Does CompetitiveEnvironment Moderate the Market Orientation Performance Relationship? Recentstudies have shown evidence of a positive relationship between marketorientation and performance.
How ever, some scholars have suggested thatcompetitive environment could moderate this relationship. The authorsinvestigate how competitive environment affects the strength of the marketorientation-performance relationship and whether it affects the focus of theexternal emphasis within a market orientation-that is, a greater emphasis oncustomer analysis relative to competitor analysis, or vice versa, within agiven magnitude of market orientation. Their results provide very limited supportfor a moderator role for competitive environment on the market orientationperformance relationship. The benefits of a market orientation are long termthough environmental conditions are often transient, and thus being marketoriented is cost-effective in spite of any possible short-term moderating effectsof the environment. There are followingfacts about Competitive Environment Moderate the Market Orientation PerformanceRelationship.If thesemoderating effects exist and are substantial and enduring, potential benefitscould result for a business from adjusting the magnitude of and emphasis inmarket orientation through the selective allocation of human or financialresources.
For example, a business in the early stages of a market’sdevelopment, when there are few competitors and demand growth is high, mightbenefit from primarily focusing on competitors as it fully develops a marketorientation. However, it is important to remember that market orientation is animportant element of business culture and thus is both difficult and expensiveto develop and maintain. Therefore, environmental moderator theorynotwithstanding, there are compelling reasons to believe that the early developmentand continuous maintenance of a market orientation is the wisest course ofaction.Moderators of the Strength of theRelationship: A market orientation is likely to be relatedto business performance in general, under certain conditions it may not becritical….
Managers of businesses operating under these conditions should payclose attention to the cost-benefit ratio of a market orientation.Propositions and Hypotheses:P1: Marketturbulence: The greater the market turbulence, the stronger the relationshipbetween a market orientation and business performance. Kohli and Jaworski’s theory underlying theproposition is that “when there is a fixed set of customers with stablepreferences, a market orientation is likely to have little effect onperformance because little adjustment to a marketing mix is necessary to catereffectively to stable prefer fences of a given set of customers” (1990, p.14). Therefore, we hypothesize: H1: The greater the extent of marketturbulence, the greater the positive impact of market orientation onperformance. P2: Technological turbulence: The greater thetechnological turbulence, the weaker the relationship between a marketorientation and business performance. As Kohli and Jaworski define it,”technology” refers to the entire process of transforming inputs tooutputs and the delivery of those outputs to the customer. They hold that inindustries characterized by rapidly changing technology, a market orientationmay not be as important as it is in tech no logically stable industries becausein such industries many of the major innovations will be developed by researchand development efforts outside the industry.
This perspective is consistentwith manufacturing strategy arguments of Hayes and Abernathy (1980) and Hayesand Wheel wright (1984). Therefore: H2: The lesser the extent of technologicalturbulence, the greater the positive impact of market orientation onperformance.P3:Intensity of competition: The greater the competition, the stronger therelationship between a market orientation and business performance. Kohli and Jaworski’s argument is that thegreater the competition, the more aggressive a business must be in dis coveringcustomer wants and creating superior customer value to satisfy them. Thus, thegreater the competition, the more a business must be market oriented to attainsuperior performance. Therefore: H3: The greater the extent of competitivehostility, the greater the positive impact of market orientation onperformance.
P4: Strength of the economy: The weaker thegeneral economy, the stronger the relationship between a market orientation andbusiness performance. According to Kohli and Jaworski, the strongerthe demand faced by a business, the more the business can “get awaywith” a minimal magnitude of market orientation. This implies that in amarket characterized by strong demand growth, demand can exceed supply andcustomers will accept more readily what is offered. Conversely, in markets inwhich demand growth is weak, businesses must exert more effort to have a clearunderstanding of how they can provide superior value by more effectivelysatisfying buyer needs. This leads to the following hypothesis: H4: The lower the rate of market growth, thegreater the positive impact of market orientation on performance. Moderators of Relative Emphasis in aMarket Orientation:Businessesthat can learn rapidly about their markets and act on that information arepositioned best for competitive advantage.
Managers cope with the vast amountsof this rapidly changing and often conflicting market information through theprocesses of selective attention and simplification. These processes often leadto adoption of either a customer- or competitor-focused market perspective,determined by the manager’s perception of the relative importance of customeror competitor analysis to a business’s ability to create and sustain superiorvalue for customer. Customer focus is a relative emphasis on collecting andprocessing customer-oriented information, and competitor focus is a relativeemphasis on competitor-oriented information.
It is of course possible thatfocusing primarily on either customers or competitors could lead to “apartial and biased picture of reality” and that balance between the two perspectivesis most desirable. Thus, we do not expect to find a statistically significantuniversal effect between any type of relative emphasis and performance. Rather,the purpose of this phase of the study is to determine whether there areconditions that favor either a customer or competitor emphasis over balance.
Theory and Hypotheses:competitiveenvironment might influence a man ager’s selection of a particular relativeemphasis within a market orientation. They say, “When market demand is predictable,the competitive structure is concentrated and stable, and there are a fewpowerful customers, the emphasis is necessarily on competitors.” They goon to suggest, “In dynamic markets with shifting mobility barriers, manycompetitors, and highly segmented end-user markets, a tilt toward a customerfocus is mandatory.” However, they provide little rationale for the necessityof the respective emphases. In this section we offer one rationale for how thefour dimensions of competitive environment suggested by Day and Wensley mightinfluence a manager’s selection of either a customer or competitor emphasis ina market orientation.
Marketgrowth. In slow growth markets customer needs are relatively predictable andthe strategic emphasis is on price, including heavy trade allowances andconsumer promotions. To avoid uneconomical pricing decisions, businesses mustpay close attention to their cost position in production, marketing, anddevelopment relative to that of the competition. The heavy emphasis on relativecost during the slow growth periods requires a competitor emphasis. The periodof most rapid sales growth in the product life cycle occurs after productintroduction as middle majority customers begin to follow the lead of the earlyadopters.
Recent evidence points to theimportance of focusing on lead users in the development and evaluation of newproducts as they become reference points for majority customers. It followsthat a customer emphasis is desirable during the high-growth period followingnew product introductions. The importance of a customer emphasis extends to thelater growth stage of a product as well.
During this period, emphasis must beon meaningful differentiation from the numerous emulators that will enter themarket and on discovering and exploiting opportunities for market segmentation.An important objective is the establishment of a strong brand franchise throughsubstantial dealer and customer service. Though competitor intelligence isimportant during this stage, customer analysis is even more critical. Therefore,we hypothesize: H 5 a: The higher the rate of market growth,the greater the positive impact of customer emphasis on performance. H5b: Thelower the rate of market growth, the greater the positive impact of competitoremphasis on performance.Research Design:The SampleThe sampleconsists of 81 strategic business units (SBUs) in a forest products company and36 SBUs in a diversified manufacturing corporation, both of which are listedamong the Fortune 500 largest industrial firms. The 81 forest products companySBUs are a subset of the sample from the study described in Narver and Slater .1An SBU is an autonomous organizational unit with a defined strategy and amanager with sales and profit responsibility.
Within each SBU the topmanagement team (TMT) was identified by the responsible group executive, andeach member was sent a questionnaire titled “Business PracticesSurvey” containing questions regarding the SBU’s competitive practices andstrategies, competitive environment, and performance in its principal servedmarket segment. We used multiple, knowledgeable members of the TMT to offsetbiases of individual respondents and thus re duce measurement error . Responserates were 84% in the forest products corporation and 74% in the diversifiedmanufacturing corporation, which yielded averages of 3.3 and 7.4 respondentsper SBU respectively. Within each SBU, TMT responses were aggregated and anaverage score on the constructs of interest was calculated for the SBU. Due tomissing values for some variables, the final sample includes 107 of the 117SBUs (91.
5%) sampled. There is a trade-off between using SBUs from only twocorporations as the sampling frame and sampling from a broader group ofbusinesses. Our approach produces very high response rates and access tomultiple respondents within each SBU. The reduction in measurement error increases the internal validity of the study. However, the generalizability ofthe study can be reduced. We believe this is a reasonable trade-off to make.Furthermore, if results from this study are consistent with Jaworski andKohli’s study, who have a broader samplebut potentially greater measurement error, confidence in the results will bestrengthened.
Tests for Moderator Effects:A puremoderator effect implies that the moderator variable (environment) modifies theform of the relationship (i.e., the slope of the regression line as representedby the regression coefficient) between the predictor variable (e.g.
, marketorientation) and the criterion variable (performance). To test for pure moderators,we utilize moderated regression analysis ; Sharma, Durand, and Gur Arie 1981)and create eight multiplicative interaction terms by multiplying the values formarket orientation and relative emphasis, respectively, by the values for thehypothesized environmental moderators. We simultaneously regress performance onmarket orientation, relative emphasis, the environmental dimensions, theinteraction terms, and nine control variables that can affect a business’sperformance. In some cases, a different type of moderator called a homologizer will influence the strength of therelationship between the predictor and the criterion variables (i.e., theproportion of variance explained by the predictor as represented by thecoefficient of determination or the correlation coefficient) but will notinteract with the predictor. In this case, market orientation might explainmore of the performance variation in low-growth markets than in high-growthmarkets.
However, the slope of the regression line is the same in both.Definition of Variables:Following isa description of the variables used in the analyses. Market orientation.
Weutilize the Narver and Slater (1990) measure of market orientation. Thismeasure is com posed of subscales to measure the customer orientation (a inthis study = .878), competitor orientation (a = .726), and inter functionalcoordination (a = .774) components of market orientation. A business’smagnitude of market orientation is the average of its scores on the threecomponents of market orientation.Results of Tests for Moderator:Table 1reports means, standard deviations, and reliabilities.
Reliability of themulti-item scales is measured with Cronbach’s (1970) alpha and of the singleitem measures with the formula for within-group interrater reliability (James,Demaree, and Wolf 1984). Table 2contains the results of the tests for the main effects of market orientation,relative emphasis (customer or competitor), and the control variables on ROA,sales growth, and new product success. Market orientation is the only predictorvariable that is significant for all three dependent variables. As expected, thereis no main effect for relative emphasis. Relative size and cost are significantpredictors for both ROA and new product success.
In Table 3, wereport results of the tests of the influence of competitive environment on therelationship between market orientation and ROA, sales growth, and new productsucess, respectively, and tests of the influence of competitive environment onthe relationship between relative emphasis in a market orientation and ROA,sales growth, and new product success respectively. The only difference betweenthe moderated regression models and the main effects models reported in Table 2is the inclusion of the interaction terms. Therefore, for the moderatedregression analysis, only the coefficients and standard errors for themultiplicative interaction terms are shown. ConclusionContrary to Kohli and Jaworski’s (1990) and Day and Wen sley’s (1988) theory,but consistent with the Jaworski and Kohli (1992) findings, we find littlesupport for the proposition that environment moderates either the nature of themarket orientation-performance relationship or the effective ness of differentrelative emphases within a market orientation.
Thus, we strongly believe thatit would be risky for a manager to attempt to adjust the business’s marketorientation to match current market conditions. First, “adjusting” abusiness’s magnitude of market orientation is complex, time-consuming, and expensive. Second, marketconditions are transient and, in the long run, all markets will encounter slowgrowth, high hostility, and changing buyer preferences, all of which areconditions that would require a high magnitude of market orientation (Kohli andJaworski 1990). It is better to invest in becoming market oriented while theenvironment is somewhat munificent than to wait until it has grown hostile.That said, the implication for managers is that they should seek to increasethe business’s overall magnitude of market orientation while remainingsufficiently flexible to shift resources between customer and competitoremphasis as market conditions change in the short run. However, we believe thatbusinesses should avoid becoming locked into a particular external emphasisbecause market opportunities and threats are fluid.
The key point is theimportance of market orientation itself. Being market oriented is the basis forcreating superior value for buyers, the meaning of competitive advantage.Accordingly, being market oriented can never be a negative.