Indirect Influences on Profitability

JOURNALOF THE ACADEMYOF MARKETINGSCIENCE

Increases in new product success and profitability have a

prices does not offer the small firm a source of sustainable

DISCUSSION AND CONCLUSIONS

Pelham, Wilson/ SMALL-FIRMPERFORMANCE

Study Limitations and Research Directions

the firm's market orientation and other key variables are

JOURNALOF THE ACADEMYOF MARKETINGSCIENCE

Relative product quality (single measure)

JOURNAL OF THE ACADEMY OF MARKETING SCIENCE

Organizational Characteristics in Industrial Firms." Journal of the

Pelham, Wilson / SMALL-FIRM PERFORMANCE

Gupta, Anil K. and V. Govindarajan. 1983. "Business Unit Strategy,

Porter, Michael E. 1979. "How Competitive Forces Shape Strategy."

ABOUT THE AUTHORS

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