Academic journal article Journal of Small Business Management

The Complementary Effects of Market Orientation and Entrepreneurial Orientation on Profitability in Small Businesses

Academic journal article Journal of Small Business Management

The Complementary Effects of Market Orientation and Entrepreneurial Orientation on Profitability in Small Businesses

Article excerpt

Market orientation (MO) and entrepreneurial orientation (EO) are correlated, but distinct constructs. MO reflects the degree to which firms' strategic market planning is driven by customer and competitor intelligence. Entrepreneurial orientation reflects the degree to which firms' growth objectives are driven by the identification and exploitation of untapped market opportunities. When modeled separately, research has reported direct effects of both constructs on firm profitability. When modeled simultaneously, however, the direct effect of EO has disappeared. This has led some scholars to postulate that EO is an antecedent of MO. The results of this study contradict this presumption and suggest that EO and MO complement one another, at least in small businesses, to boost profitability. The major difference between this and previous studies is the inclusion of innovation success, which captures an indirect effect of EO on profitability. At least in small firms, the results suggest that EO complements MO by instilling an opportunistic culture that impacts the quality and quantity of firms' innovations.

Introduction

Organizational culture is not purely a large firm issue; it is equally important for small firms. Simply put, culture influences success. Two firm level factors that have undergone extensive discussion in the literature are market orientation and entrepreneurial orientation (EO). Market orientation (MO) is posited to reflect the extent to which firms establish the satisfaction of customer needs and wants as an organizing principle of the firm (Jaworski and Kohli 1993). EO is posited to reflect the extent to which firms establish the identification and exploitation of untapped opportunities as an organizing principle of the firm (Lumpkin and Dess 1996). This paper addresses a natural question that often arises when such cultural factors are identified: How relevant are they to the bottom line? We suggest that past research has underplayed the importance of EO as a driver of profitability. The purpose of this paper is to demonstrate the role of EO in firm profitability and to explain how we have come to this conclusion.

Market orientation and entrepreneurial orientation are both learning constructs (Baker and Sinkula 2002, 1999; Slater and Narver 1995). Firms that learn more effectively than their competitors possess the basis for more rapid improvement, which can translate into superior new product success, profitability, market share, and, perhaps, sustainable competitive advantage (Day 1994). That MO is a learning construct is reflected in its high intercorrelation with learning orientation (LO) (Hult and Ketchen 2001; Slater and Narver 1998b; Becherer and Maurer 1997; Smart and Conant 1994; Miles and Arnold 1991; Morris and Paul 1987).

Empirical research reports independent direct effects of both MO (Baker and Sinkula 2002) and EO (Covin and Slevin 1986) on profitability. However, when the effects of EO and MO have been modeled together simultaneously, the direct effect of EO has disappeared (Matsuno, Mentzer, and Ozsomer 2002; Slater and Narver 1998a). This outcome is depicted in Figure 1.

[FIGURE 1 OMITTED]

It is possible that past research has understated the impact of EO on profitability because its effect may be indirect. Specifically, since EO is an innovation-based construct, it is possible that its effect on profitability is mediated by another construct, innovation success (i.e., administrative, product and service innovations). Figure 2 details the independent but complementary roles of EO and MO proposed in this research. MO is expected to have a direct effect on firm's profitability and an indirect effect mediated by innovation success. EO is expected to have an indirect effect on firms' profitability and an indirect effect mediated by innovation success. EO is expected to have an indirect effect on profitability mediated by innovation success, but no direct effect on profitability. …

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