Does Competitive
Environment Moderate the Market Orientation Performance Relationship?

 

Recent
studies have shown evidence of a positive relationship between market
orientation and performance. How ever, some scholars have suggested that
competitive environment could moderate this relationship. The authors
investigate how competitive environment affects the strength of the market
orientation-performance relationship and whether it affects the focus of the
external emphasis within a market orientation-that is, a greater emphasis on
customer analysis relative to competitor analysis, or vice versa, within a
given magnitude of market orientation. Their results provide very limited support
for a moderator role for competitive environment on the market orientation
performance relationship. The benefits of a market orientation are long term
though environmental conditions are often transient, and thus being market
oriented is cost-effective in spite of any possible short-term moderating effects
of the environment.

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There are following
facts about Competitive Environment Moderate the Market Orientation Performance
Relationship.

If these
moderating effects exist and are substantial and enduring, potential benefits
could result for a business from adjusting the magnitude of and emphasis in
market orientation through the selective allocation of human or financial
resources. For example, a business in the early stages of a market’s
development, when there are few competitors and demand growth is high, might
benefit from primarily focusing on competitors as it fully develops a market
orientation. However, it is important to remember that market orientation is an
important element of business culture and thus is both difficult and expensive
to develop and maintain. Therefore, environmental moderator theory
notwithstanding, there are compelling reasons to believe that the early development
and continuous maintenance of a market orientation is the wisest course of
action.

Moderators of the Strength of the
Relationship:

 A market orientation is likely to be related
to business performance in general, under certain conditions it may not be
critical…. Managers of businesses operating under these conditions should pay
close attention to the cost-benefit ratio of a market orientation.

Propositions and Hypotheses:

P1: Market
turbulence: The greater the market turbulence, the stronger the relationship
between a market orientation and business performance.

 Kohli and Jaworski’s theory underlying the
proposition is that “when there is a fixed set of customers with stable
preferences, a market orientation is likely to have little effect on
performance because little adjustment to a marketing mix is necessary to cater
effectively to stable prefer fences of a given set of customers” (1990, p.
14). Therefore, we hypothesize:

 H1: The greater the extent of market
turbulence, the greater the positive impact of market orientation on
performance.

 P2: Technological turbulence: The greater the
technological turbulence, the weaker the relationship between a market
orientation and business performance.

 As Kohli and Jaworski define it,
“technology” refers to the entire process of transforming inputs to
outputs and the delivery of those outputs to the customer. They hold that in
industries characterized by rapidly changing technology, a market orientation
may not be as important as it is in tech no logically stable industries because
in such industries many of the major innovations will be developed by research
and development efforts outside the industry. This perspective is consistent
with manufacturing strategy arguments of Hayes and Abernathy (1980) and Hayes
and Wheel wright (1984). Therefore:

 H2: The lesser the extent of technological
turbulence, the greater the positive impact of market orientation on
performance.

P3:
Intensity of competition: The greater the competition, the stronger the
relationship between a market orientation and business performance.

 Kohli and Jaworski’s argument is that the
greater the competition, the more aggressive a business must be in dis covering
customer wants and creating superior customer value to satisfy them. Thus, the
greater the competition, the more a business must be market oriented to attain
superior performance. Therefore:

 H3: The greater the extent of competitive
hostility, the greater the positive impact of market orientation on
performance.

 P4: Strength of the economy: The weaker the
general economy, the stronger the relationship between a market orientation and
business performance.

 According to Kohli and Jaworski, the stronger
the demand faced by a business, the more the business can “get away
with” a minimal magnitude of market orientation. This implies that in a
market characterized by strong demand growth, demand can exceed supply and
customers will accept more readily what is offered. Conversely, in markets in
which demand growth is weak, businesses must exert more effort to have a clear
understanding of how they can provide superior value by more effectively
satisfying buyer needs. This leads to the following hypothesis:

 H4: The lower the rate of market growth, the
greater the positive impact of market orientation on performance.

 

 

Moderators of Relative Emphasis in a
Market Orientation:

Businesses
that can learn rapidly about their markets and act on that information are
positioned best for competitive advantage. Managers cope with the vast amounts
of this rapidly changing and often conflicting market information through the
processes of selective attention and simplification. These processes often lead
to adoption of either a customer- or competitor-focused market perspective,
determined by the manager’s perception of the relative importance of customer
or competitor analysis to a business’s ability to create and sustain superior
value for customer. Customer focus is a relative emphasis on collecting and
processing customer-oriented information, and competitor focus is a relative
emphasis on competitor-oriented information. It is of course possible that
focusing primarily on either customers or competitors could lead to “a
partial and biased picture of reality”  and that balance between the two perspectives
is most desirable. Thus, we do not expect to find a statistically significant
universal effect between any type of relative emphasis and performance. Rather,
the purpose of this phase of the study is to determine whether there are
conditions that favor either a customer or competitor emphasis over balance.

Theory and Hypotheses:

competitive
environment might influence a man ager’s selection of a particular relative
emphasis within a market orientation. They say, “When market demand is predictable,
the competitive structure is concentrated and stable, and there are a few
powerful customers, the emphasis is necessarily on competitors.” They go
on to suggest, “In dynamic markets with shifting mobility barriers, many
competitors, and highly segmented end-user markets, a tilt toward a customer
focus is mandatory.” However, they provide little rationale for the necessity
of the respective emphases. In this section we offer one rationale for how the
four dimensions of competitive environment suggested by Day and Wensley might
influence a manager’s selection of either a customer or competitor emphasis in
a market orientation.

Market
growth. In slow growth markets customer needs are relatively predictable and
the strategic emphasis is on price, including heavy trade allowances and
consumer promotions. To avoid uneconomical pricing decisions, businesses must
pay close attention to their cost position in production, marketing, and
development relative to that of the competition. The heavy emphasis on relative
cost during the slow growth periods requires a competitor emphasis. The period
of most rapid sales growth in the product life cycle occurs after product
introduction as middle majority customers begin to follow the lead of the early
adopters. Recent evidence  points to the
importance of focusing on lead users in the development and evaluation of new
products as they become reference points for majority customers. It follows
that a customer emphasis is desirable during the high-growth period following
new product introductions. The importance of a customer emphasis extends to the
later growth stage of a product as well. During this period, emphasis must be
on meaningful differentiation from the numerous emulators that will enter the
market and on discovering and exploiting opportunities for market segmentation.
An important objective is the establishment of a strong brand franchise through
substantial dealer and customer service. Though competitor intelligence is
important 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: The
lower the rate of market growth, the greater the positive impact of competitor
emphasis on performance.

Research Design:

The Sample

The sample
consists of 81 strategic business units (SBUs) in a forest products company and
36 SBUs in a diversified manufacturing corporation, both of which are listed
among the Fortune 500 largest industrial firms. The 81 forest products company
SBUs are a subset of the sample from the study described in Narver and Slater .1
An SBU is an autonomous organizational unit with a defined strategy and a
manager with sales and profit responsibility. Within each SBU the top
management team (TMT) was identified by the responsible group executive, and
each member was sent a questionnaire titled “Business Practices
Survey” containing questions regarding the SBU’s competitive practices and
strategies, competitive environment, and performance in its principal served
market segment. We used multiple, knowledgeable members of the TMT to offset
biases of individual respondents and thus re duce measurement error . Response
rates were 84% in the forest products corporation and 74% in the diversified
manufacturing corporation, which yielded averages of 3.3 and 7.4 respondents
per SBU respectively. Within each SBU, TMT responses were aggregated and an
average score on the constructs of interest was calculated for the SBU. Due to
missing values for some variables, the final sample includes 107 of the 117
SBUs (91.5%) sampled. There is a trade-off between using SBUs from only two
corporations as the sampling frame and sampling from a broader group of
businesses. Our approach produces very high response rates and access to
multiple respondents within each SBU. The reduction in measurement error in
creases the internal validity of the study. However, the generalizability of
the study can be reduced. We believe this is a reasonable trade-off to make.
Furthermore, if results from this study are consistent with Jaworski and
Kohli’s  study, who have a broader sample
but potentially greater measurement error, confidence in the results will be
strengthened.

Tests for Moderator Effects:

A pure
moderator effect implies that the moderator variable (environment) modifies the
form of the relationship (i.e., the slope of the regression line as represented
by the regression coefficient) between the predictor variable (e.g., market
orientation) 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 for
market orientation and relative emphasis, respectively, by the values for the
hypothesized environmental moderators. We simultaneously regress performance on
market orientation, relative emphasis, the environmental dimensions, the
interaction terms, and nine control variables that can affect a business’s
performance. In some cases, a different type of moderator called a homologizer  will influence the strength of the
relationship between the predictor and the criterion variables (i.e., the
proportion of variance explained by the predictor as represented by the
coefficient of determination or the correlation coefficient) but will not
interact with the predictor. In this case, market orientation might explain
more of the performance variation in low-growth markets than in high-growth
markets. However, the slope of the regression line is the same in both.

Definition of Variables:

Following is
a description of the variables used in the analyses. Market orientation. We
utilize the Narver and Slater (1990) measure of market orientation. This
measure is com posed of subscales to measure the customer orientation (a in
this study = .878), competitor orientation (a = .726), and inter functional
coordination (a = .774) components of market orientation. A business’s
magnitude of market orientation is the average of its scores on the three
components of market orientation.

Results of Tests for Moderator:

Table 1
reports means, standard deviations, and reliabilities. Reliability of the
multi-item scales is measured with Cronbach’s (1970) alpha and of the single
item measures with the formula for within-group interrater reliability (James,
Demaree, and Wolf 1984).

Table 2
contains 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 predictor
variable that is significant for all three dependent variables. As expected, there
is no main effect for relative emphasis. Relative size and cost are significant
predictors for both ROA and new product success. In

Table 3, we
report results of the tests of the influence of competitive environment on the
relationship between market orientation and ROA, sales growth, and new product
sucess, respectively, and tests of the influence of competitive environment on
the relationship between relative emphasis in a market orientation and ROA,
sales growth, and new product success respectively. The only difference between
the moderated regression models and the main effects models reported in Table 2
is the inclusion of the interaction terms. Therefore, for the moderated
regression analysis, only the coefficients and standard errors for the
multiplicative interaction terms are shown.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion
Contrary 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 little
support for the proposition that environment moderates either the nature of the
market orientation-performance relationship or the effective ness of different
relative emphases within a market orientation. Thus, we strongly believe that
it would be risky for a manager to attempt to adjust the business’s market
orientation to match current market conditions. First, “adjusting” a
business’s magnitude of market orientation is complex,

 time-consuming, and expensive. Second, market
conditions are transient and, in the long run, all markets will encounter slow
growth, high hostility, and changing buyer preferences, all of which are
conditions that would require a high magnitude of market orientation (Kohli and
Jaworski 1990). It is better to invest in becoming market oriented while the
environment is somewhat munificent than to wait until it has grown hostile.
That said, the implication for managers is that they should seek to increase
the business’s overall magnitude of market orientation while remaining
sufficiently flexible to shift resources between customer and competitor
emphasis as market conditions change in the short run. However, we believe that
businesses should avoid becoming locked into a particular external emphasis
because market opportunities and threats are fluid. The key point is the
importance of market orientation itself. Being market oriented is the basis for
creating superior value for buyers, the meaning of competitive advantage.
Accordingly, being market oriented can never be a negative.

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