INFLUENCE OF MARKET ORIENTATION ON BUSINESS PERFORMANCE CASE: CROATIAN MANUFACTURING COMPANIES

eljko Buni, 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. Nataa Renko Supervisor: n.renko@efzg.hr 16th EDAMBA Summer Academy Soreze, France July 2007

INFLUENCE OF MARKET ORIENTATION ON BUSINESS PERFORMANCE

eljko Buni, 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 customers 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 1960s, the impact of MO on business performance and its effects were not the subjects of studies until the 1990s. 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

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.

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

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.

Figure 1. Jaworski i Kohli Model (1993) ANTECEDENTS CONSTRUCT MODERATORS CONSEQUENCES

TOP MANAGEMENT * Emphasis * Risk Aversion

EMPLOYEES * Organizational commitment * Espirit de Corps

MARKET ORIENTATION INTERDEPARTMENTAL DYNAMICS * Conflict * Connectedness * Intelligence Generation * Inteligence Dissemination * Responsiveness

OKOLINA * Market Orientation * Technological Turbulence * 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

EMPLOYEES ORGANIZATIONAL COMMITMENT

ESPIRIT DE CORPS
ENVIRONMENTAL FACTORS

RIVALRY AMONG EXISTING COMPETITOR THREAT OF NEW COMPETITOR ENTRY BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF SUBSTITUTES

MARKET TURBULENCE

MARKET ORIENTATION * INTELIGENCE GENERATION * INTELLIGENCE DISSEMINATION * RESPONSIVENESS

TECHNOLOGICAL TURBULENCE FIVE COMPETITIVE FORCES INTENSITY

MARKET TURBULENCE

BUSINESS PERFORMANCE

TECHNOLOGICAL TURBULENCE

SALES GROWTH 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% nonsignificant 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: 9

''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.

10

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 nonresponse 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.

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

11

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, 12

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.

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)

13

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.

14

Figure 3. Final Model of Market Orientation for Croatian Manufacturing Companies

EXTERNAL ANTECEDENT FIVE COMPETITIVE FORCES

EMPLOYEES ORGANIZATIONAL COMMITMENT

ESPIRIT DE CORPS

RIVALRY AMONG EXISTING COMPETITOR 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

15

REFERENCES
Avlonitis, G. J. Gounaris, S. P. (1999), ''Marketing Orientation and its Determinants : An Empirical Analysis'', European Journal of Marketing, Vol.35., No. 11/12., 1003-1037. Buchanan, B. (1974), ''Building organizational commitment: The socialization of managers in work organizations'', Administrative science Quarterly, Vol.19., No.4, 533-546. Cervera, A., Molla, A., Sanchez, M. (2001), ''Antecedentds and Consequences of Market Orientation in Public Organizations'', European Journal of marketing, Vol.35, No.11/12, 1259-1286

Cronbach, L.J. (1951), ''Coefficient Alfa and the Internal Structure of Tests'', Psychometrika, Vol.16., 297-334. Dawes, J. (1999), ''The relationship between subjective and objective company performance measures in market orientation research: further empirical evidence''; Marketing Bulletin, Vol.10., 65-75. Deshpande, R., Farley, J. U.,Webster, F. E. (1993), ''Corporate, Culture, Customer Orientation, and Innovativeness in Japanese Firms : A Quadrad Analysis'', Journal of Marketing, Vol.57., July, 2327. Jaworski, B. J.,, Kohli, A. K. (1993), ''Market Orientation: Antecedents and Consequences'', Journal of Marketing, Vol.57, July, 52-70. Kaynak E., Kara, A. (2004), ''Market orientation and organizational performansce: A comparison of industrial versus consumer companies in mainland China using market orientation scale (MARKOR)'', Journal of Small Business Management, Vol.43, No.2, 105-118. Kohli, A. K., Jaworski, B. J. (1990), ''Market Orientation: The construct, Research Propositions and Managerial Implications'', Journal of Marketing, Vol.54., April, 1-18. Lusch, R.F., Laczniak, G.R. (1987), ''The Evolving Marketing Concept, Competitive Intensity and Organisational Performance'', Journal of the Academy of Marketing Science, Vol.15, Fall, 1-11.

16

Narver, J. C., Slater, S. F. (1990), ''The Effect of a Market Orientation on Business Profitability'', Journal of Marketing, Vol. 54, October, 20-35. Ngansathil, W. (2001), ''Market Orientation and Business Performance: Empirical Evidence from Thailand'', Doktorska disertacija, Virginia University of Technology, Melbourne Nunually, J.C. (1970), Introduction to Psyhological Measurement, New York, McGraw Hill O'Cass, A., Ngo, L.V. (2005), ''Industry forces, Strategic Typologies, Firm Characteristics and brand performance: The balance between External and Internal'', ANZMAC 2005 Conference: Entreprenewurship, Innovation and New Product Development, 83-89. Peter,J.P., (1979), ''Reliability: A Review of Psychometric Basics and Recent Marketing Practices'', Journal of Marketing Research, Vol.16., May,No.1, Pitt, L., Caruana, A., Berthon, P. R. (1996), ''Market Orientation and Business Performance: Some European Evidence'', International Marketing Review, 13, 5-18. Porter, M. (1980), Competitive strategy: Techniques for analysing industries and competitors, New York, The Free Press. Ruekert, R. W. (1992), ''Developing a Market Orientation: An Organizational Strategy Perspective''. International Journal of Research in Marketing, Vol.9., No.3. 225-45. Shapiro, B.P. (1988), ''What the Hell is ''Market Oriented'', Harvard Business Review, No.6., 119125. Zebal, M.A. (2003), ''A synthesis model of market orientation for a developing coutry the case of Bangladesh'', Doktorska disertacija, Victoria University of Technology, Melbourne

17