INFLUENCE OF MARKET ORIENTATION ON BUSINESS

PERFORMANCE

CASE: CROATIAN MANUFACTURING COMPANIES

Željko Bunić, Faculty of Economics and Business Zagreb

University of Zagreb
Kennedy sqaure, Zagreb
CROATIA

Telephone : 00385 98 490-982

Email : zeljko.bunic@hespo.hr

Supervisor, Dr. Nataša Renko

Supervisor: n.renko@efzg.hr

16th EDAMBA Summer Academy

Soreze, France

July 2007

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INFLUENCE OF MARKET ORIENTATION ON BUSINESS PERFORMANCE

Željko Bunić, Faculty of Economics and Business Zagreb

Abstract:

Market orientation (MO) concept, relationships between MO and business performance (BP)
and environmental factors (EF) role is subject of thesis. Thesis accepts Jaworski and Kohli
structural model, that on comprehensive way enhance framework of MO: antecedents,
construct, consequences, moderators. In addition of original model, author propose
conceptual framework that consider EF as antecedents of MO and alternatively as moderators
of relationship between MO and BP. The new variable in model is five competitive forces
intensity.
The methodology of framwork test involves quantitive research methods, validity and
reliability of measure scales test and checking of variables. In order to test hypothesis use of
multivariate regression analysis and moderated regression analysis is employeed.

Keywords: Market orientation, Business performance, Environmental factors, Five

competitive forces

RESEARCH BACKGROUND

In order to improve business performance, companies worldwide rely on market orientation

based on the classic marketing doctrine. According to the classic doctrine, satisfying
customer’s needs and requirements is the basic path to the improvements of business
performance. MO refers to the implementation of the marketing concept. Even though the
marketing concept was introduced in 1960’s, the impact of MO on business performance and
its effects were not the subjects of studies until the 1990’s. Since then, a new perspective for
viewwing marketing concept as implementatin has emerged within the marketing literature. In
this context, five different perspectives have been advanced that visualised MO as the
implementation of marketing concept: These are; decision-making perspective, market
intelligence perspective, culturally based behavioural perspective, strategic perspective an the

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customer orientation perspective (Shapiro, 1988; Kohli i Jaworski, 1990; Narver i Slater,
1990; Ruekert, 1992; Desphande et al., 1993).
Two out of five mentioned perspectives have reached attention by schoolars and practioners:
(1) culturaly based behavioural perspective and (2) market intelligence perspective.

Culturaly based behavioural perspective define the MO as business culture that commits the
organisation to the creation of superior value for customer. This stream is supported by the
work of Narver and Slater (1990).
Conceptual model developed by Narver and Slater (1990) includes three behavioural
components of MO: customer orientation, competitor orientation and interfunctional
coordination. All of them are incorporated in intelligence generation and dissemination. MO
also includes long-term focus and profitability as the decision criteria.

Market intelligence perspective of MOs refers to specific behaviours that lead to

improvements in performance. Kohli and Jaworski viewed the term ''MO'' as the
implementation of the marketing concept. In other words, a market oriented firm is the one
whose actions are consistent with the marketing concept. Kohli and Jaworski (1990) proposed
three core themes in marketing concepts: (1) customer focus, (2) coordinated marketing, and
(3) profitability. They defined MO as ''organization-wide generation of market orienttion
pertaining to current and future customer needs, dissemination of the intelligence across
departments, and organization-wide responsiveness to it (Kohli and Jaworski, 1990:6).

Market intelligence refers to the collection and assesment of both customers' current and
future needs, plus the impact of government regulation, competition, technology and other
envirnomental forces.
Market intelligence must be communicated and disseminated throughout an organization in
both formal and informal ways,. Effective dissemination of MO is seen as a vital act since it
provides a shared basis fo collaborative efforts by different departments.
The last component of MO is responsiveness to market intelligence which is generated and
disseminated. The responsiveness involves the selection of target markets, the design and
selection of products and services, the production, distribution and promotion of the product.
In order to measure MO construct, Jaworski and Kohli developed MARKOR scale.

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Based on intensive research of the large body of MO literature, this thesis accepts Jaworski
and Kohli structural model of MO.There are four specific reasons why author adopts prefers
market intelligence perspective instead of culturaly based behavioral perspective:
(1) Kohli and Jaworski consistently and on comprehensive way enhance complete
framework of MO: antecedents, construct, consequences, moderators,
(2) MARKOR scale reflects specific activities and behaviours related on MO,
(3) MARKOR scale was succesfully implemented in other contries than US (e.g. Pitt and
Caruana, 1996; Kaynak and Kara, 2004).
(4) Narver and Slater model (1990) under term ''market'' consider only customers and
competitors, neglecting the role of envirnomental factors.

CONCEPTUAL FRAMEWORK AND RESEARCH QUESTIONS

CONCEPTUAL FRAMEWORK AND STRUCTURAL MODEL

Conceptual framework of MO and structural model of effects of MO on business performance

is definied according to synthesis of analyzed theoretical findings. The author has developed
the conceptual framwwork on the basis of Jaworski and Kohli model (1993). Figure 1. shows
the original model, and figure 2. proposed model. Both models have four major components:
(1) MO, (2) Antecedent to MO, (3) Environmental moderators and (4) Business performance

Domain 1: Market Orientation

At the core of the conceptual framework is the MO. As mentioned earlier, Jaworski and Kohli
(1990) model describes MO in terms of specific behaviours related to the organization-wide
generation of market inteligence pertaining to current and future customer needs, dissemination
of this inteligence across departments and organisation-wide responsiveness to it.

Domain 2. Antecedents to Market Orientation

The degree of MO of an organization depends on the presence or absence of some internal and
external factors. These factors are labelled as antecedents of MO. The framework indicates that
senior management characteristics, organizational characteristics and interdepartmental

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dynamics are the internal factors or internal antecedents. On the other hand, market turbulence,
technological turbulence and five competitive forces intensity are external factors or external
antecedents. Investigation of antecedents in this thesis is limited on external factors only.
Reasons for this are following:
(1) in compare with external antecedents, internal antecedents have been widely explored in
marketing literature (e.g. Jaworski and Kohli, 1993, Cervera et al. 2001, Ngansathil, 2001,
Zebal, 2003), (2) the thesis focus is on environmental factors and its influence on MO.

Domain 3. Environmental Moderators

Based on the assumption that under certain condition may not be neccessary for a firm, it
appears likely that there are moderators which affect the relationship between MO and business
performance.
In this thesis it is hypothesised that three envirnomental variables – market turbulence,
tehcnological turbulence and five competition forces intensity influence the linkage between
MO and performance.

Domain 4. Business Performance

No measure on its own can totally represent busines performance. Economic performance of
an organization is viewed as the function of some financial indicators such as return on sales
(ROS), return on assests (ROA), Sales Growth, Revenues/Cost ratio. Therefore performance
was measured via five objective indicators: three-year percentag change in sales, three year
average of ROS, three year average of ROA, three year average of Revenues/Costs ratio and
finally, three year average of Sales/Sales related costs ratio.
Non-economic performance is viewed as the function of employees organizational
commitment and espirit de corps.

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 Figure 1. Jaworski i Kohli Model (1993)

ANTECEDENTS CONSTRUCT MODERATORS CONSEQUENCES

EMPLOYEES
TOP MANAGEMENT * Organizational commitment
* Espirit de Corps
* Emphasis
* Risk Aversion

MARKET ORIENTATION
INTERDEPARTMENTAL
* Intelligence Generation OKOLINA
DYNAMICS
* Inteligence Dissemination
* Responsiveness * Market Orientation
* Conflict
* Technological Turbulence
* Connectedness
* Competitive Intensity

ORGANIZATIONAL SYSTEMS

* Formalisation
* Centralization
* Departmentalizations
* Reward System BUSINESS
PERFORMANCE
Figure 2. - Proposed Model of Market Orientation for Croatian Manufacturing Companies

EXTERNAL
ANTECEDENT

FIVE COMPETITIVE FORCES

ORGANIZATIONAL COMMITMENT
RIVALRY AMONG
EXISTING COMPETITOR ESPIRIT DE CORPS

THREAT OF NEW
COMPETITOR ENTRY ENVIRONMENTAL FACTORS

BARGAINING POWER OF
SUPPLIERS MARKET TURBULENCE

MARKET ORIENTATION
BARGAINING POWER OF
BUYERS TECHNOLOGICAL
* INTELIGENCE GENERATION TURBULENCE
* INTELLIGENCE DISSEMINATION
THREAT OF SUBSTITUTES * RESPONSIVENESS FIVE COMPETITIVE FORCES
INTENSITY

MARKET TURBULENCE
BUSINESS PERFORMANCE

SALES GROWTH
TECHNOLOGICAL
TURBULENCE
ECONOMIC PERFORMANCE

PROFITABILITY

INTERNAL ANTECEDENTS

TOP MANAGEMENT

INTERDEPARTMENTAL
DYNAMICS

ORGANIZATIONAL
SYSTEMS
RESEARCH QUESTIONS

The aims of thesis were to answer on four research questions.

Research question One : How does market orientation affect economic performance ?

Academic scholars and business practitioners have advocated the importance of firms having a MO
for the simple reason that MO can improve a firm's business performance. The extensive literature
review identified 111 studies of relationship between MO and business performance. Together these
studies reveal 78 % positive effects of MO on measures of business performance, 22% non-
significant effects, and 1% negative effects. Thus, the conceptual framework suggests that MO
rewards economic performance of business.

Performance measures

Performance measured used in previous studies have been varied. They range from market share,
return on assests (ROA), return on investement (ROI), return on assests (ROA), return on sales
(ROS) and sales growth and included both subjective and objective, composite and invididual
measures.
In this thesis business performance is measured by via five objective indicators: three-year
percentage change in sales, three year average of ROS, three year average of ROA, three year
average of Revenues/Costs ratio and finally, three year average of Sales/Sales related costs ratio.
The use of objective performance measure have been conducted in order to avoid a ''a danger of
getting a false positive finding using subjective measures'' (Dawes, 1999).

Research question Two : How does market orientation affect employees ?

Beside the economic performance, MO can improve a firm's non-economic performance, viewed as
the function of emploeyees organizational commitment and espirit de corps.
Organizational commitment is an internal feeling, belief, or set of intentions than enhances an
employee's desire to remain with an organization (Buchanan, 1974; Zebal, 2003). Kohli and
Jaworski (1990) argued that MO provides psychological and social benefits to employees, it leadst
to a sense of pride in belonging to an organization in which all depatments and individuals work
towards the common goal of satisfying customers an that this positive response towards the work
situation results in increased organizational commitment.
Espirit de corps construct is very similar to the teamwork construct and it is an feeling of employees
that they have to work together, to help individuals and the society in order to make a contribution
of organization. Espirit de corps is instrumental in reducing the gap between service quality
specifications and actual delivery, thereby improving consumers' perceptions of service quality
(Kohli and Jaworski, 1990).

Previous studies (e.g. Jaworski and Kohli, 1993;Zebal, 2003) statisticaly proved a strong and
positive relationship between MO and both, organizational commitment and espirit de corps. Thus
the conceptual framework suggests that MO rewards non-economic performance of business.

Research question Three: Do environmental moderators such as market turbulence, technological

turbulence and five-competitive forces intensity strenghten or weaken the relationship between MO
and business performance ?

Previous studies have identified several environmental conditions which may have influence on
relationship betweeen MO-business performance relationship. The main envirnomental factors are:
market turbulence, technological turbulence, competitive intensity.

Market turbulence is defined as the degree to which the composition of customers and their
preferences have changed over a period of time (Jaworski and Kohli, 1993). Jaworski and Kohli
(1993) explained that in turbulent markets, firms have to keep modyfying hteir producst or services
to cope with changing customers' preferences. In stable markets, the need to do so is considerably
reduced. Therefore, fimrs operating in more turbulent markets are lilkely to have a greater need to be
market oriented compared to firms whic operate in less turbulent markets.

Technological turbulence is defined as the extent to which technology has changed in a particular
industry (Jaworski and Kohli, 1993). In industries characterised by rapidly changing technology,
MO may not be as important as it is in technologically stable industries. Therefore, MO is likely to
be more strongly related to business performance in low rather than highly turbulent industries.

The author propose the replacement of competitive intensity by introducing of ''five competitive
forces''. Namely:
''The intensity of competition in an industry is neither a matter of coincidenc nor bad luck. Rather,
competition in an industry is rooted in its underlying economic structure and goes well beyond the
behavoiur of current competitors. The state of competition in an industry depends on five basic
competitive forces....(1) Rivalry among existing firms, (2) Threat of new entrants, (3) Threat of
substitute products, (4) Bargaining power of suppliers and (3) Bargaining power of buyers'' (Porter,
1980:3)

Research question Four: Do environmental moderators such as market turbulence, technological

turbulence and five-competitive forces intensity can be considered as antecedents of market
orientation ?

Kohli and Jaworski (1990) found a number of factors associated with MO, which the authors
summarised as comprising three areas: top management factors, interdepartmental dynamics and
organizational factors. In spite of that Jaworski and Kohli (1993) mention that external factors can
be argued to be antecedents of MO and some other authors consider the external factors as
antecedents of MO ( e.g. Lusch and Laczniack, 1987; Avlontis and Gounaris 1997; Zebal, O'Cass
and Ngo, 2005).
Thus, the conceptual MO framwork should consider external factors as antecedents of MO

Based on research questions 10 main hypothesis and 70 corollary hypothesis is proposed.

THE RESEARCH METHODOLOGY

In order to test defined strutural model and research hypothesis empirical research was conducted
on the sample of Croatian manufacturing companies.

The Research Design:

The research uses a cross-sectional design1. This kind of design is suitable for studies that aim to
analyse a phenomenon, situtation , problem, attitude or issue by considering a cross-section of the
population at one point in time. This study alsoemployed the surveyed method, which make use of
a questionnaire as well as mail survey as the means to data collection. In order to minimise the non-
response issue the following guidelines were used:
(1) A cover letter was used, introducing the researcher, the objectives of the research an the
importance of the survey. A supervisor support letter was also attached.
(2) A cover letter was adressed to the names and position of the key informants who were in
charge of companies (managing director)
(3) Participants were offered a copy of summary of research result if they completed and
returned the questionnaire,
(4) A postage-paid reply envelope was enclosed for each questionnaire

The research was conducted on population of Croatian manufacturing companies if they met the
criteria that they: (a) employed twenty and more people, (b) had been operating for more then five
years, and (c) were manufacturing organisations. The rational for this was that companies
employing under twenty people would be less likely to be able to answer questions relating to the
concepts used in the study. The restriction on the years of operation was because companies that
are very young can enjoy exlosive growth which would bias the results. Lastly, it was considered
that manufacturing companies are most suitable for research.

1
Cross-sectional design involves the collection of information any given sample of population elements only once
(Malhotra, 1996)
Data Collection Procedure

Data was collected through the use of fully structured questionnaires as well as through use of
official financial agency data (objective financial data – income statementa & balance sheet). The
questionnaire first developed in English was translated into Croatian.
The population consisted from 1.333 companies and the questionnaire was sent to all of them in
November, 2006. A total of 410 questionnaires were returned. Of 410 returned questionnaires 51
were unusable. Hence, 359 usable questionnaires (26.9%) were included for data analysis. The
overall response rate is considered quite high when compared to similar research of MO.

The Survey Instrument

A structured questionnaire was used in this research. The questionnaire was divided into 4 sections
and consist from 51 questions (I-Market orientation,; II-Organizational Commitment and Espirit de
Corps, III – Market Turbulence & Technological Turbulence; IV – Five Competitive forces). The
all of measures used in this study were developed in previous studies of MO (MARKOR –
Jaworski and Kohli, 1993) and Five competitive forces (INDUSTRACT – Pecotich et. al, 1999).
All used measures used five-point Likert scale.
The business performance data have been calculated for each company based on objective financial
data collected from offical financial agency FINA.

Data Preparation Procedures

Data preparation was divided int two stages. Firstly, the raw data was edited, coded and converted
into the actual variables of interest. The coded databased were analysed using SPSS 13.0
Secondly, the variables were checked for outliers, normality, linearity, multicollinearity, and
homoscedasticity to satisfy the underlying assumptions of the multiple regression analysis.

Data Analysis Procedures

The data analysis began with the testing of reliability and valildity of the measures.

Reliability is defined as the extent to which measurements of the particular test are repeatable. In
other words, the measuring procedure should yield consitent results on repeated tests (Nunnally,
1970). The most recommened measure of internal consistency if provided by coefficent alpha or
Cronbach's (1951) alpha and this study used it.
Validity refers to the degree to which instruments measure the constructs that they are intended to
measure (Peter, 1979). In other words, validity is defined as the accuracy of measurement. In this
study was applicated construct validity assessment. Construct validity is the extent to which a
measure is related to other measures in a manner consistent with theoreticallyy based concepts.
There are two categories of construct validity, both of which are examined: convergent validity and
discriminant validity.2 Both discriminant and convergent validity are assessed by using factor
analysis. The aims of factor analysis are to summarise the patterns of correlations among variables
and to reduce a large numbers of variables to a smaller number of variables. In general, there are
two kinds of factor analysis: exploratory and confirmatory.

The next step in Data Analysis was Descriptive Statistics in order to calculate the means, standard
deviations, skewness and kurtosis of all constructs and objective indicator. Finally, a correlation
analysis was conducted on all variables in the study for two purposes. The first was to check the
presence of multicollinearity and second to explore the relationships between varibles.

Analysis of empirical results

In order to support or non-support the research hypothesis multiple regression analysis (MRA) and
moderated regression analysis (MORA) are employed.

Multiple regression analysis is a technique for finding an adequate and appropriate model
consisting of a set or subset of measured independent variables that estimates the true, unknown
regression function for the dependent variable.All three MRA regression techniques have been
used: standard multiple regression, hierachical regression and stepweise regression. Standard MRA
was used in order to test relationship between market orientation and economic and non-economic
performance, hierachical MRA was used as a tool in moderated regression analysis and stepwise
MRA was used in order to test influence of environmental factors on market orientation construct.

2
Convergent validity referes to the degree to which the scale correlates in the same direction with other measures of
the same construct (in other words, the items show homogeneity within the same construct). Discriminant validity
referes to the extent to which a measure is distrinct from other measures, that is, it shows heterogeneity between
different constructs (Malhotra, 1996)
MORA suppose existence of moderator variable. A moderator effect implies that the moderator
variable modifies the form of the relationship between the predictor variable and the criterion
variable. MORA indicates existence of four different types of moderator variables: pure moderator,
quasi-moderator, homologizer or predictor (non-moderator).

METHODOLOGICAL/PHILOSOPHICAL IMPLICATIONS

The empirical market orientation for Croatian manufacturing companis has been developed on the
basis of the findings of this study. Market orientation is at the center of the model, whereas
technological turbulence and five competitive forces can be considered as antecendents of market
orientation. The relationship between market orientation and business performance is significant and
positive in case of profitability and economic performance as , whereas there is not significant
relationship between market orientation and sales growth. The relationship between market
orientation and non-economic performances is very significant and positive. The linkage between a
market orientation and performance appears to be robust across contexts characterized by varying
levels of market turbulence, technological turbulence and five competitive forces intensity.
On the basis of this findings, final model of market orientation for Croatian manufacturing
companies is presented on Figure 3.
Figure 3. – Final Model of Market Orientation for Croatian Manufacturing Companies

EXTERNAL
ANTECEDENT

FIVE COMPETITIVE FORCES

ORGANIZATIONAL COMMITMENT
RIVALRY AMONG
EXISTING COMPETITOR ESPIRIT DE CORPS

THREAT OF NEW
COMPETITOR ENTRY

BARGAINING POWER OF
SUPPLIERS

BARGAINING POWER OF
BUYERS
THREAT OF SUBSTITUTES
MARKET ORIENTATION
* INTELIGENCE GENERATION
* INTELLIGENCE DISSEMINATION
* RESPONSIVENESS

BUSINESS PERFORMANCE

TECHNOLOGICAL
TURBULENCE
ECONOMIC PERFORMANCE

PROFITABILITY

INTERNAL ANTECEDENTS

TOP MANAGEMENT

INTERDEPARTMENTAL
DYNAMICS

ORGANIZATIONAL
SYSTEMS
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