Market orientation and business performance The role of positional advantage

Market orientation and business performance The role of positional advantage

MARKET ORIENTATION AND BUSINESS PERFORMANCE:

THE ROLE OF POSITIONAL ADVANTAGE

by Linda L Vytlacil

JEAN GORDON, PhD, Faculty Mentor and Chair

FRANK BARNES, PhD, Committee Member MARTHA ROGERS, PhD, Committee Member

William A Reed, PhD, Acting Dean, School of Business and Technology

A Dissertation Presented in Partial Fulfillment

Of the Requirements for the Degree

Doctor of Philosophy

Capella University December 2010 

UMI Number: 3439658

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© Linda Vytlacil, 2010

Abstract

Understanding business performance is the cornerstone of research in strategic

management, and explaining how strategy influences performance is the fundamental object of inquiry for the discipline Yet little in the strategic management literature

recognizes the influence of marketing on business performance Connecting marketing management and strategic management literatures is not trivial and involves more than just a translation of language, but rather a true bridging of the relevant literature in a cross-discipline spirit While perhaps reasonable to implore strategic management

researchers to adopt marketing concepts, this cross-discipline spirit can be advanced by the adoption of strategic management empirics into marketing’s models Marketing researchers have commenced building this bridge by investigating the relationship

between business strategy and market orientation in the overall context of business performance, and this study contributes to that body of knowledge by investigating simultaneously the relationship among the key constructs of market orientation (customer orientation, competitor orientation, and interfunctional coordination), positional

advantage (differentiation advantage and cost advantage), and business performance (market performance and financial performance) Using a single-informant approach, 144 executives from among U.S manufacturers responded to an email invitation to

participate in a web-based survey, and models tested from the collected data were

covariance structure models with multiple indicators for all latent constructs Results reveal that customer orientation has a positive effect on differentiation advantage, while interfunctional coordination has a positive effect on low cost advantage One interesting

finding is that competitor orientation has no effect on either component of positional advantage The findings also show that both differentiation advantage and cost advantage have a positive effect on market performance We also find that market performance is a distinct construct from financial performance in the operationalization of business

performance, and the results indicate an indirect path from positional advantage to

financial performance through market performance Finally, results indicate that the market characteristics of market turbulence and technological turbulence have no

moderating effect between the market orientation components and positional advantage, nor do they indicate that the choice of an analyzer or prospector strategy type moderates the relationship between the market orientation components and positional advantage

Dedication

For Tom

Acknowledgments

The author acknowledges her husband, Tom, who continues to be the best and most positive influence imaginable to me as a wife, mother, and professional You are my greatest cheerleader, and I admire you The author also acknowledges her children, Max and Emma, who are indeed “the best kids on the planet.” The author also wishes to acknowledge her father, Guenter Schmidt, who instilled courage, resilience, and a

passion for learning

The author wishes to acknowledge her mentor, Dr Jean Gordon, and Dr Frank Barnes, whose encouragement has been essential to help me complete one of my life’s goals The author acknowledges Dr Martha Rogers, who inspired my passion for “the customer” and the value of demand-side thinking

CHAPTER 2 LITERATURE REVIEW

CHAPTER 3 METHODOLOGY

CHAPTER 4 DATA ANALYSIS

Confirmatory Factor Analysis of the Proposed Measurement Model 72 Confirmatory Factor Analysis of the Modified Measurement Model 76

Causal Path Model Testing of the Proposed Structural Model

The Moderating Effects of Market Environment and Strategy Type 88

CHAPTER 5 RESULTS, CONCLUSIONS, AND RECOMMENDATIONS

List of Tables

Table 4 Means, Standard Deviations, Reliability Coefficients, and Inter-Construct

Table 5 Goodness of Fit Indexes for the Initial Measurement Model 74

Table 6 Maximum Likelihood Estimates for the Indicator Variables of the Initial

Table 7 Correlations Between Constructs for the Initial Measurement Model 76 Table 8 Factors Removed for the Proposed Modified Measurement Model 77 Table 9 Goodness of Fit Indexes for the Modified Measurement Model 77 Table 10 Maximum Likelihood Estimates for the Indicator Variables of the

Table 11 Correlations Between Constructs for the Modified Measurement Model 80

Table 14 Maximum Likelihood Estimates for the Indicator Variables of the

Table 18 Tests for the Moderating Effects of Market Characteristics and

Table 19 Goodness of Fit Indexes for the Modified Structural Model 94

Table 20 Maximum Likelihood Estimates for the Indicator Variables of

Table 21 Results of the Path Analyses for the Modified Structural Model 97

List of Figures

CHAPTER 1 INTRODUCTION

Introduction to the Problem

Understanding business performance is the cornerstone of research in strategic management (Rumelt, Schendel, & Teece, 1994) While the measurement of business performance is the way in which organizations assess the effectiveness of strategy development and execution, explaining how strategy influences performance is the fundamental object of inquiry for the discipline (Barney, 1997) Yet despite Drucker’s (1954) entreat that elevated the role of marketing as “the whole business seen from the point of view of its final results, that is, from the customers point of view” (pp 37-39), little in the strategic management literature recognizes the influence of marketing on business performance

The marketing discipline certainly contributed to this gap Prior to 1990,

researchers in marketing had developed little by way of empirics to operationalize the marketing concept (Biggadike, 1981; Day, 1994) Kohli and Jaworski (1990) conclude that, notwithstanding marketing’s heritage and acknowledged importance, its literature yielded no clear definition of the marketing concept, no accepted method to measure it, and “virtually no empirically based theory” (p 1) Thus, the discipline was simply in no position to contribute to the strategic management literature about the role of marketing

in explaining business performance

Taking a clarion call first posed by practitioners at a Marketing Science Institute (MSI) conference in 1987, academics throughout the 1990’s advanced the conceptual

development of market orientation as the operationalization of the marketing concept and its empirical support Twenty years on, marketing literature reveals substantial evidence for the positive relationship between market orientation and business performance (see Cano Rodriguez , Carrillat, & Jaramillo, 2004; Kirca, Jayachandran, & Bearden, 2005) This evidence, however, is marginally recognized in the strategic management literature; the author identifies fewer than ten quantitative research articles in the top strategic management journals1 employing one of the key measures of market orientation as an antecedent to business performance

The resistance by strategic management researchers to adopt marketing

orientation as a key influencer of business performance can be explained in part by the difference in language and paradigms across the disciplines Slater and Narver (1998) point to the misguided refusal of strategic management to distinguish the narrow concept

of “being customer-led” from the proactive, longer-term philosophy of market orientation and, thus, making market orientation vulnerable to the criticisms heaped on firms that have failed to lead through periods of disruptive industry discontinuity “because they listen too carefully to their customers” (Christensen & Bower, 1996, p 198) Webster (2005) further suggests that “marketing thought development has lagged behind shifts in the market environment and has become less relevant for managers” (p.121) Ultimately, researchers in marketing remained challenged to connect marketing management

outcomes into the framework of strategic management (Webster, 2005)

1 Top tier strategic management journals surveyed included Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly, Journal of Management, Journal of Management Studies, Management International Review, and Strategic Management Journal

Connecting marketing management and strategic management literatures is not trivial and involves more than just a translation of language, but rather a true bridging of the relevant literature in a cross-discipline spirit Day and Montgomery (1999) note that key marketing concepts such as positional differentiation, customer orientation,

marketing, and segmentation have been adopted by strategic management, and serve as precedent for continued cross-discipline communication While perhaps reasonable to implore strategic management researchers to adopt the marketing concept, this cross-discipline spirit can be advanced by the adoption of strategic management empirics into marketing’s models Such a bridge from strategic management into marketing benefits the overall understanding of the relationship between market orientation and business

outcomes, and equally importantly, how organizations translate stronger market

orientation into superior business performance

Marketing researchers have commenced building this bridge by investigating the relationship between business strategy and market orientation in the overall context of influences of business performance (Langerak, 2003b) Using the Miles and Snow (2003) definition of strategy type, Matsuno and Mentzer (2000) demonstrate that strategy type moderates the relationship between market orientation and business performance Slater and Narver (1996) demonstrate a positive relationship between market orientation and the strategic management concept of positional advantage, and Hult and Ketchen (2001) further demonstrate that this positional advantage, stemming from the convergence with market orientation, has a positive effect on organizational performance Expanding on the Hult and Ketchen (2001) model that employs a latent construct for positional orientation, Langerak (2003b) uses observed variables to present further evidence for the moderating

effect of positional advantage in explaining the relationship between market orientation and business performance

The bridge-building effort also requires systematic attention by marketing

researchers to the measurement of business performance specified in the strategic

management literature As a strategic framework in marketing, market orientation should influence market performance, which in turn should impact financial performance (Guo, 2002) While literature investigating the market orientation–business performance link has dimensionalized business performance to include one or more measures of

organizational effectiveness, few studies distinguish between market-based measures (e.g., customer satisfaction, value for the customer, market share) and financial-based measures (e.g., ROA, sales growth) (Guo, 2002) Fewer still include both as separate, interrelated effects in empirical analysis No market orientation study includes both the indirect effects of strategy variables and the separate, interrelated effects of market- and financial performance Thus, opportunity exists for researchers in marketing to advance the understanding of the mechanisms by which an organization transforms market

oriented culture into stronger financial performance

Background of the Study

This study investigates the moderating effect of positional advantage in the relationship between market orientation and business performance among U.S

manufacturers While a substantial body of research demonstrates the positive

relationship between market orientation and business performance, cross-discipline research to reflect business strategy is required to understand how organizations go about

converting market orientation into financial performance As Slater and Narver (1996) assert, “understanding the link between marketing as culture (i.e., market orientation) and marketing as strategy is important to our comprehensive appreciation of market

orientation’s contribution to organizational effectiveness” (p.159)

The marketing concept states that organizations which meet the latent and

expressed needs and wants of customers better than their competitors achieve superior business performance (Slater & Narver, 1998) As the operationalization of the marketing concept that places the customer at the center of business decisions, market orientation is

an organizational culture comprised of three behavioral components (customer

orientation, competitor orientation, and interfunctional coordination) and two decision criteria (long-term focus and profitability) (Narver & Slater, 1990)

Research in market orientation has focused on demonstrating the direct effects on business outcomes, including innovation, organizational commitment, new product success, and overall performance (Singh, 2004) By far the most studied consequence of stronger market orientation is that of business performance A significant body of

marketing literature points to a strong, positive market orientation–business performance link, yet the evidence for such a direct link is not unequivocal and belies the complexity

in the relationship (Hult & Ketchen, 2001) This disparity suggests the presence of other factors influencing the market orientation–business performance link, and calls for

further investigation into the indirect effects Recent studies have sought to account for these indirect effects by investigating the strategic context of the organization Studies including strategy variables such as strategy type (Matsuno & Mentzer, 2000) and

positional advantage (Hult & Ketchen, 2001; Langerak, 2003b; Menguc, Auh, & Shih,

2007) find they are able to explain more fully the market orientation–business

performance link

Another factor to improve the explanation of the market orientation–business performance link is the definition of business performance Treated as a single construct

of business performance comprised of financial and/or non-financial (market)

performance measures, few studies have explicitly conceived of non-financial

performance as a distinct antecedent to financial performance Homburg and Pflesser (2000) demonstrate that “market oriented organizational culture has an indirect effect on financial performance through market performance” (p 450)

Finally, it is important to replicate studies in new populations (Hubbard &

Armstrong, 1994) The conceptual model in this study is similar to that employed by Langerak (2003b) in his examination of Dutch manufacturers Langerak (2003b) is the only study to simultaneously explore the relationship among market orientation,

positional advantage, and business performance The current study seeks to extend Langerak’s study model by exploring the multi-dimensionality of the business

performance variable, and to do so among U.S manufacturers

Statement of the Problem

While the operationalization of the marketing concept as market orientation is established in the literature, evidence of a direct relationship between market orientation and business performance is not unequivocal This suggests a level of complexity by which organizations transform a market oriented culture into stronger business

performance Given the role of marketing in context of strategy, cross-discipline research

incorporating strategy is required to understand how organizations go about transforming

market orientation into performance This study was motivated by the discovery of sparse cross-discipline research between strategic management and marketing to explain this broader organizational management issue

Purpose of the Study

The purpose of the study is to investigate the role of organizational choice of strategy to improve our understanding of how organizations convert a market oriented culture into superior business performance The study incorporates business strategy in three ways: (a) by investigating how the individual components of market orientation (i.e., customer orientation, competitive orientation, and interfunctional coordination) influence an organization’s positional advantage (i.e., differentiation advantage and cost advantage), (b) by exploring how the firm’s positional advantage affects its business performance, and (c) by ascertaining the potential moderating influences of a firm’s strategy type and external environmental factors (i.e., competitive intensity, market turbulence, and technological turbulence)

The study also responds to Guo’s suggestion for further research to explore “what lies beneath” the relationships informing business performance by distinguishing market performance from financial performance in the influence path from market orientation to economic performance (Guo, 2002, p 1161)

Rationale for the Study

Day and Montgomery (1999) summon marketing to a leadership role in

integrating cross-functional research and dialog, especially between marketing and strategic management While cross-discipline research has been conducted to investigate the relationship between business strategy and market orientation (Hult & Ketchen, 2001; Langerak, 2003b; Matsuno & Mentzer, 2000; Menguc et al., 2007), only two (Hult & Ketchen; Matsuno & Mentzer) employ a sample that includes U.S companies, and none

of the studies distinguish market performance and financial performance in the

specification of business performance Only Langerak (2003b) simultaneously explores the relationship among market orientation, positional advantage, and business

performance, and does so among Dutch manufacturers The rationale for this study is twofold: (a) to contribute to the sparse cross-discipline research between strategic

management and marketing to inform further on this broader organizational management issue, and (b) to fill the gap in market orientation research in understanding the indirect effect of positional advantage on financial performance through market performance

Research Questions

This study investigates the relationship among market orientation, positional advantage, and business performance in the context of internal firm strategy type and external market characteristics The research questions posed in this study are as follows:

R1: What is the relationship between market orientation and positional advantage

of a firm in terms of differentiation or low cost advantage with respect to competitors?

R2: What is the relationship between positional advantage and market

Based on the research questions, the hypotheses of the study are as follows:

H1a: There is a positive relationship between customer orientation of a firm and its differentiation advantage

H1b: There is a positive relationship between competitor orientation of a firm and its differentiation advantage

H1c: There is a positive relationship between the interfunctional coordination of a firm and its differentiation advantage

H2a: There is a positive relationship between the competitor orientation of a firm and its cost advantage

H2b: There is a positive relationship between the interfunctional coordination of a firm and its cost advantage

H3a: There is a positive relationship between the differentiation advantage of a firm and its market performance

H3b: There is a positive relationship between the cost advantage of a firm and its market performance

H4a: Market turbulence moderates the relationship between market orientation components and positional advantage

H4b: Technological turbulence moderates the relationship between market

orientation components and positional advantage

H4c: Competitive intensity moderates the relationship between market orientation components and positional advantage

H5: There is a positive relationship between the components of market

orientation and positional advantage and strategy type

H6: There is a positive relationship between market performance of a firm and its financial performance

Significance of the Study

This study is significant to academic researchers and practitioners alike Market orientation has developed into a major work stream in marketing literature Since its inception as the operationalization of the marketing concept in the early 1990’s, the direct link between market orientation and business performance has been established in the marketing literature Given the strategic role of marketing in management strategy, researchers have turned their sights on understanding the relationship between strategy and market orientation (Langerak, 2003b) This study adds to the extant literature by simultaneously evaluating the relationship among market orientation, positional

advantage, and business performance among U.S manufacturers It further adds to the

literature by demonstrating the multidimensionality of business performance as both market performance and financial performance Practitioners also gain insight from this

study as it further informs on the role of organizational strategy to explain the modus operandi by which an organization converts market orientation culture into superior

business performance

Definition of Terms

Business performance The component of organizational effectiveness,

encompassing both financial and market indicators (Venkatraman & Ramanujam, 1987)

Competitor orientation The level of understanding that a firm has as to the

relative strengths, weaknesses, capabilities and strategies of its current and future rivals (Narver & Slater, 1990)

Competitive intensity The degree of competitive activities among rivals in a

market The more intensive the competitive environment, the more alternatives a

customer has to meet their needs and wants (Jaworski & Kohli, 1993)

Cost advantage A benefit obtained by a firm when it produces a parity product at

lower cost vis-à-vis competitors and is able to pass the lower cost on to customers

(Porter, 1991)

Customer orientation The level of understanding that a firm has about the needs

and wants of its current and future customers so that it can continuously create superior value for them (Narver & Slater, 1990)

Differentiation advantage The advantage that accrues to a firm when it creates

such superior value that customers are willing to pay a price premium that exceeds the cost of adding that value (Porter, 1991)

Financial performance The subcomponent of business performance indicating

the efficiency in achieving an organization’s economic goals (Venkatraman &

Ramanujam, 1987)

Interfunctional coordination is the planned integration of its resources that a firm

directs toward creating superior value for its current and future customers (Narver & Slater, 1990)

Marketing concept An organizational goal to understand the latent and expressed

needs and wants of customers in its target markets such that it can satisfy those needs

more efficiently and effectively than market competitors (Slater & Narver, 1998)

Market orientation As the operationalization of the marketing concept, market

orientation is “the organization culture…that most effectively and efficiently creates the necessary behaviors for the creation of superior value for buyers and, thus, continuous superior performance for the business” (Narver & Slater, 1990)

Market performance The subcomponent of business performance indicating the

effectiveness of an organization’s products, programs, and marketing activities (Homburg

& Pflesser, 2000)

Market turbulence The rate of change in customer preferences and composition

of a firm’s customer portfolio A relatively stable market is one in which customers needs and wants do not change much over a given period and in which the characteristics,

attributes, and the set of customers themselves are relatively constant (Jaworski & Kohli, 1993)

Positional advantage The superior market position of an organization due to its

ability to capture perception of superior value from customers (differentiation advantage) and/or prove that value at a lower cost than its competitors (cost advantage) (Porter, 1991)

Strategy type The strategic orientation a firm develops as a planned adaptation to

its perception of the external environment (Miles & Snow, 2003)

Technological turbulence The velocity of change in the processes of production

and product distribution to the customer A relatively turbulent industry is one in which technological development is rapid and affects the way a firm produces and brings products to market (Jaworski & Kohli, 1993)

Assumptions and Limitations

Like any empirical work, this study embodies several assumptions and

limitations The research design assumes that survey participants are sufficiently

knowledgeable about their firm’s culture, strategies, and performance to adequately inform the study Furthermore, the study employs subjective measures of business

performance, and thus assumes that informant judgment represents an objective

assessment of the organization’s performance

Several limitations exist in the study One limitation is the use of a single

informant for each organization, which limits the ability to assess informant bias

(Phillips, 1981) Another limitation resides in the sample frame Like Langerak (2003b),

this study uses informants from manufacturing firms The results may not be

generalizable to non-manufacturing firms Finally, the study employs a cross-sectional design in assessing the influence path of market orientation, positional advantage, and business performance This approach is irrespective of any temporal nature to the

relationships, and should be confirmed with a longitudinal study

Conceptual Framework

Narver and Slater (1990) conceive a model of market orientation consisting of three behavioral components: customer orientation, competitor orientation, and

interfunctional coordination These components comprise the coordinated market

intelligence development and dissemination activities by which an organization creates value for customers and superior performance for the business In order for an

organization to achieve sustained superior performance, it must also achieve sustained competitive advantage (Porter, 1991) Such competitive advantage arises from an

organization’s positional advantage and refers to the differentiation and/or cost advantage

of the business with respect to its competitors (Porter, 1991)

Similar to Langerak (2003b), the conceptual model for the study disaggregates market orientation into the three core components, and conceives distinct influences of the market orientation components on the differentiation advantage and cost advantage Specifically, the model hypothesizes that all three components of market orientation directly affect the differentiation advantage of the firm, while only competitor orientation and interfunctional coordination are expected to influence a firm’s cost advantage The study differs from Langerak (2003b) in that business performance is disaggregated into

core components of market performance and financial performance, such that

differentiation and costs advantage are hypothesized to affect financial performance indirectly through market performance

Organization of the Remainder of the Study

This study simultaneously investigates the relationship among market orientation, positional advantage, and business performance, and the remainder of the paper is

organized as follows Chapter 2 reviews the relevant marketing and strategic management literature Chapter 3 introduces the methodology employed in the study by presenting the related research questions, hypotheses, study design, data collection method, and sample frame As a quantitative study, the research methodology, survey instrument, and

analytical plan employed to test the hypotheses are also presented Chapter 4 details the results and presents the findings from the study Finally, Chapter 5 discusses the study’s implications to researchers and practitioners alike, addresses study limitations, and offers recommendations for further research

CHAPTER 2 LITERATURE REVIEW

Market Orientation

The marketing concept, as the discipline’s primary theoretical paradigm,

developed in the literature with emphasis on definition and analysis Prior to the 1950’s, marketing was seen as a departmental function focused on products, rather than on

customers, and on convincing “prospects that they needed what the firm was producing” (Webster, 1988, p 31) Drucker’s (1954) positioning of marketing as a general

management responsibility matured the role of marketing into an overall company

posture that places the customer at the center of business activity:

There is only one valid definition of business purpose: to create a customer….It is

the customer who determines what a business is… Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation.….Actually marketing is so basic that it is not just enough to have a strong sales department and to entrust marketing to it Marketing is not only much broader than selling, it is not a specialized activity at all It encompasses the entire business It is the whole business seen from the point of view of its final result, that is, from the customer’s point of view (pp 37-39)

Conceptual development of marketing emphasized functional integration,

organizational coordination, and customer value creation (Felton, 1959; Houston, 1986; Hunt & Morgan, 1995; Levitt, 1960; McNamara, 1972; Webster, 1988, 1994) The

marketing concept is summarized as an overall organization goal such that “an

organization’s purpose is to discover needs and wants in its target markets and to satisfy those needs more effectively and efficiently than competitors” (Slater & Narver, 1998, p 1001)

Prior to 1990, few empirical works had operationalized the marketing concept, prompting Day to remark that “the marketing concept has been more an article of faith than a practical basis for managing a business” (Day, 1994, p 37) Kohli and Jaworski (1990) expounded on the dearth of empirical work supporting the marketing concept:

Given its widely acknowledged importance, one might expect the concept to have

a clear meaning, a rich tradition of theory development, and a related body of empirical findings On the contrary, a close examination of the literature reveals a lack of clear definition, little careful attention to measurement issues, and

virtually no empirically based theory Further, the literature pays little attention to the contextual factors that may make a market orientation either more or less appropriate for a particular business (p 1)

This neglect was identified by MSI, which funded research to explore empirically the marketing concept through development of a construct for market orientation

(Deshpandé, 1999) Taking the clarion call posed first by practitioners at an MSI

conference in 1987, academics throughout the 1990’s contributed significantly to the conceptual development of market orientation as the operationalization of the marketing concept and to its empirical support Three seminal research studies during these last two decades pioneered the thinking around market orientation, serving as the cornerstones for subsequent research in this area The distinction among the three is the way in which the market orientation construct is conceived – as a set of behaviors exhibited by

organizational members, as a set of activities carried out in the organization, or as an entire organizational culture

The first study by Narver and Slater (1990) presents market orientation as an organizational culture that manifests in three behaviors: customer orientation, market orientation, and interfunctional coordination The second study by Jaworski and Kohli

(1993) postulates market orientation as a three-component construct of activities: market intelligence generation, market intelligence dissemination, and organizational

responsiveness to the generation and disseminated intelligence The third study by

Deshpandé, Farley, and Webster (1993) presents market orientation in the context of organizational culture and innovativeness Main themes from these seminal studies

demonstrate market orientation as a business unit construct (market versus marketing),

recognize the role of corporate culture influencing market orientation, and introduce scales that are useful for theory testing, benchmarking, and tracking (Kohli, 2003) Most importantly, all three studies demonstrate empirically the fundamental premise of the marketing concept–that is, the positive link between market orientation and business performance Serving as the foundation for contemporary research, subsequent empirical work has focused on confirming the market orientation—business performance link and

on extending our understanding of this link by exploring the role of mediators and

moderators, expanding sample frames, and broadening research methods (Singh, 2004)

This section presents the definition of market orientation, its conceptualization and constructs, important scales developed in the seminal works, subsequent

improvements to existing scales as well as new scales enhancements, and future direction

of empirical research in the conceptual development of market orientation

Definition of Market Orientation

From the inaugural Marketing Science Institute (MSI) conference in 1987, market orientation has been defined as (a) an organizational-level culture, (b) a set of behaviors, (c) a set of activities, (d) a resource, or (e) a foundation for decision-making (Hurley &

Hult, 1998) The original definition of market orientation was conceived as an aspect of organizational culture with a shared set of beliefs and values that place the customer at the center of business decisions (Deshpandé & Webster, 1987) Subsequent research by Narver and Slater (1990) focused on market orientation as a set of behaviors evidenced

by a market-oriented culture, where market orientation comprises three behavioral

components (customer orientation, competitor orientation, and interfunctional

coordination) and two decision criteria (long-term focus and profitability)

Simultaneously, market orientation was defined by Kohli and Jaworski (1990) as a set of

activities conducted by organizations as the “organization wide generation of market intelligence pertaining to current and future customers needs, dissemination of market intelligence across departments, and organization wide responsiveness to it” (p 6)

In the context of a resource-based view, Hunt and Morgan (1995) employ

resource-advantage theory to define market orientation as:

“[a] the systematic gathering of information on customers and competitors, both present and potential, [b] the systematic analysis of the information for the

purpose of developing market knowledge, and [c] the systematic use of such knowledge to guide strategy recognition, understanding, creation, selection, implementation, and modification” (p 11)

As such, market orientation is a resource that affords an organization potential for sustainable competitive advantage

The final definitional category is outside of marketing discipline and scholarship, and is attributed to one of the first mainstream business strategy articles to evaluate market orientation Shapiro (1988) suggests that an organization has a market orientation

if “information on all important customers and buying influences permeates every

corporate function, so that strategic and tactical decisions are made interfunctionally and interdivisionally, and these well-coordinated decisions are executed with a sense of commitment” (Tajeddini, Trueman, & Larsen, 2006, p 534)

To synthesize, all definitions recognize market orientation as more than simply the implementation of the marketing concept with a singular focus on understanding and satisfying customers Rather, the emerged definitions of market orientation involve both customers and competitors, recognize some role of organizational culture in facilitating adoption and support of market orientation, and recognize the fit of market orientation as foundational to corporate strategy

Conceptualization and Measurement of Market Orientation

The primary conceptualization and measurement of market orientation developed mainly along two perspectives: a behavioral perspective and a cultural perspective

(Griffiths & Grover, 1998; Homburg & Pflesser, 2000) The difference between the two perspectives lies in the “implicit assumption of what market orientation represents within

an organization” (Griffiths & Grover, 1998, p 311) Whereas the behavioral perspective indicates market orientation is the degree of adoption of the marketing concept as

manifest in relevant activities, the cultural perspective contends that market orientation is related more to the overall organizational culture–one that “most effectively and

efficiently creates the necessary behaviors from the creation of superior value” (Narver & Slater, 1990, p 21)

Three seminal studies offer the initial conceptualization and measurement of market orientation: Deshpandé and Webster (1989), Narver and Slater (1990), and Kohli

and Jaworski (1990; 1993) Preliminary results of all three studies were presented at a

1990 MSI conference to facilitate discussion on “Organizing to Become Market-Driven” (Swartz, 1990), and were published subsequently in leading academic journals

Deshpandé and Webster (1989) presented the first conceptualization of market

orientation in the context of organizational culture by applying the concepts to marketing The purpose of their initial 1989 study was to integrate the paradigms of organizational culture and to “develop a research agenda in marketing grounded in the five cultural paradigms of comparative management” (Deshpandé & Webster, 1989, p 3) Their argument was that most of marketing management research into which market orientation falls is dominated by two paradigms of structural functionalism or contingency theory, and ignores–or is simply ignorant of–the breath of paradigms of organizational culture theory

Deshpandé, Webster, and Farley (1993) integrated their market-orientated culture view into an empirical study of the relationship among organizational culture type,

customer orientation (which they argue is synonymous to market orientation), and

innovativeness to business performance This view is consistent with the broader

definition of a market orientation scale, because it addresses not only customers, but external market and competitors as well They employ a nine-item scale of customer orientation that was administered via personal interviews to 50 quadrads (two buyer-seller dyads) for each organization in the sampling frame of publicly traded companies on the Tokyo Nikkei stock exchange Existing scales were adapted or adopted from previous work for the constructs of culture type, innovativeness, and business performance The results of the study show that market orientation, as reported by the customer, is related

positively to business performance–although the relationship as reported by the marketer

is not supported

In October 1990, Narver and Slater (1990) published the first comprehensive empirical research demonstrating a positive market orientation—business performance link The scale was developed under a behavioral perspective consisting of three

components and a decision criteria consisting of two components Narver and Slater conceptualized market orientation business-specific and market-level factors that

influence business performance Based on their behavioral definition of market

orientation, Narver and Slater conceptualize it as a unidimensional construct comprised

of customer orientation, competitor orientation, and interfunctional coordination Their 15-item scale for this construct (MKTOR) was developed via two rounds of qualitative assessment with an academic panel followed by a pretest with six practitioners similar to those in their sample frame This sample frame is defined as a manager with sales and profit responsibility from within one of 113 strategic business units (SBU) in the forest products division of a major corporation Split samples were used to assess reliability and validity, while the full sample was used to test for construct validity The study results show a positive relationship between market orientation and business profitability for both the commodity and non-commodity SBU’s

Jaworski and Kohli (1993) published the first empirical research presenting the antecedents and consequences of market orientation The objective of their research was threefold: (a) to determine the effect on market orientation of three sets of antecedents, (b) to determine the effect of market orientation on a set of business outcomes including business performance, and (c) to measure the moderating effect of environmental

variables between market orientation and business performance Market orientation is conceptualized as three distinct business activity components (market intelligence

generation, dissemination, and responsiveness) to allow for differing effects of the

antecedents upon the separate components of market orientation The 32-item market orientation scale developed for this study employs a four-phase iterative process of pre-testing among marketing managers, non-marketing managers, top level management, and academic expertise Subjective and objective measures were used for business

performance The primary data sample were drawn from multiple informants at 13 MSI member companies and 102 companies from Dun and Bradstreet, while a secondary single-informant sample of 230 members of the American Marketing Association was used for cross-validation The study results demonstrate a positive relationship between market orientation and the subjective measure of business performance However, the link between market orientation and market share is not supported

Extending their work to focus on assessing the psychometric properties of the market orientation scale, Kohli, Jaworski, and Kumar (1993) developed a 20-item market orientation scale (MARKOR) The objective of the study was to assess the degree to which an SBU generates market intelligence across departments, disseminates the market intelligence “vertically and horizontally through both formal and informal channels”, and responds to the intelligence by developing and implementing marketing programs (p 473) The same sample used by Jaworski and Kohli (1993) was used for this study Three rounds of pre-testing were engaged employing 27 executives, 7 academics, and 7

managers in which an initial 25-item scale was expanded to 32 items, and resulted in the 20-item MARKOR scale The research results yield a valid measure of market orientation

represented by a “factor structure that consists of one general market orientation factor, one factor for intelligence generation, one factor for dissemination an responsiveness” as well as factors to account for the role of the informant (Kohli et al., p 467)

Comparison of Key Scales

Most studies in market orientation employ either the MKTOR or MARKOR

scale (Farrell, 2000; Harris, 2002; Harris & Ogbonna, 2001; Matsuno, Mentzer, & Rentz, 2000) Studies that have adopted the MKTOR scale and approach include Day (1994); Deshpandé, Farley, and Webster (1993); Han, Kim and Srivastava (1998); Harris (2001); Langerak (2003b); Pelham and Wilson (1996); and Sargeant and Mohamad (1999) Those adopting the approach and items from MARKOR include Atuahene-Gima (1996); Matsuno and Mentzer (2000); Rose and Shoham (2002); Ruekert (1992); and Siguaw, Simpson, and Baker (1998)

While popular in the market orientation literature, researchers have called out significant problems with these two scales and underlying studies, primarily focused on the limitations of the scales’ psychometric properties Key criticisms leveled against MKTOR address face validity Kohli, Jaworski, and Kumar (1993) contend that MKTOR includes items outside of specific behaviors or activities of market orientation Siguaw and Diamantopoulos (1995) further contend that the scale items are not completely aligned to the dimensions originally present by Narver and Slater in their propositions Structural fit is also an issue Testing three models of the MKTOR scale–a

unidimensional, multidimensional, and multidimensional with a general factor model– Siguaw and Diamantopoulos find the latter to be best, albeit with no theoretical

foundation for the general factor and with results that were “NOT particularly

impressive” (p 85)

MARKOR also has its detractors Matsuno, Mentzer, and Rentz (2005) argue that the scale “only represents a limited number of stakeholder domains It captures mostly customers and competitors as focal domains for understanding the market environment and does not explicitly address how other market factors suggested in the literature…may influence competition and customers” (p 528) Structural issues exist with MARKOR as well (Kohli et al., 1993; Matsuno & Mentzer, 2000; Siguaw et al., 1998)

MKTOR is found superior to MARKOR when considering convergent and

discriminant validity (Pelham, 1997), efficiency (Matsuno et al., 2005), and predictive validity (Matsuno et al., 2005; Oczkowski & Farrell, 1998) In meta-analysis, the results are mixed MARKOR is found to have stronger effects on business performance (Ellis, 2006), whereas Rodriguez Cano, Carrillat, and Jaramillo (Cano Rodriguez et al., 2004) find higher reliability for MKTOR Additional concerns leveled on both scales address the fact that each relies exclusively on informants within the firm rather than from an external perspective (Gotteland, Haon, & Gauthier, 2007), employs single rather than multiple informants (Farrell & Oczkowski, 1997), and includes no items that compare the results for the firm to competitors (Harris, 2002)

Scale Improvements

Given the problems conceptually and operationally with the popular scales, researchers set out to improve market orientation measurement in three ways: (a) by

modifying the current scales or methodological procedures, (b) by integrating or

synthesizing existing scales, or (c) by simply creating new scales

Three examples illustrate scale improvement via modification to extant scales or changes in the methodological procedures used in the original analyses Siguaw and Diamantopoulos (1995) revisit the unidimensionality assumption of the three components

of customer orientation, competitive orientation, and interfunctional coordination of MKTOR Employing a better technique in confirmatory factor analysis, they do not find evidence that either a model of unidimensionality or multidimensionality is a good fit Furthermore, replicating the Narver and Slater (1990) analysis with an improved

exploratory factor analysis technique, Siguaw and Diamantopoulos find that competitive orientation and customer orientation “emerge as distinct dimensions, the same cannot be said for the interfunctional coordination component” (p 85), and find evidence

supporting the validity of the long-term profitability decision dimension hypothesized by Narver and Slater

Examining this same issue of dimensionality of the MKTOR scale using

structural equation modeling, Ward, Girardi, and Lewandowska (2006) find evidence for multidimensionality of all three market orientation components, but confirm the findings

of Narver and Slater that the decision dimensions of long-term horizon and profit

emphasis “do not contribute to the measurement of market orientation and are best not considered as part of the domain of this construct” (p 164)

In the third example, Slater and Narver (2000) themselves replicated their original

1990 study with two relevant modifications The first difference is an extension of the sample frame from a single business unit in one organization to multiple businesses

across a variety of industries Secondly, the replicated study employs a multiple

informant approach in which the chief marketing officer completed the market

orientation portion of the study, while the general manager informed on profitability From this replication, Slater and Narver (2000), albeit under the same assumption of unidimensionality and using the same techniques as in their previous work, find stronger results than in their original study, and suggest increased “confidence in the importance and generalizability of the market orientation – profitability relationship found in the

1990 Narver and Slater study” (p 69)

The second way in which studies improve market orientation measurement is by integrating multiple market orientation scales In the most basic form of integration, researchers deploy multiple scales directly in the empirical studies Citing the unique differences between the Narver and Slater (1990) and Kohli and Jaworksi (1990)

conceptualization of market orientation, Hult, Ketchen, and Slater (2005) incorporated both conceptualizations of market orientation, and find that “both Narver and Slater’s and

Kohli and Jaworski’s concepts are important and different performance antecedents,

suggesting that future studies should include both versions” (p 1179) Under similar assumptions, Gonzalez-Benito and Gonzalez-Benito (2005) seek to integrate the cultural aspect of market orientation as found in the Narver and Slater (1990) scale with the operational elements set out by Jaworski and Kohli (1993) among Spanish industrial firms, and find a “significant relationship between the cultural and operational measures

of the market orientation” (p 803)

Other studies synthesize improved scales by amassing items from multiple

studies, and empirically determining the final set of relevant items to craft a new market