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 DOI: 10.1177/0266242607074518

2007 25: 152International Small Business JournalLütfihak Alpkan, Cengiz Yilmaz and Nihat Kaya

an Empirical InvestigationMarket Orientation and Planning Flexibility in SMEs: Performance Implications and

  

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What is This? 

- Mar 22, 2007Version of Record >>

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Market Orientation and Planning Flexibility in SMEsPerformance Implications and an Empirical Investigation

L Ü T F I H A K A L P K A NGebze Institute of Technology, Turkey

C E N G I Z Y I L M A ZBogaziçi University, Turkey

NIHAT KAYAGebze Institute of Technology, Turkey

The study examines the joint effects of market orientation (an internal, cultural factor) and planning fl exibility (an internal, process factor) on business performance in small and medium-sized fi rms. In addition, the conceptual model incorporates market dynamism (an external factor) as a moderator on business performance. A number of hypothesized relationships are tested with a sample of small and medium-sized manufacturing fi rms in Turkey. The results suggest that while, in general, both market orientation and planning fl exibility positively infl uence fi rm performance, contrary to the author’s hypothesis, planning fl exibility exerts a negative effect on performance in highly dynamic markets. Theoretical and managerial implications of these and other fi ndings are discussed.

KEYWORDS: market dynamism; market orientation; planning fl exibility; small and medium-sized enterprises

1. Introduction

Factors contributing to the competitive performance of small and medium-sized fi rms (hereafter SMEs)1 have long been attracting the attention of researchers, pol-icy makers and business owners/managers. Research in the strategic management literature provides a long list of strategic, structural, managerial, cultural and pro-cedural aspects as antecedents of high performance in SMEs (e.g. Churchill and Lewis, 1983; Covin and Covin, 1990; Deshpande and Parasuvaran, 1986; Shuman et al, 1985). The main postulate of this literature is that superior performance in

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[DOI:10.1177/0266242607074518]Vol 25(2): 152–172

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the competitive arena requires an effective combination of all relevant internal organizational elements, i.e. strategy, culture, climate, processes and procedures enabling greater adaptability to the rapidly changing customer preferences and dynamic marketplace factors (Baker et al., 1999; Naman and Slevin, 1993). Accordingly, a market-oriented organizational culture and fl exible strategic planning approach have been suggested as key factors in business performance (e.g. Barringer and Bluedorn, 1999; Slater and Narver, 1998).

Empirical research suggests that a market-oriented organizational culture may work as a critical driver of superior performance for SMEs (Appiah-Adu and Singh, 1998; Pelham, 1999, 2000; Pelham and Wilson, 1996). Indeed, numerous authors have noted that SMEs can overcome the size and effi ciency related advantages of larger scale fi rms, such as market power, economies of scale, broad product lines, and superior production technology, by becoming more market oriented (e.g. Slater and Narver, 1994). Similarly, the strategy literature has long recognized fl exibility as a natural source of competitive advantage of SMEs, and planning as an effective tool to deal with the uncertainty created by rapid changes in the environment (Gray and Mabey, 2005; Spicer and Sadler-Smith, 2006). Barringer and Bluedorn (1999), in this respect, have suggested the notion of fl exibility in planning, that is, the ability to adjust strategic plans to rapidly changing market conditions, as a valuable strategic tool for those fi rms facing uncertain and complex markets. Such a fl exible approach to planning activity allows fi rms to adjust their strategic plans quickly to pursue op-portunities and to keep up with environmental fl uctuations (Kukalis, 1989), which in turn is expected to result in continuous improvements in customer value and sustainable competitive advantages (Matthyssens et al., 2005).

The purpose of the article is to investigate the intertwined roles of ‘market orientation’ – an endogenous, cultural factor – and ‘strategic planning fl exibility’ – an internal, process factor – in achieving superior organizational performance. To this end, we develop a contingency model (shown in Figure 1) that posits both of these constructs as direct antecedents of SME performance, thus complementing the effects of one another as they jointly improve the organization’s ability to adapt to the changes in the environment and deliver superior customer value. In addition, based on the fi ndings in prior research, that market orientation and planning fl exibility work best under highly dynamic marketplace conditions, our model incorporates market dynamism (an uncontrollable, external factor) as a moderator that effects the size of each factor on SME performance.

The article proceeds in the following manner. First, we briefl y review the literature regarding market orientation and planning fl exibility. We then develop hypotheses concerning the effects of market orientation and planning fl exibility on SME performance. Second, we incorporate market dynamism into our theoretical analyses and discuss its moderating role in the performance impacts of market orientation and planning fl exibility. Next, we test our hypotheses using data from 312 manufac-turing SMEs in Turkey. We explain in detail the data collection method and analytical procedures. Finally, we provide the research fi ndings and discuss their managerial and theoretical implications.

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2. Background and Research Hypotheses

Market Orientation as a Cultural Factor Affecting Firm PerformanceOrganizational culture, defi ned by Deshpande and Webster (1989) as the pattern of shared values and beliefs that help employees understand organizational functioning and thus provide them norms for behaviour in the organization, has become one of the central research topics in the strategic marketing literature since the early 1980s. For instance, Ouchi and Wilkins (1985) assert that, for a complete investigation of the organization phenomena, it is imperative for researchers to include culture as a specifi c variable into their explanatory models. Similarly, within the realm of the contingency management perspective, Deal and Kennedy (1982) and Peters and Waterman (1982) argue that organizational culture should be treated in empirical studies as an independent variable, endogenous to the fi rm. Deshpande and Webster (1989) further propose to test the performance impacts of specifi cally market-oriented cultural traits and norms. One of the central components of a fi rm’s overall culture is a marketing culture. This refers to the level of importance placed by members of the organization on marketing activities and has long been found as facilitating operational effi ciency and customer satisfaction (Webster, 1995). Gradually, a market-oriented culture has emerged in this literature, as a component of organizational culture, that most effectively creates the necessary behaviours for superior value for buyers and, thus, superior performance for the business (Narver and Slater, 1990).

The concept of market orientation describes a specifi c form of organizational cul-ture that focuses on ‘delivering products and services valued by customers, usually

Figure 1. Conceptual Model

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accomplished through ongoing monitoring of market conditions, and adaptation of organizational responses’ (Grewal and Tansuhaj, 2001: 67). Pelham and Wilson (1996) assert that a market-oriented culture is the main source of competitive advantage facilitating customer-driven value creation. However, being market oriented suggests much more than being simply customer led in that it entails an organization-wide focus not only on customers but also on all marketplace actors (e.g. competitors). This requires effective inter-functional coordination, is longterm in focus and proactive in nature (Slater and Narver, 1998).

Accordingly, Slater and Narver (1994) assert that the construct of market orien-tation is composed of three complementary dimensions: customer orientation, competitor(s) orientation and inter-functional coordination, each serving in con-junction with others for long-term profi tability. ‘Customer orientation’, as the central dimension of market orientation, necessitates the creation of an organizational atmosphere where every employee puts the objective of customer satisfaction fi rst for every effort he or she makes. ‘Competitor(s) orientation’ involves active moni-toring of the existing and potential competitors and attempts to create competitive advantages in the marketplace. Finally, ‘inter-functional co-ordination’ is the need for disseminating marketplace information and developing a system of active coordination across different organizational functions (or departments) is another necessary condition for a successful market orientation.

The links between a market-oriented culture and organizational performance have been demonstrated repeatedly in recent empirical research. A market-oriented organizational culture may work as a critical driver of various aspects of superior performance, including product quality, new product success, and profi tability not only for large-scale fi rms (e.g. Deshpande et al., 1993; Hult and Ketchen, 2001; Jaworski and Kohli, 1993; Kohli and Jaworski, 1990; Morgan and Strong, 1998; Narver and Slater, 1990; Noble et al., 2002; Slater and Narver, 1994) but also for SMEs (e.g. Appiah-Adu and Singh, 1998; Pelham, 1999, 2000; Pelham and Wilson, 1996). SMEs can overcome the size and effi ciency related advantages of larger fi rms, such as market power, economies of scale, broad product lines, and superior production technology, by developing capabilities for closeness and responsiveness to market demands (e.g. Slater and Narver, 1994). According to the fi ndings of Pelham (2000), for instance, market-oriented SMEs are more likely to achieve superior fi nancial performance particularly if they follow a growth/differentiation strategy. Similarly, Smallbone et al. (1995) fi nd that high performance SMEs benefi t largely from a market-oriented culture, particularly when it is coupled with a differentiation and/or low cost strategy. Finally, in the Turkish business culture context a recent study by Yilmaz et al. (2005) reveals that customer orientation (as a component of market orientation) increases corporate fi nancial performance substantially. Accordingly, we suggest the following hypothesis:

Hypothesis 1: The level of market orientation in SMEs will be positively related to their overall performance.

Planning Flexibility as a Process Factor Affecting Firm PerformanceOrganizational strategy, defi ned as the long-term course of action of a fi rm, needs to be aligned with organizational culture and environmental challenges. Strategic planning,

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therefore, provides a detailed fl ow of activities that help in shaping the minds of organizational members and organizing the procedures employed by the various departments. Especially for the SME, a well-prepared strategic plan may decrease the level of uncertainty by defi ning clearly its strengths and weaknesses, its markets, products, processes, and so on (Matthews and Scott, 1995). On the one hand, the development of a repertoire of strictly relied upon growth-oriented goals, plans, and routines (regular and predictable behaviours that embed themselves in processes, products and standards of service) may enable high effi ciency under current conditions of the present marketplace; on the other hand, any lack of fl exibility po-tentially limits fi rms’ capabilities to respond to radical change (e.g. Richbell et al., 2006; Spicer and Sadler-Smith, 2006).

An organizational inability to anticipate and react to the changing environ-mental conditions (Risseuw and Masurel, 1994), together with a rigid commitment of the fi rm’s resources to a specifi c strategic direction (i.e. a rigid plan) may limit in this respect the capability of generating contingent repositionings (Slotegraff and Dickson, 2004). For instance according to Bhalla et al. (2006), without any managerial action to ensure survival through fl exibility and adaptation, rigidity in planning may lead to disasters in the long run. Thus, a degree of fl exibility in strategic plans is critical for effective organizational processes and outcomes.

Barringer and Bluedorn’s (1999) notion of planning fl exibility draws largely upon the literature on organizational fl exibility, that is, an organization’s capacity to adapt and respond to environmental changes in a timely and appropriate manner with minimal degradation of performance (Das and Elango, 1995; Eppink, 1978; Golden and Powell, 2000; Upton, 1995). The concept of planning fl exibly is not about planning comprehensively versus superfi cially, or proactively versus reactively (Grewal and Tansuhaj, 2001), or offensively versus defesively (Evans, 1991). Rather, it is about preparing strategic plans that are changeable, adaptive, and responsive; and the organizational ability to change them when necessary. According to Kukalis (1991), the antecedents of fl exibility in the strategic planning system include short-term planning and frequent reviews and revisions to adapt to unexpected environ-mental changes. In this context, the notion of planning fl exibility is viewed as a primary component of strategic fl exibility, i.e. the property of possessing manoeuvring capabilities (Grewal and Tansuhaj, 2001) in adjusting strategic objectives (Lau, 1996), modifying strategic plans (Evans, 1991), replicating core technologies (Galbraith, 1990), reallocating resources (Buckley and Casson, 1998), and recalibrating all the activities frequently (Saini and Johnson, 2005).

Prior research has generally associated fl exibility in organizational procedures with superior performance, particularly for smaller fi rms that have a lean and adap-tive structure. For instance according to Fletcher and Harris (2002) those SMEs reviewing and questioning their strategic objectives and plans periodically, perform much better than those who only prepare and strictly follow their business plans. For larger fi rms, however, excessive focus on fl exibility may have several down-sides including increased costs, increased stress on employees, and a lack of organ-izational focus (Das and Elango, 1995). Although strict plans reduce fl exibility, they are usually necessary for large-scale fi rms to establish a clear direction with respect

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to resource allocation. Unsuccessful and dispersed efforts in large fi rms for adjust-ment may lead not to higher fl exibility and performance but instead to disorganiza-tion and ambiguity (Kozan, 1982). Hence, larger organizations may benefi t more from formal planning (Harris and Ogbonna, 2006; Leppard and McDonald, 1991). In contrast, because their contingencies and advantages are different, SMEs prioritizing to be adaptive to marketplace competition rather than being effi cient in internal functioning may need a more remedial, practical, and rapid approach to planning (Saker and Speed, 1992). The prime competitive driver for many (if not most) SMEs is, basically, a fl exible planning approach to cope successfully with foreseeable and unforeseeable developments in the external environment.

For many SME managers, rigid plans may have many downsides. A sophisticated and tight business plan is likely to undermine the ability of SMEs to react fl exibly to environmental dynamism because of the inertia that is created by the ‘strict rules of action’ included in the plan. According to Robinson and Pearce (1984), for instance, SMEs generally avoid relying on detailed planning activities and, rather than acting proactively, they prefer a reactive orientation. These authors also assert that the owner-managers in SMEs may lack the necessary time and mastery to develop a detailed conventional plan. Strategic plans are often formulated on the basis of changes that can be foreseen (Krijnen, 1979). However, SMEs tend to operate in environments that are diffi cult to foresee and are diffi cult to infl uence because of their limited market power. As a result, the strategy of SMEs involves an iterative process of trial and error in response to market changes. Therefore, planning activity in many (if not most) SMEs is in the form of frequent adaptations of simple operational procedures to changes in the environment (Risseuw and Masurel, 1994).

According to Sharfman and Dean (1997), the ability of strategists to cycle between implementation and formulation, i.e. to fi nd ways to take a few tentative steps, and then to refi ne their plans in line with the feedback they receive, would increase organizational adaptiveness. Such fl exibility in strategic planning may result in superior organizational performance for SMEs. Flexibility in strategy and operational procedures enables fi rms to respond quickly and effectively to the fore-seen or unforeseen changes in the competitive marketplace without sacrifi cing effi ciency (Golden and Powell, 2000). Further empirical evidence for the perfor-mance-enhancing role of strategic planning fl exibility is provided in a recent study by Alpkan and Kaya (2004). Based on these studies and fi ndings, we suggest the following hypothesis:

Hypothesis 2: The level of planning fl exibility in SMEs will be positively related to their overall performance.

Market Orientation and Planning Flexibility RelationshipA review of the literature provides a number of theoretical and empirical studies relating different dimensions of organizational culture to various aspects of strategic planning. For instance, Harrison et al. (1994) propose that taller organizational pyra-mids, representing high power distance cultures, possess more formalized, mechanistic,

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and rigid types of planning and control systems. More specifi cally, Slater and Narver (1994) assert that organizational fl exibility, adaptability, capacity for speed, and propensity for innovation can be leveraged best with a market-oriented culture. Similarly, Slater and Narver (1995) argue that market orientation and strategic planning approach must reinforce each other, the former being a cultural element pertaining to organizational norms and values, and the latter a climate element about structures and processes. Saker and Speed (1997) elaborate on the direction of this relationship by arguing that, according to the contingency approach, culture is an important determinant of the planning process.

More recent studies conceptualize market orientation as an infl uence on stra-tegic planning fl exibility, and both as critical drivers of high performance. For in-stance, Johnson et al. (2003) propose that market orientation with a market-driven perspective in turbulent markets will necessitate the development of market-focused strategic fl exibility, i.e. abilities to generate fi rm-specifi c real options for the confi guration and reconfi guration of superior customer value propositions. Greenley et al. (2004) argue that organizations adopting a strong customer and competitor orientation are more likely to develop learning capabilities for adapting to environmental changes, implementing new ideas, and initiating changes in stra-tegic planning. Saini and Johnson (2005) fi nd support for the interaction between strategic fl exibility and proactive customer orientation focusing on the latent needs of the customers. Harris and Ogbonna (2006) suggest that fi rms that are ignorant of, or unable to, fully appreciate competitor actions and developments in the competitive environment are likely to become more committed to the current strategic course of action and less likely to instigate efforts to change. Based on this literature, we suggest that a market-oriented culture leads to higher levels of planning fl exibility.

Hypothesis 3: The the level of market orientation in SMEs will be positively related with the level of planning fl exibility.

The Moderating Role of Market DynamismIn this context, dynamism refers to the rate of change and the degree of instability of the factors within an environment (Li and Simerly, 1998). The once relatively stable competitive environment has been replaced, in virtually all industries, by increased market dynamism; that is, product life cycles have become shorter, customers have been changing their preferences faster and competition has become increasingly fi erce (Dreyer and Grønhaug, 2004). On the one hand, an increased market dynamism and associated risks of uncertainty render decision making diffi cult and constitute serious drawbacks for business performances in virtually all industries. On the other hand, increased marketplace dynamism may contribute positively to the competitive performances of both SMEs and larger organizations, provided that these succeed in developing a fi t between culture and strategy. We, therefore, examine the moderating effects of market dynamism on the performance impacts of a market-oriented culture and a fl exible strategic planning approach.

Prior research about fi rm performance and market orientation (Jaworski and Kohli, 1993; Slater and Narver, 1994) has found no, or equivocal, evidence for the

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moderating role of environmental factors on the performance impact of market orientation. A non-exhaustive list of environmental uncertainty components in-vestigated include market dynamism and competitive intensity (Appiah-Adu and Singh, 1998; Kumar et al., 1998), competitive intensity, market growth and technical turbulence (Pelham, 1999), demand uncertainty and technological uncertainty (Grewal and Tansuhaj, 2001), and overall environmental uncertainty (Lonial and Raju, 2001). A number of recent studies seem to support the existence of a positive moderation by these uncertainty factors on the market orientation– fi rm performance relationship in different settings, e.g. Kumar et al. (1998) in the US health care industry; Greenley (1995) and Harris (2001) in UK fi rms; Appiah-Adu and Singh (1998) and Golden et al. (1995) in a transition economy, Russia.

Generally, because SMEs are less able than larger fi rms to shape their environ-ment, they are compelled to acquiesce in response to environmental fl uctuations (Tiessen et al., 2001). Whereas, as Hambrick (1983) notes, increased environmental dynamism brings SMEs both opportunities and threats, it can be suggested that a market-oriented culture works best in dynamic markets. This is because market-oriented SMEs generally have greater capabilities for (1) identifying and meeting the changing needs and desires of customers, and (2) developing the necessary skills to respond properly to changing environmental conditions (e.g. Appiah-Adu and Singh, 1998; Grewal and Tansuhaj, 2001).

Environmental dynamics should also moderate the planning flexibility–performance relationship by forcing SMEs to align their strategies with the environ-ment. In turbulent markets, greater fl exibility is needed in the strategic process, as increased levels of market dynamism forces companies to shift their focus from economies of scale and property-based resources to fl exibility and knowledge-based resources (Miller and Shamsie, 1996; Thompson, 1993). In their seminal discussion of learning organizations, Slater and Narver (1995) assert that adopting a fl exible planning approach that questions and changes when deemed necessary, even the basics of an organization’s mission and strategies, may produce generative learning and superior adaptability to dynamic environments.

A fl exible planning approach works best in highly dynamic markets because it helps capability building to respond quickly to changing market conditions (Dreyer and Grønhaug, 2004; Grewal and Tansuhaj, 2001; Levy and Powell 1998). According to Andersen (2000), conventional centralized and rigid strategic planning should be integrated with – but not replaced by – a fl exible planning approach by delegating the top managers’ authority for deciding about new market activities, new products, new policies, etc., to middle management. In line with these views, Johnson et al. (2003) reveal that the performance impact of fl exibility is contingent on the level of market turbulence. Brews and Hunt (1999) and Venkatraman (1990) show that fl exible planning, complemented by appropriate internal management systems, might be the best strategic practice for fi rms facing dynamic market conditions. Therefore we present two hypotheses:

Hypothesis 4: The level of market dynamism will positively moderate the effect of market orientation on SME performance.

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Hypothesis 5: The level of market dynamism will positively moderate the effect of planning fl exibility on SME performance.

3. Method

3.1. Data CollectionData were collected through face-to-face interviews with executives of SMEs in Turkish manufacturing. This sampling context was selected for the study because of the high level of variability across different industries in terms of dynamism and other uncertainty drivers observed recently in the Turkish manufacturing environment (e.g. Alpkan and Kaya, 2004). We believe that this context enables us to conduct more stringent tests of the hypothesized relationships. The sampling frame consists of randomly selected 1000 manufacturing SMEs employing less than 250 employees. An executive from each fi rm was fi rst contacted via mail and then via phone in order to solicit cooperation for the study. After these contact attempts, 354 fi rms agreed to participate in the study and completed the question-naires (response rate = 35.4%). Some of the participating executives chose not to answer a number of essential questions and therefore their fi rms were eliminated from the fi nal sample. As a result, the effective sample size of the study is 312. Tests for non-response bias were conducted by comparing the respondents who agreed to participate after the fi rst contact attempt with those who participated after the second contact attempt. No signifi cant differences were found in the construct means of the two groups, suggesting that non-response bias may not be a major problem in our sampling process.

3.2. Measurement of ConstructsThe constructs in our study are developed by using measurement scales adopted from prior studies. All constructs are measured using seven-point Likert scales with anchors strongly disagree (= 1) and strongly agree (= 7). Items for measuring Market Orientation are adopted from Narver and Slater (1990). This scale consists of items measuring the Customer Orientation (6 items), Competitor(s) Orientation (4 items), and Interfunctional Coordination (5 items) components of market orientation. The Planning Flexibility scale (9 items) is adopted from Barringer and Bluedorn (1999). Similarly, selected items from Appiah-Adu and Singh (1998) and Pelham and Wilson (1996) are used for measuring Market Dynamism (6 items). Items in this scale assess the rate of change in customer needs, com-petitors’ strategies, products, and technology. These items were selected because they are the strongest possible sources of dynamism in the sampling context. Finally, seven items are adopted from Homburg et al. (1999) to measure different aspects of SME performance, such as profi tability, market share, customer satisfaction, and adaptability. All performance items assess performance levels relative to the industry averages. Measurement items are displayed in the Appendix.

3.3. Measure ValidationWe used structural equation modelling to assess the psychometric properties of our measurement scales. We fi rst conducted a second-order confi rmatory factor

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analysis of the 15 Market Orientation items, specifying Market Orientation as a second-order factor and the three dimensions as fi rst-order factors with items of each loading onto the theorized dimension, to examine the extent to which the three-dimensional conceptualization of the Market Orientation construct fi ts the observed data. This model displayed reasonably good fi t to the data (χ2 [87] = 264; χ2/ d.f. = 3; Root Mean Square Residual [RMR] = 0.06; Comparative Fit Index [CFI] = 0.95; Goodness of Fit Index [GFI] = 0.87; Normed Fit Index [NFI] = 0.93), and all items loaded with signifi cant coeffi cients onto their respective fi rst-order constructs. Next, further evidence for the theorized measurement relationships was obtained from the results of a four-factor confi rmatory factor analysis where all items of the Planning Flexibility, Market Dynamism, and Firm Peformance constructs were specifi ed to load onto their respective factors and the 15 Market Orientation items were fi rst aggregated (averaged score of the average item scores of each dimen-sion was taken) and then integrated into the analysis as a single-indicant for the Market Orientation factor.2 This model also displayed reasonably good fi t to the observed data (χ2 [225] = 621; χ2/ d.f. = 2.7; Root Mean Square Residual [RMR] = 0.07; Comparative Fit Index [CFI] = 0.90; Goodness of Fit Index [GFI] = 0.85; Normed Fit Index [NFI] = 0.85), given the large number of parameters estimated.

All items loaded signifi cantly onto their respective constructs, providing evidence for convergent validity; and all bi-variate factor correlations were signifi cantly less than one, providing evidence for discriminant validity. In addition all variance extracted estimates were greater than .5 and all composite reliability estimates (as well as coeffi cient alpha estimates) were greater than .7, providing further evidence for the internal consistency of our measurement scales (Fornell and Larcker, 1981). Thus, overall, we concluded that the measurement scales used in the study were adequately reliable and valid.

3.4. AnalysesConstruct means, standard deviations, and scale correlations are presented in Table 1. Whereas the mean levels of the variables appear to be quite high, the Harman’s (1967) single factor test indicates that common method variance is not present to a considerable extent in these fi ndings. That is, in an analysis of all study items, the fi rst principal component was capable of explaining less than 20% of the variability in the data.

As it is seen in the correlation matrix, all of the variables are correlated positively and signifi cantly to each other. A subsequent analysis of variance infi lation factor (VIF) statistics show that none of the the VIF statistics exceed 1.27, thus multicollinearity is

Table 1. Descriptive Statistics and Construct Correlations

Variable M SD 1 2 3 4

Market Orientation 5.77 .83 1.000 Planning Flexibility 4.60 1.00 .18** 1.000Market Dynamism 4.78 1.12 .29** .23** 1.000Overall Performance 5.10 1.00 .57** .26** .45** 1.000

Notes: N = 312; *p < 0.05; **p < 0.01

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not a major problem (Freund and Littell, 1991). Still, however, in order to minimize the potential effects of multicollinearity on our results, the analyses are undertaken using mean-centered independent variables (Jaccard et al., 1990).

Sequential regression models are used to test the hypothesized relationships in Figure 1. In the fi rst model, planning fl exibility is posited as the dependent vari-able and market orientation as the independent variable in order to test for the statistical signifi cance of the hypothesized positive relationship between them. In the second model, overall SME performance is posited as the dependent variable, and market orientation and planning fl exibility as its predictors. Next, in order to test for the moderating effects of market dynamism, two (two-way) interaction terms representing moderating effects of market dynamism on the impacts of market orientation and planning fl exibility on fi rm performance are incorporated into the analyses. The results of these analyses are provided in Table 2.

As shown in Table 2, the results indicate that market orientation is a signifi cant driver of planning fl exibility, and, more importantly, both of them are positively related to SME performance. The performance impact of market orientation is found to be stronger than that of planning fl exibility. Concerning the moderating role of market dynamism, we see that the positive performance impact of market orientation on SME performance becomes even stronger in highly dynamic markets; whereas, contrary to our expectations, the positive performance impact of planning fl exibility declines fast and turns to negative as market dynamism increases.

4. Discussion

A number of theoretical and managerial implications emerge from these results. First, we evaluate the joint effects of market orientation and planning fl exibility on fi rm performance. The critical role – repeatedly demonstrated in prior research – of a market-oriented organizational culture (e.g. Appiah-Adu and Singh, 1998; Kohli and Jaworski, 1990; Narver and Slater, 1990; Noble et al., 2002; Pelham and Wilson, 1996) and that of a fl exible approach in strategic planning (e.g. Alpkan and Kaya, 2004; Golden and Powell, 2000; Kukalis, 1989)

Table 2. Results of Analyses

Independent Variables Dependent Variable Planning Flexibility Performance Performance (Model 1) (Model 2) (Model 3) Std. B t Value Std. B t Value Std. B t Value

(1) Market Orientation .17 3.10** .57 12.28** .51 11.51**(2) Planning Flexibility – – .14 2.97** .15 3.41** (3) Market Dynamism – – – – .20 4.30** (4) Market dynamism * Market Orientation – – – – .16 3.53** (5) Market Dynamism * Planning Flexibility – – – – –.19 –4.41** R² = .03 R² = .37 R² = .49 F = 9.66** F = 87.62** F = 56.64**

Notes: N = 312; **p < .01; *p < .05

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for superior organizational performance are confi rmed in the study. Interestingly, however, we fi nd planning fl exibility as exerting a negative effect on SME per-formance when market dynamism is higher. Thus, our research reveals that market orientation – which is found to be both a predictor for planning fl exibility and a strong contributor for overall SME performance – may have dual effects on SME performance in highly dynamic markets: (1) a direct positive effect, and (2) an indirect negative effect through increased planning fl exibility. Firms in highly dynamic markets should, therefore, focus exclusively on developing a market-oriented culture, while at the same time keeping the level of planning fl exibility at some reasonable level.

These fi ndings highlight, on one hand, the diffi culty of establishing organiza-tional mechanisms for balancing different internal adaptation efforts in dynamic markets. From a managerial standpoint, we can deduce that the assumption that SMEs are naturally advantageous, thanks to their lean structure and size, to deal with high market dynamism, does not automatically produce a competitive ad-vantage. The downsides of planning fl exibility articulated in the literature for the coordination problems of larger fi rms (e.g. Das and Elango, 1995; Kozan, 1982) seem to be valid for SMEs operating in dynamic markets. Spending excessive resources and time in developing skills to monitor environmental developments, and taking risks to change strategic direction via urgent decisions for adapting, revising, and adjusting plans in a relatively short period of time may prove diffi cult. This may not only lead to a reduction in profi ts but also can provide no guarantee to exert an adequate or suffi cient response to catch up with the necessities and pace of external change. Instead, relying on a well-developed, market-oriented culture may lead SMEs to exhibit such market-oriented practices as building close relationships with clients and conducting interfunctional meetings for higher customer value (Gainer and Padanyi, 2005).

On the other hand, this study reveals that balancing the efforts for external adaptation is a very diffi cult task for the strategists of SMEs in dynamic markets, regardless of the level of market orientation in the organization’s culture. Firms attempting to achieve fl exibility in strategic planning may develop an extra sensi-tivity and quick reactivity to all kinds of environmental changes without consid-ering the strategic relevance of their efforts. Many SMEs committed to exploiting the present benefi ts of the marketplace may choose to focus solely on the notion of adaptability to secure their survival and stability. However as Zhang et al. (2006) indicate, proactive and innovative SMEs that prefer developing a ‘prospector’ or ‘analyser’ orientation towards the environmental opportunities not only to survive in the short but also to grow in the long run.

An exaggerated focus on fl exibility in strategic planning may cause instability in decision-making and an insuffi cient commitment to the fi rm’s strategic direction. This phenomenon, coupled with SME defi ciencies in other dimensions of stra-tegic planning, such as scanning intensity and planning expertise, may be detrimental for firm performance. Furthermore, the negative effects of this ‘excessive fl exibility’ may exist both in the short run, because speedy but superfi cial revisions in the strategic plans may not always respond well to every kind of environmental condition, and in the long run, because every new adjustment may remove the

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possible avenues for improvement created by former ones. In its ultimate form, this planning approach may lead to a series of frequent and continuous changes in plans that are akin to no planning at all.

5. Limitations and ConclusionThis article has examined the joint effects of market orientation and planning fl ex-ibility on business performance in SMEs. However, the limitations of our study provide new ideas for further research. Our study was limited to a small sample of SMEs in the manufacturing industry in Turkey. This study setting can lead to a careful generalizability of the results because most aspects of Turkish manufacturing industries – including legal framework, norms of conducting business, processes, and infrastructural characteristics – are globally integrated and largely resemble European and North American businesses.

The variables were selected to represent different aspects of theoretical relations within the conceptual framework. To represent organizational culture and strategy, we employed the construct of ‘market orientation’; to incorporate the strategic management process, we investigated the effects of ‘planning fl exibility’; and, in order to take into account environmental contingencies, we included ‘market dynamism’ in our analyses. Subsequent research could replicate our study in broader sampling contexts and extend our theoretical model by studying the effects of a larger set of variables. For instance, as well as market orientation, other strategic orientations (e.g. technological orientation and entrepreneurial orientation) or the subdimensions of it (e.g. customer orientation, competitor orientation, etc.), or other task and general environmental factors (e.g. uncertainty, turbulence, competitive intensity, etc.) could be investigated. Likewise, studying other dimensions of fl exibility, besides planning fl exibility (e.g. manufacturing fl exibility, organizational fl exibility, etc.), and other dimensions of strategic planning (e.g. scanning intensity, planning horizon, etc.) could represent further avenues for developing the relationships revealed in this research.

In conclusion, our fi ndings suggest that SMEs need to develop both a proactive market-oriented culture and a fl exible process of strategic planning. It is important to note, however, that developing an entrenched market-oriented organizational culture that is shared by a majority in the organization requires (1) commitment and leadership of top managers, particularly the owner-manager, and (2) enhanced formal and informal procedures and cultural artefacts (e.g. symbols, slogans, ceremonies, etc.) supporting market orientation. Although Harris and Ogbonna (1999) warn strategists about the diffi culty of crafting a cultural change towards a more market-oriented organization, an evolutionary approach for socialization may work better in smaller organizations where owner-managers’ commitment for higher customer value may be transmitted more easily to the smaller number of employees.

Strategic planning fl exibility seems to necessitate a balance between change to adapt to environmental dynamics and maintaining the status quo. In other words, strategists are obliged to be open to new ideas, new sources of information, and new alternatives, as Sharfman and Dean (1997) suggest. There is a need to revise, accordingly, strategic plans in order not to miss opportunities and manage risks

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whilst, at the same time preserving the organizational commitment for a clear strategic direction.

Notes1. According to the defi nition of the European Commission entered into force on 1 January

2005, SMEs are those companies which employ less than 250 persons, have an annual turnover not exceeding 50m euro, and/or an annual balance sheet total not exceeding 43m euro (http://www.europa.eu.int/comm)

2. The error term for the single-indicant was set at 10% of its observed variance.

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Appendix

Measurement ItemsMarket Orientation (coeffi cient alpha = 0.85)

Customer Orientationa. Focusing on commitment to customersb. Creating value for customersc. Understanding customer needsd. Setting customer satisfaction objectivese. Measuring customer satisfactionf. After sales service

Competitor Orientationg. Salespersons sharing competitor informationh. Responding rapidly to competitors’ actionsi. Top managers discussing competitors’ strategiesj. Targeting opportunities for competitive advantage

Interfunctional Coordinationk. Interfunctional customer callsl. Information shared among functionsm. Gaining a functional integration in strategyn. All functions contribute to customer valueo. Sharing resources across the whole fi rm Source: Narver and Slater (1990).

Planning Flexibility (coeffi cient alpha = 0.82)a. The emergence of a new technologyb. Shifts in economic conditionsc. The market entry of new competitiond. Changes in government regulationse. Shifts in customer needs and preferencesf. Modifi cations in supplier strategiesg. The emergence of an unexpected opportunityh. The emergence of an unexpected threati. Political developments that affect your industry Source: Barringer and Bluedorn (1999).

Market Dynamism (coeffi cient alpha = 0.78)a. Changes in customer needsb. Constant changes in competitors’ strategies/actionsc. Rate at which products/services become obsoleted. Rate of change in technologye. Time needed by the competitors to imitate innovations done by othersf. Competitive power of the competitors Source: Appiah-Adu and Singh (1998), Pelham and Wilson (1996).

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Performance (coeffi cient alpha = 0.84)a. Adapting your marketing strategy adequately to changes in competitors’ marketing

strategiesb. Adapting your products quickly to the changing needs of customersc. Reacting quickly to new market threatsd. Achieving customer satisfactione. Securing desired market sharef. Attracting new customersg. Earning profi ts Source: Homburg et al. (1999).

LÜTFIHAK ALPKAN is an associate professor of management and organization at Gebze Institute of Technology, Turkey. He obtained his PhD in management and organization from Gebze Institute of Technology in 2000. His main areas of interest are Strategic Management, SMEs, Organizational Culture and Ethics. His research has been published in the Journal of Business Research, among many other journals and numerous conference proceedings. Please address all correspondence to: Lütfi hak Alpkan, Associate Professor of Management and Organization, Gebze Yüksek Teknoloji Enstitüsü, Isletme Fakültesi, 41400 Gebze-KOCAELI, Turkey. [email: alpkan@gyte.edu.tr]

CENGIZ YILMAZ is an associate professor of marketing at Bogaziçi University, Turkey. He obtained his PhD in marketing from Texas Tech University in 1999. His research interests focus on inter-fi rm relationships, distribution channels and relationship marketing, and strategic issues concerning intra- and inter-fi rm aspects in marketing systems and their links with business performance. His research has been published in the Journal of the Academy of Marketing Science, Journal of Business Research, Industrial Marketing Management, European Journal of Marketing, among many other journals and numerous conference proceedings. Please address correspondence to: Cengiz Yilmaz, Associate Professor of Marketing Management, Bogaziçi Üniversitesi, IIBF, 34342 Bebek, Istanbul, Turkey. [email: cengiz.yilmaz@boun.edu.tr]

NIHAT KAYA is an associate professor of management and organization at Gebze Institute of Technology, Turkey. He obtained his PhD in management and organization from Gebze Institute of Technology in 2002. His main areas of interest are Strategic Management, SMEs, and Human Resource Management. His research has been published in the International Journal of Human Resource Management, among many other journals and numerous conference proceedings. Please address correspondence to: Nihat Kaya, Associate Professor of Management and Organization, Gebze Yüksek Teknoloji Enstitüsü, Isletme Fakültesi, 41400 Gebze-KOCAELI, Turkey. [email: nkaya@gyte.edu.tr]

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Orientation du marché et du marché et souplesse de la planifi cation dans les PMELes implications de la performance et une étude empirique

Lütfi hak AlpkanInstitut de technologie de Gebze, TurquieCengiz YilmazUniversité de Bogaziçi, TurquieNihat KayaInstitut de technologie de Gebze, Turquie

L’étude examine les effets cumulés que peuvent avoir l’orientation du marché (un facteur culturel interne) et la souplesse de planifi cation (un facteur de processus interne) sur la performance commerciale des petites et moyennes entreprises. En outre, le modèle conceptuel incorpore le dynamisme du marché (un facteur externe) comme élément modérateur qui enfl e l’importance des conséquences de ces deux facteurs sur la performance commerciale de l’entreprise. On a vérifi é ces rapports hypothétiques auprès d’un échantillon de PME implantées en Turquie, les résultats faisant ressortir que – même si en général l’orientation du marché et la souplesse de planifi cation ont une infl uence plutôt positive sur la performance de l’entreprise – contrairement à ceci, la souplesse de planifi cation hypothétique exerce un effet négatif sur la performance dans le cas des marchés particulièrement dynamiques. L’article analyse les implications théoriques et entrepreneuriales de ces constats et d’autres observations. Mots clés: dynamisme du marché; orientation du marché; souplesse de la planifi cation; petites et moyennes entreprises

Orientación del mercado y fl exibilidad de planifi cación en las PYMELas consecuencias del desempeño y una investigación empírica

Lütfi hak AlpkanInstituto de Tecnología de Gebze, TurquíaCengiz YilmazUniversidad de Bogaziçi, TurquíaNihat KayaInstituto de Tecnología de Gebze, Turquía

El estudio examina los efectos conjuntos de la orientación del mercado (un factor cultural interno) y la fl exibilidad de planifi cación (un factor de proceso interno) en el desempeño de las pequeñas y medianas empresas. El modelo conceptual incorpora, además, el dinamismo del mercado (un factor externo) como un moderador que aumenta la magnitud de los efectos en el desempeño de la empresa. Las relaciones hipotéticas se comprueban con una muestra de pequeñas y medianas empresas manufactureras en Turquía. Los resultados indican que por lo general tanto la orientación del mercado como la fl exibilidad de planifi cación infl uyen positivamente en el desempeño de la empresa; al contrario del caso hipotético, la fl exibilidad de planifi cación ejerce un efecto negativo en el desempeño en los mercados muy dinámicos. Se discuten los resultados teóricos y empresariales de éstas y otras conclusiones. Palabras clave: dinamismo del mercado; orientación del mercado; fl exibilidad de planifi cación; pequeñas y medianas empresas

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Marktorientierung und Planungsfl exibilität in KMULeistungsimplikationen und eine empirische Untersuchung

Lütfi hak AlpkanGebze Institut für Technologie, TürkeiCengiz YilmazBogaziçi Universität, TürkeiNihat KayaGebze Institut für Technologie, Türkei

Die Studie untersucht die zusammenhängenden Auswirkungen von Marktorientierung (ein interner kultureller Faktor) und Planungsfl exibilität (ein interner Prozessfaktor) auf die Unternehmensleistung in kleinen und mittelgroßen Unternehmen. Darüber hinaus berücksichtigt das konzeptionelle Modell die Dynamik des Marktes (ein externer Faktor) als Vermittler, der den Effekt der beiden anderen Faktoren auf die Unternehmensleistung erhöht. Diese hypothetischen Beziehungen wurden an ausgewählten kleinen und mittleren herstellenden Betrieben in der Türkei getestet. Während Marktorientierung und Planungsfl exibilität die Unternehmensleistung im Allgemeinen positiv beeinfl ussen, zeigen die Ergebnisse, dass Planungsfl exibilität in hochdynamischen Märkten entgegen aller Annahmen eine negative Auswirkung auf die Leistung hat. Theoretische und unternehmerische Implikationen dieser Erkenntnisse und andere Untersuchungsergebnisse werden diskutiert. Schlüsselwörter: Marktdynamik; Marktorientierung; Planungsfl exibilität; kleine und mittelgroße Unternehmen

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