Market Orientation, NPD Performance, and Organizational Performance in Small Firms

Abstract

Many studies have established relationships among market orientation, new product performance, and organizational performance; however, few have examined these relationships in small firms. Where small firms have been examined, 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 demonstrating that market orientation increases new product success and thereby improves organizational performance. Ensuring optimal new product performance is essential for small firms, particularly in light of the strong relationship between new product success and a company's health. However, given that the success rate of new products worldwide has been low, increasing understanding of what drives new product performance is critical. Measures of new product success can be grouped into five categories: (1) market‐level measures; (2) financial measures; (3) customer‐acceptance measures; (4) product‐level measures; and (5) timing measures. In small firms, the most frequently used success measures are customer‐acceptance and product‐level measures; however, a link between the new product measures used and organizational success has not been established. This paper presents a model linking market orientation, new product performance, and organizational performance in small firms. The model was explored using data collected from 106 small firms in Ireland. The results show significant relationships among market orientation, new product performance, and organizational performance. However, when these relationships are explored in more detail, it emerges that of the three measures used for market orientation only one—competitor orientation—is significantly linked with new product performance. Additionally, of the five measures used for new product performance only two—market performance and financial performance—are linked with organizational performance. The findings of this study demonstrate that small firms report significantly lower levels of competitor orientation than customer orientation or interfunctional coordination. However, competitor orientation is the only dimension of market orientation that is significant in predicting new product performance. Small firms also perform significantly better on product‐level and customer‐acceptance new product performance measures than on market‐level, financial, or timing measures. The study makes four recommendations for small firms. First, small firms should keep a closer eye on their competitors, improving their understanding of what products competitors offer, why customers do or don't buy competitor products, how they attract customers, and how satisfied customers are with competitors' products. Second, they need to be more aware of the impact that new products will have on their market position in terms of volume, sales growth, revenue, and market share. Third, small firms need to put more effort into measuring the financial performance of their new products, for example, development costs, contribution, profitability, and return on investment (ROI) or internal rate of return (IRR). Finally, small firms should attempt to be more objective in efforts to satisfy customers and to avoid overfocusing on a small number customers to the detriment of increasing market share.