Market orientation and performance: the moderating effects of product and customer differentiation.

Introduction

Industrial firms face difficult decisions in determining how to compete in current and prospective markets. Should process or product R&D be emphasized? Which functional competency (production, R&D, or marketing) is more critical for success? Is a market-oriented culture or a technically-oriented culture more appropriate? To many managers the answers to these questions seem obvious: namely go with industry practices. But is this always appropriate, given the common production orientation in most industrial firms (Webster, 1981)?

Appropriate strategy decisions

For smaller industrial firms, with fewer resources to compete on either a low-cost or a differentiated R&D basis, correct answers to these questions are critical for survival. To make appropriate strategy decisions it is essential that small firm top managers have a good understanding of the nature of critical market factors in current and alternative markets in order to develop an understanding of the critical competences needed to survive in these markets. Yet for top managers in small industrial firms, there is a tendency to value competitive intelligence over customer intelligence and devote less time to marketing decision making compared with other functions (Pelham et al., 1988).

Management researchers have long known the direct influence of the industry environment on firm performance and structure (e.g. Beard and Dess. 1981: Lawrence and Lorsch, 1967). Researchers have also documented the moderating influence of the industry environment on the strategy-performance relationship (e.g. Hitt and Ireland, 1985; Venkatraman and Prescott, 1990). The extent of industry influence on management strategies was documented by Miles and Snow (1978). Management researchers (Dill, 1958; Keisler and Sproul, 1982; Khandwalla, 1976; Paine and Anderson, 1977) suggest that perceptions of industry complexity, heterogeneity, and turbulence influence managerial decision making, and strategies.

Based on this research, we raise this question: In what kinds of industry situations is a market orientation culture a more important determinant of business success? The answer to this question should be of interest to firms currently in these situations or pondering entering markets with a different situation.

Defining market orientation

Narver and Slater (1990) define market orientation as "the organization culture that most effectively and efficiently creates the necessary behaviors for the creation of superior value for buyers and, thus, superior performance for the business." According to their definition, market orientation is composed of the dimensions of customer orientation, competitor orientation, and interfunctional coordination.

The moderating influence of the industry environment on the market orientation-performance relationship is suggested by Day and Wensley (1988), who noted that firm orientations (other than marketing) may be of paramount importance in certain industries. The potential for differing influences of market orientation across industry environments is suggested by Narver and Slater's (1990) study. They found a positive relationship between market orientation and profitability (relative return on investment) for specialty strategic business units (SBUs) with differentiated products (products perceived to be significantly different in features and benefits), but a negative relationship for commodity SBUs with undifferentiated products. Narver and Slater's examination of the means for commodity SBUs suggest that the negative market orientation influence may have been influenced by the presence of large established SBUs which competed primarily on low cost and price. Despite these differences, Slater and Narver (1994) ask this question: "Why should a market-oriented business necessarily be influenced by "environmental moderators?" They argue that, "with its external focus and commitment to innovation, a market-oriented business should be prepared to achieve and sustain competitive advantage in any environmental situation." We agree that a market-oriented business should be better prepared in any environment to adjust its strategy (McKee et al., 1989) to changing conditions in order to provide superior customer value. In addition, a market-oriented culture should provide a firm with some level of advantage across all environments because of the pervasive importance of customer satisfaction and the difficulty of fostering such a market-oriented culture. But the question remains: Are there some industry environments where a market-oriented culture is a significantly greater (or lesser) source of sustainable competitive advantage? For instance, it could be argued that market orientation is a more important source of competitive advantage for small industrial firms given the predominance of top managers with functional backgrounds other than sales or marketing, and the tendency to emphasize those functions (Pelham and Clayson, 1988).

Sustainable competitive advantage

Lado et al. s, (1992) conditions for a sustainable competitive advantage may offer some explanations as to why a market-oriented culture may be more important in some industry situations. Their sustainable competitive advantage conditions are uniqueness, difficulty in copying (Porter, 1985), and causally ambiguous (Reed and DeFillipi, 1990).

There may be some industry environments where a high level of firm market orientation is an unusually strong source of competitive advantage because other firms in that industry have relatively low levels of market orientation. In these environments, many managers may either fail to understand the relationship between market orientation and performance or may consider other orientations to be more important.

There may be other environments the average level of market orientation is relatively high because many managers in these industries recognize the need to emphasize market orientation in order to cope with high levels market complexity, change, or customer satisfaction demands. But, because of the difficulty of fostering strong and pervasive norms directed toward achieving customer/competitor understanding and customer satisfaction, a firm that achieves a level of market orientation higher than the industry average should achieve greater success in that industry. Managerial perceptions of the competitive environment may influence how strenuously managers attempt to foster firm-wide market orientation behaviors, but modifying employee behaviors is an extremely difficult proposition.

Previous studies of moderating influences

Kohli and Jaworski (1990) offered a sound theoretical discussion of why market orientation may have little effect on performance under certain industry conditions. For instance, in a stable market where customer needs undergo little change, there may be a lessened need for activities designed to continuously measure customer needs. Also, R&D expertise (per Bennett and Cooper, 1979) may be a more important source of competitive advantage, than market orientation, in a technologically dynamic market. They also argue (per Houston, 1986) that, in more competitively intense markets or low growth markets, firms must pay more attention to market-oriented firm activities to survive.

Methodological limitations

Previous studies (Jaworski and Kohli, 1993; Slater and Narver, 1994) have not found any significant moderating influences of the industry conditions of dynamism, technological turbulence, or competitive …