Frontiers of Entrepreneurship Research 1995

Frontiers of Entrepreneurship Research
1995 Edition

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    FRONTIERS OF ENTREPRENEURSHIP RESEARCH 1995.


    THE IMPORTANCE OF MARKET ORIENTATION FOR EMERGENT FIRMS

    Eileen Fischer, York University
    A. Rebecca Reuber, University of Toronto

    ABSTRACT

    Market orientation relates positively to the performance of large firms, but has not yet been studied in the context of emergent firms. This study of 58 small, young, owner-managed software firms indicates that some of the components of market orientation (customer orientation, competitive orientation, and intra-firm communication) correlate positively with a number of measures of firm performance. Regressions show that the components of market orientation account for a significant percentage of the variation in the measures of performance. Among the firm and owner-level variables examined, the owner's previous marketing experience seemed the best predictor of the firm's market orientation.

    INTRODUCTION: WHAT IS A MARKET ORIENTATION?

    Management theorists have long suggested that the key to success in business lies in understanding and providing what customers want and need, rather than in focusing on what the firm has to sell (e.g. Drucker 1973, Levitt 1960). The marketing literature has encapsulated this notion as the marketing concept, stating that "the key to achieving organizational goals consists in determining the needs and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors" (Kotler and Turner, 1989, p. 17). Until recently, however, operationalizations of what it means, in behavioral terms, to be "market oriented" and assessments of the relationship between market orientation and performance have been lacking (Kohli and Jaworski 1990; Narver and Slater 1990). Researchers attempting to address this gap between philosophy and implementation have identified three behavioral elements of market orientation: customer orientation, competitor orientation and intra-functional coordination (Narver and Slater 1990). Customer orientation entails activities involved in acquiring and acting upon information about buyers; competitor orientation entails activities involved in acquiring and acting upon information about competitors; and intra-functional coordination is comprised of efforts to share internally the information and actions plans so as create customer value. Evidence suggests that these behaviors are significantly positively associated with the performance of large industrial firms (Narver and Slater 1990, Slater and Narver 1994) but no research has been conducted on how market orientation affects small, emerging businesses.

    This paper is a first step toward determining a) what behaviors constitute a market orientation for small, emerging businesses; b) how these behaviors are related to indicators of firm performance and c) what the determinants of emerging firms' market orientations might be. To accomplish its goals, the paper first reviews the nature of the construct of market orientation. It next considers how it might be manifest and how significant it might be for emergent firms. The paper then reports on an empirical study of the link between proposed market orientation measures and the performance of emerging software firms, as well as of the predictors of these market orientation behaviors. The paper closes with a discussion of the conceptual and methodological issues highlighted and the practical implications suggested by the study for owner/managers.

    WHAT IS MARKET ORIENTATION?

    Until recently, there have beem many philosophical descriptions of the nature of market oriented businesses but few clear indications of the specific activities that translate the philosophies into practice. Within the last five years, two sets of authors working independently to address this gap published the results of exhaustive literature reviews, of extensive interviews with senior marketing and non-marketing managers, and of survey research among Fortune 500 firms (Kohli and Jaworski 1990; Kohli, Jaworski and Kumar 1993; Narver and Slater 1990; Slater and Narver 1994). While the two research teams produced slightly differing insights into the behavioral components of market research, they agreed on the following: being market oriented implies that firms

    1) seek information about their customers' current and future needs, and take action based on this information (we will refer to this as customer orientation);

    2) seek information about their competitors' current strengths and weaknesses and their long term capabilities and strategies, and take action based on this information (we will refer to this as competitor orientation);

    3) coordinate the actions taken by sharing customer and competitor information internally (we will refer to this as intra-firm communication).

    Thus far these authors have been concerned with assessing the nature and importance of market orientation for large firms in various industries. They have found that while the three components of market orientation can be analytically separated, in practice they are so interrelated as to be a single construct. That is, firms tend to manifest similar levels of behaviors associated with each of the three components: for instance, firms which are highly customer oriented tend also to be highly competitor oriented and to place considerable emphasis on intra-firm coordination. Thus market orientation is not considered to be a multi-part strategy. Rather, it is considered to be a description of the firm's culture.

    In addition to the nature of market orientation, the effects of market orientation on firm performance have also been investigated. Narver and Slater (1990; Slater and Narver 1994) have found that, controlling for other factors which affect performance such as market level growth, concentration, entry barriers, buyer power, seller power, and technological change, market orientation accounts for a significant percentage of the variation in return on assets, sales growth and new product success among large, established firms in diverse industries. They argue that being market oriented is appropriate for all firms regardless of the context in which they operate: "becoming and remaining market oriented are essential to the continuous creation of superior value. . . . [B]usinesses that are more market oriented are best positioned for success under any environmental conditions" (Slater and Narver 1994, p. 53).

    The discussions of market orientation have implied that it applies equally to firms of any type, in any industry, and that the behavioral manifestations of market orientation could be assessed in a similar fashion across different firm contexts. In the next section, we consider whether these assumptions seem likely to be appropriate for emergent firms.

    WHAT DOES MARKET ORIENTATION MEAN FOR EMERGENT FIRMS?

    To our knowledge, no one has yet empirically investigated whether or how market orientation, as defined above, affects the performance of small, emerging firms. A number of questions about the market orientation of small firms can be raised.

    First, what might some of the behavioral manifestations of market orientation be for small and/or emerging firms. It is possible that a market oriented new, small firm exhibits different behaviors than a market oriented large firm. That is, the actual practices associated with customer orientation, competitor orientation, and/or intra-firm communication may be distinctive for small firms.

    Customer and competitor orientation for large businesses has been measured by assessing the extent to which the firm agrees that, for instance, it "understands customer needs" or that it "targets opportunities for competitive advantage" (Narver and Slater 1990, p. 24). This would seem to be a necessary but insufficient means of assessing customer and competitor orientation for emergent firms. As with large, established firms, we might expect to see evidence that emergent firms are acting upon the customer information they obtain if they indicate that they shape their offerings to reflect and anticipate customer needs. Similarly, we might expect that they are acting upon the competitor information they gather if they indicate that they target market niches where they believe they have a competitive advantage. And (particularly in the software industry) we anticipate that firms must act on a customer orientation by beating competitors to market with innovations in their product categories.

    While measures of the extent to which firms act on customer and competitor information may be similar regardless of firm size, there may be an additional measurement requirement for small firms. Neither the Narver and Slater team nor the Kohli and Jaworski team directly assess information gathering practices in their measures of customer and competitor orientation. It may be necessary to measure actual information collecting behaviors to adequately assess customer and competitor orientation for small, new firms. The literature on the marketing research practices and environmental scanning activities of new and/or small firms provides some insight in this regard. Studies explicitly focused on these firms' market research practices suggest that although structured surveys of customers are sometimes used they are often perceived as limited in value, while unstructured and informal means of obtaining information about customers are used more frequently and valued more highly (Boag and Munro 1986; Fischer, Dyke, Reuber and Tang 1990; Hills and Narayana 1989; Kao 1986; Teach and Tarpley 1989, Spitzer, Hills and Alpar 1989). Studies of the information scanning practices of small/entrepreneurial firms also indicate that structured surveys of customers are much less frequently conducted than are informal means of data collection such as personal networking (Brush 1992; Peters and Brush 1993; Smelzer, Fann and Nikoliasen 1988). Similarly, the literature on information scanning by small and/or entrepreneurial firms indicates that the preferred means of obtaining information about competitors appears to be informal networking with customers and business associates (Brush 1992; Peters and Brush 1993).

    This literature would seem to have two implications for considering what behaviors might constitute competitor and customer orientation for emergent firms. First, it suggests that we cannot assume as might be the case for large, established firms that new, small firms actively seek market information. While many do, it appears that some do not. A necessary facet of assessing such firms' market orientation would thus seem to be gauging the extent to which they seek such information. And if we are to consider the ways such firms seek information about customers and competitors, we must consider not only formal surveys but also more informal or unstructured means such as personal interactions with customers.

    Intra-firm communication for large firms has been measured by respondents' levels of agreement that "information is shared among functions". Small/new firms are often not highly functionally divided. Even if they are, it is feasible that intra-firm communication is not the critical issue for small organizations that it is for large ones because the manager can readily collect and disseminate information to all members of the firm. However, it is plausible that even small firms can be more or less effective at intra-firm communication depending on the extent to top management and/or those performing internal functions (e.g. developing software) communicate with those performing external functions (e.g. selling software).

    To summarize this discussion we suggest that:

    P1: Acting upon customer information will be reflected by firms' tendencies to shape offerings to meet customer needs, and will be positively related to firm performance.

    P2: Acting upon competitor information will be reflected by firms' tendencies to
    a) target market niches where they have a competitive advantage and
    b) introduce product innovations before competitors
    and will be positively related to firm performance.

    P3: Customer and competitor information gathering will be reflected by firms' tendencies to use formal and informal means of gathering market-place information and will be positively related to firm performance.

    P4: Intra-firm communication will be reflected by the extent to which those performing external functions communicate with other members of the firm and will be positively related to firm performance.

    The theory of market orientation suggests that the three facets identified are only separable analytically. In practice, it is suggested that the various behaviors which constitute each facet of market orientation will be highly interrelated. If the measures suggested above are valid, we should then expect to find them highly significantly correlated among themselves. Thus we suggest that:

    P5: Indicators of customer orientation, competitor orientation and intra-firm communication will be significantly and positively related with one another.

    Perhaps the most salient question of all is whether more market oriented small, emergent firms will be likely to be more successful than those which are less market oriented. We believe it is reasonable to consider that this orientation might favourably affect the performance of such firms. Some rationale for the assertion comes from a number of authors who have suggested that behaviors involved in this orientation, such as ongoing monitoring of the marketing environment, are critical to the creation and success of new ventures (e.g. Hills and LaForge 1992; Timmons 1985; Vesper 1990). However, it is plausible that market orientation as conceptualized here may be less critical for emergent firms than for established firms. Firms often arise due to the founder's recognition of a market opportunity that no other organization is filling or filling well, and research suggests that the quality of the opportunity has a significant direct impact on the quality of a firm's performance (Chandler and Hanks 1994). Further, some research suggests that industry structure (e.g. Sandberg 1986), or the interaction of strategy and structure (e.g. Kunkel and Hofer 1993), are critical determinants of a new venture performance. Thus it may be that emerging firms need not have a market orientation to survive and prosper. To examine this question we suggest that:

    P6: Indicators of market orientation will account for a significant portion of the variance in indicators of firm performance for emergent firms.

    To examine the measurement and theoretical propositions raised here, the empirical study described below considers the relationship among and between measures of market-oriented behaviors and measures of success typically used for small and/or new firms. The study also examines firm and owner-level predictors of the various facets of market orientation in order to be able to provide some practical guidance to firm owners who might be interested in whether and how to increase firms' levels of market orientation.

    RESEARCH METHODOLOGY

    Research Instrument

    A questionnaire to capture data on customer orientation, competitor orientation, intra-firm communication, performance, and firm and owner demographics was developed on the basis of previous research and interviews.1 The questionnaire was pre-tested with a group of owner-managers of software firms in order to ensure that the questions were clear and captured the desired information.

    The questionnaires were administered to the owner or to a top-management team member of Canadian software firms by trained research assistants. These assistants first contacted the firms by phone to arrange an interview, then sat with the respondent while she or he filled in the survey form. The research assistants were trained to clarify the nature of questions and to explain their rationale. This procedure was adopted in order to ensure that as complete as possible a set of information was collected from a large portion of respondents contacted. Interviews were conducted between February and May of 1994.

    Sample

    Firms to be contacted were identified from a directory of Canada's software firms compiled by Industry, Science and Technology Canada. The directory is not an exhaustive listing of all software firms, but is intended to include a large portion of those which are currently emerging. The directory listed 164 firms. To focus clearly on a reasonably homogenous industry and on emerging owner-managed enterprises, firms were excluded if they: did not derive a majority of their revenue from software; had more than 200 employees; were not managed by a founding partner; were subsidiaries of other firms; and/or been purchased by other firms. This left 132 eligible firms.

    By the cut-off date of June 1, 1994, 58 firms had provided usable replies, yielding a response rate of 42%. This response rate is reasonable, and probably reflects the considerable investment made in transporting research assistants to head offices across Canada and the effort made by the assistants to encourage managers to complete the survey. Despite the response rate, however, there may well be systematic differences in the characteristics of the sample obtained and of the population.

    To consider whether responding firms differed systematically from non-respondents, the mean number of employees and the mean annual revenue of responding firms was compared with those for eligible firms. T-tests indicate that there are no significant differences between mean values of these variables for the sample of software firms obtained versus those for all eligible firms identified in the directory. This suggests the sample of firms is reasonably representative of those in the directory. Unfortunately, the firms listed in the directory are not necessarily representative of the entire population of owner-managed software firms in Canada, and hence we must be cautious not to generalize our results. The median age of firms in our sample was eight years and the median number of full time employees was 12.

    Measures

    Measures of the extent to which customer information was used to shape business practices were obtained by asking to respondents to use a scale of one to five where one indicates strong disagreement and five indicates strong agreement to respond to the statements "we emphasize that customer needs always come first" and "we emphasize our company's superior customer service."

    Indicators of the extent to which competitor information was used to shape business practices were obtained by asking respondent to use the same type of scale to respond to the following statements "we emphasize being the first to have new products available" and "we emphasize serving a particular niche within the market."

    One measure of the extent to which firms gather customer and competitor information was obtained by asking respondents which of the following kinds of intelligence gathering practices they undertake: user groups, user conferences, customer visits, market research surveys, and focus groups. An index was created by summing the number of practices undertaken.

    Another indicator of customer and competitor information gathering was obtained by querying respondents about the size of their network of business contacts relative to that of other managers in their industry. Respondents used a one to five scale to reply to the statement: "my network of business contacts is large relative to the networks of other CEOs in this industry."

    Indicators of the extent to which intra-firm communication was stressed were obtained by asking how frequently the top manager(s) met face to face with those who sell the product and how often they talked on the phone to those who sell the product.

    Five measures of firm performance were obtained. These included current levels of sales (response categories ranging from under $100,000 to over $10 million were provided), current levels of profits (response categories ranging from under $50,000 to over $5 million were provided), current percentage of sales outside Canada (a measure of international success), percentage change in the last two year period in sales inside North America and percentage change in the last two year period in sales outside North America.

    Several measures of firm and owner demographics were obtained. These included: age of firm, number of full time employees, largest percentage of sales derived from a single product, education level of the owner, number of firms founded by the owner, previous industry experience of the owner, previous management experience of the owner, previous marketing experience of the owner, previous financial experience of the owner, and previous international experience of the owner.

    Analytic Techniques

    As this is a very preliminary study into the nature and importance of market orientation of small firms, very simple analytic techniques were used. To explore the potential behavioral components of market orientation for the emergent firms being studied, the bivariate correlations between each measure of each component of market orientation and each measure of firm performance were examined. To explore the interrelatedness of the three elements of market orientation, the correlations among all the measures of each were examined. Stepwise weighted least squares regressions were used to assess the portion of variance in each measure of performance accounted for by all of the measures of market orientation. And bivariate correlations were again used to examine the relationships between the firm and owner demographic variables and the measures of market orientation.

    RESULTS

    To examine the first proposition, that acting upon customer information will be reflected by firms' tendencies to shape offerings to meet customer needs, and will be positively related to firm performance, the correlations between the items measuring the extent to which customer information was used and the five measures of firm performance were examined. Table 1 summarizes the results. The findings indicate that, contrary to the first proposition, the measures used to assess firms' tendencies to act upon customer information are unrelated to measures of firm performance. It appears that these are inadequate measures of emergent firms' tendencies to shape their offering to meet customers' needs. Although the wording of these measures is similar to that used by Narver and Slater (1990; Slater and Narver 1994) in their investigation of large firms' customer orientation, lack of measurement validity appears to account for the lack of correlations found. (An alternative to measurement error, of course, is that the theory being explored is inapplicable. It is possible that the measure is an adequate reflection of the underlying construct, but that this aspect of customer orientation is unrelated (or even negatively related) to firm performance for the sample being studied here. However, results reported below lend more credence to the idea of measurement error than that of theory inapplicability).

    (Table 1)

    To examine the second proposition, that acting upon competitor information will be reflected by firms' tendencies to a) target market niches where they have a competitive advantage and b) introduce product innovations before competitors, and will be positively related to firm performance, correlations between measures of the extent to which information was used and measures of performance were examined. Results are reported in Table 2. Again the findings provide no support for the proposition: these measures of firms' tendencies to act on competitor information are unrelated or negatively related to the measures of firm performance. The measures, despite their similarity to those used by Narver and Slater (1990), appear to be inadequate indicators of propensity to act upon competitor information.

    (Table 2)

    To test proposition three, that customer and competitor information gathering will be reflected by firms' tendencies to use formal and informal means of gathering market-place information and by their use of a business network and will be positively related to firm performance, correlations between the information monitoring measures and all the performance measures were examined. Results are displayed in Table 3. The results for this proposition are somewhat more mixed. Size of business network, like the previous indicators of customer and competitor orientation, is largely unrelated (or negatively related) to firm performance. Number of intelligence programs undertaken, however, is significantly positively related to four of the five performance measures. This suggest some very tentative support for the notion that a customer and competitor orientation can be measured in this manner and these constructs may be related to firm performance. It is interesting to note that measures of customer and competitor orientation that most closely resemble those used for large firms proved least relevant whereas one of the indicators devised to reflect what is known about the behavior of emergent firms showed promise.

    (Table 3)

    To test the fourth proposition, that intra-firm communication will be reflected by the extent to which those performing external functions communicate with other members of the firm and will be positively related to firm performance, correlations between measures of communication frequency and measures of performance were examined. These results are summarized in Table 4.

    (Table 4)

    These results are moderately supportive of the fourth proposition. Our measures of the frequency with which head office contacts sellers appears to reflect at least some of the underlying variance in intra-firm communication, and there appears to be a relationship between intra-firm communication and at least some aspects of firm performance. These results are particularly interesting given that one might not expect intra-firm communication would be an issue in firms as small as most of those in this sample.

    To examine proposition five, that indicators of customer orientation, competitor orientation and intra-firm communication will be significantly and positively related with one another, bivariate correlations among all measures of each facet of market orientation were examined. The results appear in Table 5. These results show positive, significant correlations among only a subset of the indicators. A number of the variables intended to reflect facets of the market orientation construct are unrelated or significantly negatively related. It is worth noting that two of the three possible correlations among the three indicators most consistently positively correlated with success (number of kinds of customer intelligence programs, frequency of telephone calls to sellers, and frequency of face to face meetings with sellers) are significant and positive. These results are suggestive that the other proposed measures of customer and competitor orientation are not valid, but that these three measures do capture variance in the marketing orientation construct as it has been conceptualized.

    To test proposition six, two sets of regressions were run for each of the performance variables. The first included as independent variables all the indicators proposed as measures of market orientation. The second included only those which had been found to correlated among themselves, and to be correlated with success (number of customer intelligence programs, frequency of face to face meetings with sellers and frequency of telephone calls to sellers). Weighted least squares regressions using stepwise entry were run. The beta coefficients for variables in each are not reported because the intercorrelation among the variables leads to multicollinearity and instability of individual parameter estimates. The results are summarized in Table 6.

    These results show that while the total set of measures proposed for market orientation accounts for a significant portion of variance in all but one indicator of performance (profit), the regressions using only the three seemingly most valid variables account for almost as much variance in percentage of international sales and percentage change in North American sales, and account for the same or a greater portion of the variance in sales, profit, and percentage change in non-North American sales. This supports proposition six, that market orientation (particularly as measured by the three indicators identified as most promising) will account for a significant portion of the variance in indicators of firm performance for emergent firms. It appears that such firms might benefit by working to create a market-oriented culture.

    To enhance the contribution of this study, an examination is presented of the relationship between firm and owner-level demographic variables and the three promising measures of market orientation. The correlations between the demographic measures and the three market orientation measures are reported in Table 7. Only number of employees (which could be regarded as an alternate performance indicator) and the marketing experience of the owner appear to help predict which firms will be market oriented.

    (Table5)

    (Table6)

    DISCUSSION, LIMITATIONS AND CONCLUSIONS

    One indicator of customer and competitor orientation (number of kinds of market intelligence programs undertaken) and two indicators of intra-firm communication (frequency of face to face meetings between members of head office and those who sell the product, and frequency of phone calls from head office to sellers of the product) are significantly and positively associated with several of the measures of firm performance. This is preliminary evidence of the predictive validity of these three measures. Further, two of the three possible correlations among these three measures are significant and positive as the theory of market orientation suggests they should be. The other measures are either uncorrelated or negatively correlated with these three indicators. This could be taken as an indicator of the convergent validity of the three promising measures. The regressions done to explore proposition six are suggestive of two things. First, they support the notion that, of all those considered here, only the three measures identified as promising warrant further consideration as indicators of market orientation, since the three measures perform nearly as well or better than the full set in accounting for variance in performance.

    Second, the regressions using the three promising measures provide some evidence that market orientation is relevant to the performance of emergent firms, since a significant portion of the variance in each of the performance indicators is accounted for by these equations.

    This study therefore indicates that further research on the importance of market orientation for emergent firms is warranted, and gives some guidance as to how market orientation might be measured. These results, however, are very preliminary. We offer some evidence of the validity of our measures, but make no claims that they capture all or primarily the variance in market orientation. Measurement of market orientation is one of the major issues requiring further consideration. It is not, as we have argued, appropriate simply to adopt the measures developed for larger businesses, since many of the questions make little sense in the context of smaller firms. Moreover, there may be a need for some unique measurement items to be developed for firms at differing stages, firms in different sectors, or firms in different industries. The measures adopted for this study would not be directly transferable to many others. For example, while it is imperative to ask about user groups when assessing extent of customer information scanning in the software industry, items asking about this information gathering mechanism would be inappropriate in other contexts. Subsequent investigations on this topic will need to consider carefully the market orientation measures used. Where possible, validated measures are, of course, preferred. Where these do not exist for the context in question, it will be necessary to consider the nature of the underlying construct and the particular practices of relevant in the context.

    (Table 7)

    A second issue concerns what factors may moderate the relationship here detected between the market orientation variables and the firm performance variables. While Slater and Narver (1994) argue that all firms in all environments benefit from a market orientation, and while this study suggests that market orientation variables do account for significant variation in performance for the emergent software firms studied here, there is need for considerably more research. It is possible that for emergent firms in some industries or some business stages, a market oriented culture is unnecessary and even unproductive. For instance, if competition is modest, if barriers to entry are high, or if there is a large unserved market, it may be possible for firms to thrive by stressing production efficiency instead.

    A third issue worth considering is whether alternative strategies can be taken by firms with a market oriented culture. Are some strategies more consistent with a market orientation? Are some infeasible? These are questions which future research must answer if this line of inquiry is to prove useful. On the basis of our study we can make only the most tentative of recommendations. It appears that for firms of the type studied here, there may be a benefit to trying to develop a market oriented culture. And it appears that having marketing expertise in the top management team is conducive to the development of this culture.

    REFERENCES

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    Brush, C., & Peters, M. (1992). Marketing Information Scanning Practices of New Service Ventures: The Impact of Owner/Founder Experience. Entrepreneurial Management Institute Working Paper 92-3-1, Boston University School of Management.

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    Narver, J. & Slater, S. (1990). The Effect of Market Orientation on Business Profitability. Journal of Marketing, 54 (4), 20-35.

    Peters, M. & Brush, C. (1993). Market Information Scanning Practices and Levels of Growth: A Comparison of New Service and Manufacturing Ventures. Presented at the Babson College Entrepreneurship Research Conference, Houston, TX.

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    Teach, R.& Tarpley, F. (1989). Entrepreneurship and Marketing: The Allocation of Time Among Business Activities. Research at the Marketing/Entrepreneurship Interface ed. G. Hills, R. LaForge & B. Parker. Chicago: University of Illinois at Chicago, 75-89.

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    1. A copy of the full questionnaire is not included due to space constraints, but may be obtained from the authors upon request.


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