Theme: Marketing & Other Functions

MARKET ORIENTATION VS OTHER BUSINESS APPROACHES, AND THEIR RELATIONSHIP WITH PROFITABILITY
Dawes, John G Marketing Science Centre

Correspondence to: John Dawes Senior Research Associate Marketing Science Centre University of South Australia North Terrace, Adelaide South Australia 5000 Australia Phone: Fax: E-mail 618 8302 0077 618 8302 0123
John.Dawes@msc.unisa.edu.au

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MARKET ORIENTATION VS OTHER BUSINESS APPROACHES, AND THEIR RELATIONSHIP WITH PROFITABILITY

ABSTRACT Marketing theory has traditionally contrasted a market orientation to internally oriented approaches stressing productive efficiency, or selling and promoting. This study examines the comparative effect of these three different emphases on profit performance. The results indicate that analysis of customer needs has a positive association with profitability. Internally oriented approaches do not have a 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 has received a lot of attention in the literature recently. Since 1990 a number of studies have found positive relationships between market orientation and performance measures such as ROI, sales growth and market share position. A market orientation has traditionally been contrasted to other internally focused orientations such as a production or sales orientation (e.g. Kotler, 1997, McCarthy et al., 1997). The implication has usually been that a market orientation will result in better performance than those approaches. While there is now some evidence that a market orientation correlates with various performance measures, there is a lack of evidence on whether it is a superior orientation to other approaches. This paper investigates the effect of a market orientation on profitability but also the effect of a focus on selling or promotion, or production efficiency.

MARKET ORIENTATION VS OTHER APPROACHES Marketing texts usually compare the marketing concept or market orientation with other orientations: production and sales. The key words used to describe a production 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 people will buy (Pearson, 1993); produce what engineers think are good products; focus on manufacturing efficiency (Schoell and Guiltinan, 1982). A production orientation appears synonymous with a high emphasis on achieving efficiency in operations. Keywords from the literature for the sales orientation are: A focus on sellers needs, emphasis on selling and promoting, make profit through volume (Bennett, 1988); back up sales force with advertising and market intelligence (Keith, 1960); volume rather than profits; short run; not segments; sell rather than plan (Kotler, 1977); aggressive selling and promotion effort; little effort to find out what customers want (Kotler, 1991); preoccupied with need of seller to sell goods now (Levitt, 1960); increase volume, selling is key skill, focus on distribution and short term results (Michaels, 1982); stimulate demand 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 what customers want (Schoell and Guiltinan, 1982); persuading customers to buy, inform and convince customers (Peterson, 1989); sell hard people will buy (Pearson, 1993). A sales orientation appears synonymous with an emphasis on an aggressive selling or promotional effort to pursue revenue objectives. There has always been an implication that these two approaches (production and sales) are less desirable than a market orientation, because they will lead to poor performance (Pearson, 1993). Also, they have been seen as mutually exclusive in most marketing textbooks (e.g. see Lusch and Lusch, 1987 in addition to the previous references). However, Pearson (1993) points out that a firm may actually have tendencies toward all three approaches. For instance, a firm might be quite market oriented but still emphasise a strenuous selling and promotional effort and production efficiency. There is some evidence that organisations operate using all three in varying degrees (Wilkinson et al., 1996). Therefore we use the terms sales focus or production focus to signal that these activities or priorities are not mutually exclusive 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 positive association between market oriented behaviour and performance, across various industry environments. However, there is a gap relating the effect of a market orientation to business emphases. Several studies identify that many small businesses adopt other approaches than just a market orientation. Peterson (1989) and Radder (1996) found that many small businesses focused more on their selling efforts or production efficiency rather a market orientation. However, we know little about how such business emphases affect performance. Could it be that a sales emphasis or a production emphasis also correlates with business performance ? Would this correlation be positive or negative ? Would any such correlation be of similar magnitude to that of a market orientation ? Is it better to have a modicum of each than a lot of just one ? Wong & Saunders (1993) is one study which has investigated this issue. It found that a market oriented approach, balanced with an emphasis on product innovation resulted in superior performance to other approaches stressing sales effort or production. Avlonitis & Gounaris (1997) found that firms with a production orientation outperformed more market oriented firms in terms of performance relative to targets but not relative to competition. More evidence is needed to better understand this issue.

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WHAT WOULD BE EXPECTED ? The theoretical rationale for expecting that a market oriented approach to business will positively correlate with performance is summarised succinctly in Narver & Slater (1990). They state that to achieve above normal performance, a business must create...superior value for its customers. The use of market intelligence will help the business to do so. Based on previous research findings and established arguments in the literature, we propose that firms would enjoy benefits in profit performance from a strong market orientation. We might also expect that an emphasis on production efficiency would be positively associated with profit. Production efficiency could help a firm to (a) reduce costs, which can directly contribute to profitability, (b) allow the firm to offer lower prices while still earning high margins, therefore gaining more profitable business, and (c) offer improvements in customer service such as reduced lead or wait times which could also result in gaining profitable business. An emphasis on sales and promotional activity might also be expected to be positively associated with profit. Firms that promote more heavily than others will presumably gain (or maintain) brand awareness, which can translate into trial and repeat purchase. On the assumption than additional sales are profitable, the firms profit performance will be superior. We also argue that an emphasis on selling/promotion or productive efficiency will not have as strong an association with profit performance than market oriented behaviour. We believe that stronger emphasis on these approaches may bring incremental benefits but will not substitute for a sound knowledge of customer needs and a preparedness to respond to them. RESEARCH HYPOTHESES Based on these observations and conjectures the following research hypotheses are formulated. H1. Market oriented behaviour is positively associated with profitability H2. A Production focus is also positively associated with profitability H3. A Sales & promotional emphasis is also positively associated with profitability H4. Market oriented behaviour is more strongly associated with profitability than either a production focus or a sales and promotional 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 directed at creating and satisfying customers through continuous needs assessment Our measures for market orientation were based on this definition. They included items for analysis of customer needs, responsiveness to customers, and information sharing about customers between organisational functions. The items for information sharing were taken from Kohli et al (1993). We recognise our measure is narrower in scope than those created by Kohli et al (1993) or Narver & Slater (1990). Our measure was developed in part from qualitative interviews with a number of company managers. This process identified that analysis of customer needs and preferences was their key priority in terms of market information acquisition. Competitor information and wider issues such as technology or government regulation were of somewhat lower priority. This narrowness may be regarded as a limitation. However we believe it is beneficial to test hypotheses using a fairly narrow measure as the independent variable. This is because if any associations are found they are more explicit. If we used a broader construct incorporating, say customer orientation, competitor orientation, and broader environmental scanning then it is difficult to say that all have a positive impact on performance, or indeed which in particular have a positive impact on performance. Our use of new scales measuring analysis of customer needs and responsiveness represents an attempt to carry out differentiated replications of previous work on market orientation. Differentiated replications using different measurement devices and environmental conditions represent good science. This is because one obtains more confidence that results are indeed due to the conceptual variables under study and not unduly dependent on the particular manner 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. Our procedure for the new scales followed the scale development paradigm proposed by Churchill (1979). We consulted previous literature on the subject to ascertain what should be included in the construct and what should not. We invited academic colleagues and practitioners to comment on the adequacy of the constructs and the pool of questionnaire items initially developed. The item pool was pre-tested on a sample of 42 managers in one large corporation and managers of 25 separate businesses by face to face interviews. We refined the instrument by deleting poorly performing items and including new ones based on respondents 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 at around r=0.7 (Dess and Robinson, 1984, Pearce et al., 1987). However, one of the studies frequently cited as evidence of this correlation, Dess & Robinson (1984), states [our] study does not suggest that subjective measures are preferable to objective measures. .....Where accurate objective measures of performance ...are available their use is strongly supported and encouraged One good reason for this is that using a subjective measure introduces more error into the analysis (see Schumacker and Lomax, 1996 p. 38). We used an objective measure of performance, namely the average ROI percentage figures for the past two years. DATA COLLECTION The sampling frame consisted of firms listed in the Australian Business Whos Who and were located in the state of South Australia. The constraint of location was necessary because the data collection method was by personal interview. The Business Whos Who information source is well representative of Australian industry with organisations from all industries included. The organisations were recruited by telephone. Over 300 organisations were approached. The criteria were that they had been in operation for over five years and 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 Firms Number of employees Turnover Industry breakdown n=121 Mean = 140; SD = 160 Mean = $36 million Min= $1.2 million, Max $450 million Manufacturing 55 Finance / Construction Services 20 Insurance 7 3 Retail 17 Wholesale 5 Transport 3 Other 11

The sample was populated quite heavily by manufacturing firms. However, the manufacturing firms in the sample were very heterogeneous in terms of the scope of industries represented and the range of sizes included. We were satisfied that the sample was broad enough so that potential unobserved influences would be randomised across the sample. The profile of the firms which participated was representative 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 interviewer stipulated that all information provided was to pertain only to the specific business unit under study, including ROI figures. We conducted a personal interview with the CEO of each organisation. This has the advantage of ensuring the intended respondent actually completes the questionnaire (Aaker and Day, 1986). One or two other executives also self completed the questionnaire. We tested for the level of reliability of scores between the executives using correlations (as per Jaworski and Kohli, 1993). In most cases there was acceptable level of agreement, the average being r=0.60. Where there was major disagreement between the scores given by respondents in a firm, we discarded the questionnaire that correlated poorly with the other two responses. This only occurred with three cases. For all firms with multiple participants the scores used were the mean average of the multiple respondents. SCALE ANALYSIS Scales should be unidimensional, that is to say, they should only measure one thing. They should also be reliable, which is a low ratio of error variance to true score variance (Gerbing and Anderson, 1988). The scale diagnostics are shown in Appendix 1. We provide the Chi square goodness of fit statistic, together with the NFI, CFI, GFI and Lisrel AGFI measures of absolute and incremental fit. We found the scales for analysis, responsiveness, production focus and sales focus to exhibit both unidimensionality and reliability. The scales also display acceptable convergent and discriminant validity. Unfortunately, and surprisingly, the items taken from Jaworski & Kohli (1993) for intelligence dissemination failed to meet both of these criteria. They were unidimensional, but had a Cronbachs alpha of only 0.64, under the generally accepted 0.70 cut off level (Nunnally, 1978). For this reason we have not reported any association or lack of it between this facet of market orientation and performance because we consider the results might not be valid. ANALYSIS METHOD We controlled for a number of variables which affect profitability either across or within industries (Porter, 1980, Scherer and Ross, 1990). These are relative cost 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 correlated with 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 at p=0.05. We then used these as control variables by including them in the regression analysis. We then entered the four independent variables plus the three control 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 the adjusted R2 to non significant levels.

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We therefore ran four regression analyses, one each for the four independent variables under study. The control variables were included in each analysis. Separate analyses allowed us to ascertain the individual effect of each independent variable. Table 2 Regression 1 Std Regression Coefficient -.23 *** .18 ** -.11 NS .18 ** 0.11 Std Regression Coefficient -.28 *** .19 ** -.14 NS .13 NS .09 Regression 2 Std Regression Coefficient Buyer Power -.24 *** Tech. change .17 ** Relative costs -.13 NS Responsivenes .12 NS s Adjusted R2 0.09 Regression 4 Std Regression Coefficient -.25 *** .18 ** -.14 NS .12 NS 0.09

Buyer Power Tech. change Relative costs Analysis Adjusted R2 Regression 3

Buyer Power Tech. change Relative costs Sales Focus Adjusted R2

Buyer Power Tech. change Relative costs Production Focus Adjusted R2

** significant at P=0.05 FINDINGS

*** significant at P=0.01

The results for the sample overall are summarised in Table 4. This shows partial support for hypothesis 1. Analysis of customer needs is significantly and positively associated with ROI across the sample. There is no support for hypotheses 2 or 3. The sales focus and production focus variables are not associated with performance across the sample. Hypothesis 4 is also partially supported by this lack of association between sales focus & production focus and performance. DISCUSSION This research adds to the growing body of evidence on market orientation and performance. It goes further by examining whether other approaches to business might 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 with performance here. It may be that responsiveness itself would not correlate with profit because it is possible to be responsive in a reactive, shoot from the hip manner. This might enable the organisation to keep somewhat abreast of customer requirements but not enable it to enjoy superior performance. In contrast, customer analysis might enable the firm to make more considered choices about how it chooses to respond, which will please customers but also pay off for the firm. LIMITATIONS OF THE STUDY An acknowledged weakness in cross sectional studies of this kind is the difficulty in ascribing causality. While we found an association between some market oriented behaviour and profit, we cannot conclude that such behaviour causes higher profit. An alternative explanation is that organisations happen to earn high profits and then try to protect that favourable situation by becoming more market oriented. Another limitation of the study is that we could not test the association between market intelligence dissemination and performance. However we feel that it would be inappropriate to report on results based on a scale which in this study, at least, displayed low reliability. Lastly, we have not considered the comparative effect of other activities such as competitor orientation (eg Narver and Slater, 1990). While a competitor orientation is considered by many authors to be a component of a market orientation we wished to identify the specific effect of customer analysis and responsiveness. This is in line 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 slightly different to prior research, and objective measures of performance which to our knowledge have not been used previously in market orientation studies. Despite using these different measures, it has supported previous research by showing that certain market oriented behaviour (customer analysis) is positively associated with 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 empirical generalisations on how market orientation affects small businesses. Secondly, longitudinal studies could help address the issue of causality. There are three conditions necessary for ascribing causality: covariance, temporal sequence, and controlling for other factors (Hair et al., 1995). Covariance has certainly been established, and as in this study, attempts have been made to control for other factors. Gathering data over several years will be a significant step towards understanding how market orientation affects business performance.

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Appendix 1 Scales Construct: Market Analysis The firm often makes use of information that states customer preferences A key strength of this firm is effective customer analysis The firm has a structured program that obtains the feedback necessary to fully understand customers The firm regularly analyses data on customer satisfaction The firm studies underlying trends or patterns in its customers behaviour Construct: Market Responsiveness The firm responds very quickly to negative customer satisfaction information The organisation responds quickly to changing customer requirements This company leads the field when it comes to meeting customers long term requirements The firm is quick to respond to factors affecting its market A high priority is placed on implementing changes to increase future customer satisfaction This firm successfully plans and implements changes required to satisfy customers in the future Construct: Selling/Promotion Emphasis There is a lot of pressure to achieve sales budgets The firm closely monitors progress towards meeting sales budgets The firm has an aggressive sales program Selling or promoting is integral to meeting the firms objectives Construct: Productivity Emphasis Process efficiency is a key factor which is constantly emphasised in this company A key strength of this organisation is having very efficient work processes The firm is regularly implementing productivity improvements Work practices are designed to provide the optimum efficiency Workplace efficiency is regularly monitored Construct: Intelligence Dissemination Marketing personnel in this organisation spend time Statistics 2 = 25.7 DF = 5, P< 0.001 CFI = 0.96 Lisrel GFI = 0.96 Lisrel AGFI = 0.89 Cronbach Alpha = 0.87 Statistics 2 = 17.1, DF =9, P< 0.04 CFI= .98 Lisrel GFI = 0.98 Lisrel AGFI = 0.95 Cronbach Alpha = 0.86

Statistics 2 = 5.4, DF = 2, P=0.06 CFI = 0.99 Lisrel GFI = 0.99 Lisrel AGFI = 0.95 Cronbach Alpha = 0.84 Statistics 2 = 5.6, DF = 5, P< 0.34 CFI = 0.99 Lisrel GFI = 0.99 Lisrel AGFI = 0.97 Cronbach Alpha = 0.93 Statistics 2 3.3 DF 2 P= 0.19

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discussing customers future needs with other functional departments In this organisation, when one department finds out something important about customers or competitors it is slow to alert other departments Data on customer satisfaction are disseminated at all levels in this organisation on a regular basis There is minimal communication between marketing and other departments/functions concerning market developments, in this organisation

CFI 0.96 =

Lisrel GFI =0.97 Lisrel AGFI =0.88 Cronbachs alpha 0.64

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