Market orientation, NPD performance, and organizational performance in small firms

Abstract

Many studies have established relationships among market orientation, new product performance, and organiza-tional performance; however, few have examined these relationships in small firms. Where small firms have beenexamined, the results suggest that the relationships identified in large firms do not always apply in small firms.Previous research has linked market orientation with organizational performance, with several authors demon-strating that market orientation increases new product success and thereby improves organizational performance.Ensuring optimal newproduct performance is essential forsmall firms, particularlyin lightof the strong relationshipbetween new product success and a company’s health. However, given that the success rate of new products world-wide has been low, increasing understanding of what drives new product performance is critical. Measures of newproduct success can be grouped into five categories: (1) market-level measures; (2) financial measures; (3) cus-tomer-acceptance measures; (4) product-level measures; and (5) timing measures. In small firms, the most fre-quently used success measures are customer-acceptance and product-level measures; however, a link between thenew product measures used and organizational success has not been established. This paper presents a model linkingmarket orientation, new product performance, and organizational performance in small firms. The model was ex-plored using data collected from 106 small firms in Ireland. The results show significant relationships among marketorientation, new product performance, and organizational performance. However, when these relationships are ex-plored in more detail, it emerges that of the three measures used for market orientation only one—competitororientation—is significantly linked with new product performance. Additionally, of the five measures used for newproduct performance only two—market performance and financial performance—are linked with organizationalperformance. The findings of this study demonstrate that small firms report significantly lower levels of competitororientation than customer orientation or interfunctional coordination. However, competitor orientation is the onlydimension of market orientation that is significant in predicting new product performance. Small firms also performsignificantly better on product-level and customer-acceptance new product performance measures than on market-level, financial,ortimingmeasures.Thestudymakesfourrecommendationsforsmallfirms.First,small firmsshouldkeep a closer eye on their competitors, improving their understanding of what products competitors offer, whycustomers do or don’t buy competitor products, how they attract customers, and how satisfied customers are withcompetitors’ products.Second, they needto bemore aware of the impact that new products will have ontheir marketposition in terms of volume, sales growth, revenue, and market share. Third, small firms need to put more effort intomeasuring the financial performance of their new products, for example, development costs, contribution, profit-ability, and return on investment (ROI) or internal rate of return (IRR). Finally, small firms should attempt to bemore objective in efforts to satisfy customers and to avoid overfocusing on a small number customers to the det-riment of increasing market share.