Market Orientation

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Theme: Marketing & Other Functions

MARKET ORIENTATION VS OTHERBUSINESS APPROACHES, AND THEIR

RELATIONSHIP WITH PROFITABILITY

Dawes, John G

Marketing Science Centre

Correspondence to:

John Dawes

Senior Research AssociateMarketing Science CentreUniversity of South AustraliaNorth Terrace, AdelaideSouth Australia 5000Australia

Phone: 618 8302 0077Fax: 618 8302 0123

E-mail [email protected]

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MARKET ORIENTATION VS OTHERBUSINESS APPROACHES, AND THEIR

RELATIONSHIP WITH PROFITABILITY

ABSTRACT

Marketing theory has traditionally contrasted a market orientation to internallyoriented approaches stressing productive efficiency, or selling and promoting.This study examines the comparative effect of these three different emphases onprofit performance. The results indicate that analysis of customer needs has apositive association with profitability. Internally oriented approaches do not havea positive association with profitability.

Keywords:

Market Orientation, Company performance

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INTRODUCTION

The subject of market orientation and its effects on business performance hasreceived a lot of attention in the literature recently. Since 1990 a number ofstudies have found positive relationships between market orientation andperformance measures such as ROI, sales growth and market share position. Amarket orientation has traditionally been contrasted to other internally focusedorientations such as a production or sales orientation (e.g. Kotler, 1997, McCarthyet al., 1997). The implication has usually been that a market orientation willresult in better performance than those approaches. While there is now someevidence that a market orientation correlates with various performance measures,there is a lack of evidence on whether it is a superior orientation to otherapproaches. This paper investigates the effect of a market orientation onprofitability but also the effect of a focus on selling or promotion, or productionefficiency.

MARKET ORIENTATION VS OTHER APPROACHES

Marketing texts usually compare the marketing concept or market orientationwith other orientations: production and sales. The key words used to describe aproduction orientation in the literature are:

Basic function is to produce, selling is incidental (Keith, 1960);production efficiency, wide coverage, low prices (Kotler, 1991);produce offerings that are easy to make rather than need fulfilling(McCarthy and Perreault, 1987); make products cheap enough peoplewill buy (Pearson, 1993); produce what engineers think are goodproducts; focus on manufacturing efficiency (Schoell and Guiltinan,1982).

A production orientation appears synonymous with a high emphasis onachieving efficiency in operations.

Keywords from the literature for the sales orientation are:

A focus on sellers needs, emphasis on selling and promoting, makeprofit through volume (Bennett, 1988); back up sales force withadvertising and market intelligence (Keith, 1960); volume rather thanprofits; short run; not segments; sell rather than plan (Kotler, 1977);aggressive selling and promotion effort; little effort to find out whatcustomers want (Kotler, 1991); preoccupied with need of seller to sellgoods now (Levitt, 1960); increase volume, selling is key skill, focuson distribution and short term results (Michaels, 1982); stimulatedemand for what it produces, not produce in response to customer

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needs (Saxe and Weitz, 1982); sellers need to move inventory;maximise volume, sell products despite evidence they are not whatcustomers want (Schoell and Guiltinan, 1982); persuading customersto buy, inform and convince customers (Peterson, 1989); “sell hardpeople will buy” (Pearson, 1993).

A sales orientation appears synonymous with an emphasis on an aggressiveselling or promotional effort to pursue revenue objectives. There has always beenan implication that these two approaches (production and sales) are less desirablethan a market orientation, because they will lead to poor performance (Pearson,1993). Also, they have been seen as mutually exclusive in most marketingtextbooks (e.g. see Lusch and Lusch, 1987 in addition to the previous references).However, Pearson (1993) points out that a firm may actually have tendenciestoward all three approaches. For instance, a firm might be quite market orientedbut still emphasise a strenuous selling and promotional effort and productionefficiency. There is some evidence that organisations operate using all three invarying degrees (Wilkinson et al., 1996). Therefore we use the terms sales focusor production focus to signal that these activities or priorities are not mutuallyexclusive from a market orientation.

MARKET ORIENTATION AND PERFORMANCE

Summations of prior research in Greenley (1995) and Avlonitis & Gounaris(1997) shows that there is a growing body of evidence pointing to a positiveassociation between market oriented behaviour and performance, across variousindustry environments. However, there is a gap relating the effect of a marketorientation to business emphases. Several studies identify that many smallbusinesses adopt other approaches than just a market orientation. Peterson (1989)and Radder (1996) found that many small businesses focused more on theirselling efforts or production efficiency rather a market orientation. However, weknow little about how such business emphases affect performance. Could it bethat a sales emphasis or a production emphasis also correlates with businessperformance ? Would this correlation be positive or negative ? Would any suchcorrelation be of similar magnitude to that of a market orientation ? Is it better tohave a modicum of each than a lot of just one ?

Wong & Saunders (1993) is one study which has investigated this issue. Itfound that a market oriented approach, balanced with an emphasis on productinnovation resulted in superior performance to other approaches stressing saleseffort or production. Avlonitis & Gounaris (1997) found that firms with aproduction orientation outperformed more market oriented firms in terms ofperformance relative to targets but not relative to competition. More evidence isneeded to better understand this issue.

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WHAT WOULD BE EXPECTED ?

The theoretical rationale for expecting that a market oriented approach tobusiness will positively correlate with performance is summarised succinctly inNarver & Slater (1990).

They state that to achieve above normal performance, a business must“create...superior value for its customers”. The use of market intelligence willhelp the business to do so. Based on previous research findings and establishedarguments in the literature, we propose that firms would enjoy benefits in profitperformance from a strong market orientation.

We might also expect that an emphasis on production efficiency would bepositively associated with profit. Production efficiency could help a firm to (a)reduce costs, which can directly contribute to profitability, (b) allow the firm tooffer lower prices while still earning high margins, therefore gaining moreprofitable business, and (c) offer improvements in customer service such asreduced lead or wait times which could also result in gaining profitable business.

An emphasis on sales and promotional activity might also be expected to bepositively associated with profit. Firms that promote more heavily than otherswill presumably gain (or maintain) brand awareness, which can translate into trialand repeat purchase. On the assumption than additional sales are profitable, thefirm’s profit performance will be superior.

We also argue that an emphasis on selling/promotion or productive efficiencywill not have as strong an association with profit performance than marketoriented behaviour. We believe that stronger emphasis on these approaches maybring incremental benefits but will not substitute for a sound knowledge ofcustomer needs and a preparedness to respond to them.

RESEARCH HYPOTHESES

Based on these observations and conjectures the following research hypothesesare formulated.

H1. Market oriented behaviour is positively associated with profitabilityH2. A Production focus is also positively associated with profitabilityH3. A Sales & promotional emphasis is also positively associated with

profitabilityH4. Market oriented behaviour is more strongly associated with

profitability than either a production focus or a sales andpromotional emphasis

MEASURES

There are several existing tools to measure market oriented behaviour. Our

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definition of market orientation follows Deshpande et al (1998):

“ The set of cross functional processes and activities directedat creating and satisfying customers through continuousneeds assessment”

Our measures for market orientation were based on this definition. Theyincluded items for analysis of customer needs, responsiveness to customers, andinformation sharing about customers between organisational functions. The itemsfor information sharing were taken from Kohli et al (1993). We recognise ourmeasure is narrower in scope than those created by Kohli et al (1993) or Narver &Slater (1990). Our measure was developed in part from qualitative interviewswith a number of company managers. This process identified that analysis ofcustomer needs and preferences was their key priority in terms of marketinformation acquisition. Competitor information and wider issues such astechnology or government regulation were of somewhat lower priority. Thisnarrowness may be regarded as a limitation. However we believe it is beneficialto test hypotheses using a fairly narrow measure as the independent variable. Thisis because if any associations are found they are more explicit. If we used abroader construct incorporating, say customer orientation, competitor orientation,and broader environmental scanning then it is difficult to say that all have apositive impact on performance, or indeed which in particular have a positiveimpact on performance. Our use of new scales measuring analysis of customerneeds and responsiveness represents an attempt to carry out differentiatedreplications of previous work on market orientation. Differentiated replicationsusing different measurement devices and environmental conditions represent goodscience. This is because one obtains more confidence that results are indeed dueto the conceptual variables under study and not unduly dependent on the particularmanner in which other studies have been conducted (Lindsay and Ehrenberg,1993).

Other foci

We also developed scales to measure a sales focus and a production focus. Ourprocedure for the new scales followed the scale development paradigm proposedby Churchill (1979). We consulted previous literature on the subject to ascertainwhat should be included in the construct and what should not. We invitedacademic colleagues and practitioners to comment on the adequacy of theconstructs and the pool of questionnaire items initially developed. The item poolwas pre-tested on a sample of 42 managers in one large corporation and managersof 25 separate businesses by face to face interviews. We refined the instrumentby deleting poorly performing items and including new ones based onrespondents’ comments.

Dependent variable

Most research into market orientation and performance has utilised subjective

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performance measures such as profitability measured on a Likert type scale.Subjective measures have been found to correlate with objective measures ataround r=0.7 (Dess and Robinson, 1984, Pearce et al., 1987). However, one ofthe studies frequently cited as evidence of this correlation, Dess & Robinson(1984), states

“[our] study does not suggest that subjective measures are preferableto objective measures. .....Where accurate objective measures ofperformance ...are available their use is strongly supported andencouraged”

One good reason for this is that using a subjective measure introduces moreerror into the analysis (see Schumacker and Lomax, 1996 p. 38). We used anobjective measure of performance, namely the average ROI percentage figures forthe past two years.

DATA COLLECTION

The sampling frame consisted of firms listed in the Australian Business Who’sWho and were located in the state of South Australia. The constraint of locationwas necessary because the data collection method was by personal interview.

The Business Who’s Who information source is well representative ofAustralian industry with organisations from all industries included. Theorganisations were recruited by telephone. Over 300 organisations wereapproached. The criteria were that they had been in operation for over five yearsand employed over ten people. Approximately 40 % ( n=121) agreed to take part.The characteristics of the sample are shown in Table 1.

Table 1

Number of FirmsNumber ofemployees

n=121Mean = 140; SD = 160

Turnover Mean = $36 million Min= $1.2 million,Max $450 million

Industrybreakdown

Manufacturing 55Services 20

Retail 17

Finance /Insurance 7

Wholesale 5

Construction3

Transport 3Other 11

The sample was populated quite heavily by manufacturing firms. However,the manufacturing firms in the sample were very heterogeneous in terms of thescope of industries represented and the range of sizes included. We were satisfiedthat the sample was broad enough so that potential unobserved influences wouldbe randomised across the sample. The profile of the firms which participated wasrepresentative of the wider population which suggested no problem with non

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response bias.

Some firms in the sample were part of larger corporations. The interviewerstipulated that all information provided was to pertain only to the specific businessunit under study, including ROI figures. We conducted a personal interview withthe CEO of each organisation. This has the advantage of ensuring the intendedrespondent actually completes the questionnaire (Aaker and Day, 1986). One ortwo other executives also self completed the questionnaire. We tested for thelevel of reliability of scores between the executives using correlations (as perJaworski and Kohli, 1993). In most cases there was acceptable level ofagreement, the average being r=0.60. Where there was major disagreementbetween the scores given by respondents in a firm, we discarded the questionnairethat correlated poorly with the other two responses. This only occurred with threecases. For all firms with multiple participants the scores used were the meanaverage of the multiple respondents.

SCALE ANALYSIS

Scales should be unidimensional, that is to say, they should only measure onething. They should also be reliable, which is a low ratio of error variance to truescore variance (Gerbing and Anderson, 1988). The scale diagnostics are shown inAppendix 1. We provide the Chi square goodness of fit statistic, together with theNFI, CFI, GFI and Lisrel AGFI measures of absolute and incremental fit. Wefound the scales for analysis, responsiveness, production focus and sales focus toexhibit both unidimensionality and reliability. The scales also display acceptableconvergent and discriminant validity. Unfortunately, and surprisingly, the itemstaken from Jaworski & Kohli (1993) for intelligence dissemination failed to meetboth of these criteria. They were unidimensional, but had a Cronbach’s alpha ofonly 0.64, under the generally accepted 0.70 cut off level (Nunnally, 1978). Forthis reason we have not reported any association or lack of it between this facet ofmarket orientation and performance because we consider the results might not bevalid.

ANALYSIS METHOD

We controlled for a number of variables which affect profitability either acrossor within industries (Porter, 1980, Scherer and Ross, 1990). These are relativecost and relative size, industry growth, industry concentration, entry barriers,buyer power, seller power and technological change (see Narver and Slater,1990).

We first identified which of the control variables was significantly correlatedwith performance. Three were, as shown in Table 3. They were buyer power (r=-0.22), technology change (r=0.20), and relative costs (r=0.16) all significant atp=0.05. We then used these as control variables by including them in theregression analysis. We then entered the four independent variables plus the threecontrol variables into a regression equation. The overall result was non

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significant (p=0.2) but one of the independent variables was significant at p=0.05.We concluded that the number of variables was reducing the test statistic and theadjusted R2 to non significant levels.

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We therefore ran four regression analyses, one each for the four independentvariables under study. The control variables were included in each analysis.Separate analyses allowed us to ascertain the individual effect of eachindependent variable.

Table 2

Regression 1 St’dRegressionCoefficient


Buyer Power -.23 *** Buyer Power -.24 ***Tech. change .18 ** Tech. change .17 **Relative costs -.11 NS Relative costs -.13 NSAnalysis .18 ** Responsivenes

s.12 NS

Adjusted R2 0.11 Adjusted R2 0.09



Buyer Power -.28 *** Buyer Power -.25 ***Tech. change .19 ** Tech. change .18 **Relative costs -.14 NS Relative costs -.14 NSSales Focus .13 NS Production

Focus.12 NS

Adjusted R2 .09 Adjusted R2 0.09

** significant at P=0.05 *** significant at P=0.01

FINDINGS

The results for the sample overall are summarised in Table 4. This showspartial support for hypothesis 1. Analysis of customer needs is significantly andpositively associated with ROI across the sample. There is no support forhypotheses 2 or 3. The sales focus and production focus variables are notassociated with performance across the sample. Hypothesis 4 is also partiallysupported by this lack of association between sales focus & production focus andperformance.

DISCUSSION

This research adds to the growing body of evidence on market orientation andperformance. It goes further by examining whether other approaches to businessmight also have positive associations with profit and found they did not.

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A major question which arises is why responsiveness is not associated withperformance here. It may be that responsiveness itself would not correlate withprofit because it is possible to be responsive in a reactive, “shoot from the hip”manner. This might enable the organisation to keep somewhat abreast ofcustomer requirements but not enable it to enjoy superior performance. Incontrast, customer analysis might enable the firm to make more consideredchoices about how it chooses to respond, which will please customers but also payoff for the firm.

LIMITATIONS OF THE STUDY

An acknowledged weakness in cross sectional studies of this kind is thedifficulty in ascribing causality. While we found an association between somemarket oriented behaviour and profit, we cannot conclude that such behaviourcauses higher profit. An alternative explanation is that organisations happen toearn high profits and then try to protect that favourable situation by becomingmore market oriented. Another limitation of the study is that we could not test theassociation between market intelligence dissemination and performance.However we feel that it would be inappropriate to report on results based on ascale which in this study, at least, displayed low reliability. Lastly, we have notconsidered the comparative effect of other activities such as competitororientation (eg Narver and Slater, 1990). While a competitor orientation isconsidered by many authors to be a component of a market orientation we wishedto identify the specific effect of customer analysis and responsiveness. This is inline with other research such as Deshpande et al (1993).

CONCLUSIONS AND DIRECTIONS FOR FUTURE RESEARCH

This study complements the existing body of research into market orientation.It has used measurement scales as independent variables which are slightlydifferent to prior research, and objective measures of performance which to ourknowledge have not been used previously in market orientation studies. Despiteusing these different measures, it has supported previous research by showing thatcertain market oriented behaviour (customer analysis) is positively associatedwith performance.

Future research can build on the findings from this study in two ways. First,more differentiated replications can be conducted to help build strong empiricalgeneralisations on how market orientation affects small businesses. Secondly,longitudinal studies could help address the issue of causality. There are threeconditions necessary for ascribing causality: covariance, temporal sequence, andcontrolling for other factors (Hair et al., 1995). Covariance has certainly beenestablished, and as in this study, attempts have been made to control for otherfactors. Gathering data over several years will be a significant step towardsunderstanding how market orientation affects business performance.

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Appendix 1 Scales

Construct: Market Analysis StatisticsThe firm often makes use of information that states customerpreferences

χ2 = 25.7 DF = 5, P< 0.001

A key strength of this firm is effective customer analysis CFI = 0.96The firm has a structured program that obtains the feedbacknecessary to fully understand customers

Lisrel GFI = 0.96

The firm regularly analyses data on customer satisfaction Lisrel AGFI = 0.89The firm studies underlying trends or patterns in itscustomers behaviour

Cronbach Alpha = 0.87

Construct: Market Responsiveness StatisticsThe firm responds very quickly to negative customersatisfaction information

χ2 = 17.1, DF =9, P< 0.04

The organisation responds quickly to changing customerrequirements

CFI= .98

This company leads the field when it comes to meetingcustomers long term requirements

Lisrel GFI = 0.98

The firm is quick to respond to factors affecting its market Lisrel AGFI = 0.95A high priority is placed on implementing changes toincrease future customer satisfaction

Cronbach Alpha = 0.86

This firm successfully plans and implements changesrequired to satisfy customers in the futureConstruct: Selling/Promotion Emphasis StatisticsThere is a lot of pressure to achieve sales budgets χ2 = 5.4, DF = 2, P=0.06The firm closely monitors progress towards meeting salesbudgets

CFI = 0.99

The firm has an aggressive sales program Lisrel GFI = 0.99Selling or promoting is integral to meeting the firm’sobjectives

Lisrel AGFI = 0.95Cronbach Alpha = 0.84

Construct: Productivity Emphasis StatisticsProcess efficiency is a key factor which is constantlyemphasised in this company

χ2 = 5.6, DF = 5, P< 0.34

A key strength of this organisation is having very efficientwork processes

CFI = 0.99

The firm is regularly implementing productivityimprovements

Lisrel GFI = 0.99

Work practices are designed to provide the optimumefficiency

Lisrel AGFI = 0.97

Workplace efficiency is regularly monitored Cronbach Alpha = 0.93Construct: Intelligence Dissemination StatisticsMarketing personnel in this organisation spend time χ2 3.3 DF 2 P= 0.19

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discussing customers future needs with other functionaldepartmentsIn this organisation, when one department finds outsomething important about customers or competitors it isslow to alert other departments

CFI 0.96 =

Data on customer satisfaction are disseminated at all levels inthis organisation on a regular basis

Lisrel GFI =0.97

There is minimal communication between marketing andother departments/functions concerning marketdevelopments, in this organisation

Lisrel AGFI =0.88Cronbach’s alpha 0.64

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Market Orientation