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Journal of Business & Industrial MarketingMarket orientation and performance: the moderating effects of product and customer differentiation
Alfred M. Pelham
Ar tic le information:To cite this document: Alfred M. Pelham, (1997),"Market orientation and performance: the moderating effects of product and customer differentiation", Journal of Business & Industrial Marketing, Vol. 12 Iss 5 pp. 276 - 296Permanent link to this document:http://dx.doi.org/10.1108/08858629710183257
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http://dx.doi.org/10.1108/08858629710183257
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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 inmost industrial firms (Webster, 1981)?
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.
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.
276 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997, pp. 276-296 © MCB UNIVERSITY PRESS, 0855-8624
Market orientation and performance:the moderating effects of productand customer differentiation
Alfred M. Pelham
An execut ive summ ary
for m anagers and
execut ives can be found
at the end of th i s
art ic le
Appropriate strategydecisions
Defining marketorientation
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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 sustaincompetitive 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).
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
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 277
Sustainable competitiveadvantage
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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.
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 intensity on the market
orientation-performance relationship. These results may have beeninfluenced by methodological limitations which we will discuss in the
methodology section of this article.
In addition to methodological limitations of these studies, the examination
of the moderating influence of individual environmental characteristics may
result in a false conclusion because industry environment characteristics
may act in combination, rather than singly, to influence the strength of
variable relationships. We suggest that it is more appropriate to study the
impact of the industry environment by examining the combination of
influences.
Product and customer differentiationHambrick and Lei’s (1985) results indicate that customer and product
differentiation are significant contingency variables in the strategy-
performance relationship. Groups of customers are considered differentiated
if their needs and buying motives are different. An example of differentiated
customer groups would be end-users and original equipment manufacturers.
Products are considered differentiated if customers perceive significant
differences in the features and benefits of competitive products. An example
of differentiated products would be diagnostic monitoring equipment
compared to undifferentiated metal bolts.
Sheth (1985) argues for a conceptualization in business markets based on
product and customer differentiation. He suggests that different types of competitive structures are emerging in business markets. His new
determinants of competitive structure are anchored in the dimensions of
product differentiation and market differentiation, with four competitive
structures proposed. Figure 1 provides Sheth’s typology, expanded to include
expected levels of importance and prevalence of market orientation as well
as expected levels of competitive intensity, complexity (from levels of
product and customer differentiation) and dynamism (or change in
technology and customer needs).
In the quadrant labeled commodity markets with a low level of product and
customer differentiation we would expect that a production orientation, with
a focus on low costs, would be a stronger source of sustainable competitive
advantage (SCA), compared to a market orientation. This expectation is
278 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Methodologicallimitations
Conceptualization in
business markets
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based on the low product differentiation and customer differentiation which
results in easier understanding of customer needs/buying criteria.
Undifferentiated products sold to a homogeneous set of customers are lesslikely to experience the same customer satisfaction problems associated with
complex products across a heterogeneous set of customers, so extensive
customer satisfaction monitoring and reaction systems may not be as crucial
as in differentiated products industries. As indicated by Day and Wensley
(1983): “When market demand is predictable, the competitive structure isconcentrated and stable, and there are a few powerful customers, the
emphasis is necessarily on competitors. But, a high level of the competitive
orientation component of market orientation may not be critical to monitorcompetitive product modifications, understand competitive strategies, and
react to those competitive actions.
However, Day and Wensley (1983) argue that, even in homogeneous product
markets, completely price-oriented, competitor-centered measures have
drawbacks. They suggest that “The preoccupation with costs and internalactivities may obscure opportunities for differentiation through creative
linkages of seller, distributor and buyer value chains. Such a perspective also
deflects attention from changes in market segment structures or customer
requirements that might shift attribute judgments. Further, the competitors
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 279
Differentiated markets
Driving force:R&D success
• Competitive intensity: Medium• Complexity: High• Dynamism: High
Market orientation:Medium importanceMore prevalent
Industry example:Industrial machineryPlastics
Fragmented markets
Driving force:Ultra specialization
• Competitive intensity: Low• Complexity: Highest• Dynamism: High
Market orientation:Highly importantMost prevalent
Industry example:ElectronicsInstruments
Commodity markets
Driving force:Economies of scale
• Competitive intensity: Highest• Complexity: Lowest• Dynamism: Low
Market orientation:Less important but rare
Industry example:Basic metalsChemicals
Segmented markets
Driving force:Application-basedcustomization
• Competitive intensity: Medium• Complexity: Medium• Dynamism: Low
Market orientation:Medium importance butmore prevalent
Industry example:Fabricated metalsPackaging
Customer differentiation
Productdifferentiation
High
Low
Low High
Figure 1. Sheth’s model of determinants of industrial competitive structure with
expected levels of environment characteristics and market orientation
Drawbacks
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are assumed to be doing a proper marketing job.” They further argue that it
is important in industrial commodity industries to compete on more than a
price basis by strengthening buyer-seller relationships and providing
superior service. Non-price sources of competitive advantage may be
especially important for smaller commodity products firms, which have less
potential for a low-cost producer strategy based on economies of scale. A
small firm with a high level of market orientation may secure a strong
competitive advantage in a commodity product environment because most
large firms respond to the very high level of price-oriented competitive
intensity with an emphasis on cost-oriented activities. A market-oriented
small firm might be able to achieve high customer satisfaction levels in a
commodity market niche by emphasis on superior service or a highly
customized product application.
At the other extreme of Sheth’s continuum of business markets is the
fragmented markets quadrant with differentiated products and differentiated
customers. Examples of industries in this quadrant are electronics and
instruments. The driving force for competitive advantage in this sector is
niching or ultra specialization. A high level of market orientation isnecessary to implement a niching strategy effectively and to focus for R&D
efforts effectively. In this quadrant we would expect that a high level of
market orientation is critical for successful new product introductions
because of the difficulty of understanding and dealing with the complex
array competitive product features/benefits. Market orientation is also
critical because of the difficulty of developing and updating products in an
environment with diverse and fast changing customer needs/buying
motivations. This diversity makes “partnering” with lead customers (von
Hipple, 1982) especially difficult. Competitive monitoring and reaction to
competitors is difficult because of the pace of new product introductions and
the diversity of types of competitive strategies. The complexity of specialty
products also makes the customer satisfaction task more difficult because of
quality control concerns. However, Jaworski and Kohli (1993) hypothesize
that, in highly technologically dynamic industries undergoing a fast pace of
new product development, R&D competence may overshadow market
orientation as the most important source of competitive advantage.
Therefore, market orientation may be recognized by many managers as
important for firm success, which should influence high industry market
orientation levels, but achieving high levels of R&D competence may be the
strongest source of competitive advantage. They also suggest that in these
markets, higher levels of growth (and market expansion possibilities) reduce
the competitive intensity level, which in turn reduces the pressure to foster
market orientation. However, the predominant firm orientation may be atechnical orientation, in which case market orientation would be a strong
source of sustainable competitive advantage if competitive levels of
technical competence are fairly even in an industry.
It is possible that the market orientation-performance relationship may be
strongest in one of the quadrants where one of the variables of product and
customer differentiation is high, while the other is low. This would describe
Sheth’s differentiated markets quadrant, where product differentiation is
high but customer differentiation is low. An industry example would be
industrial machinery. Sheth suggests that the driving force for competitive
advantage is R&D success, which may overshadow market orientation. The
reduced complexity resulting from a less diverse set of customers should
reduce the importance of market orientation, while the higher level of
280 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Fragmented markets
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competitive intensity from reduced opportunities to market products should
foster higher levels of industry market orientation.
Sheth’s segmented markets quadrant is described as low in product
differentiation, but low in customer differentiation. An example on an
industry in this quadrant is packaging. Sheth suggests that the driving force
for competitive advantage is application-based segmentation. The argumentsfor a low or high influence of market orientation on performance are similar
to those for commodity markets. However, in segmented markets
understanding of a diverse set of customers is important to implement
application based customization successfully. However, because of more
outlets for the company’s product, there should be less competitive intensity,
which should reduce the pressure to foster market-oriented behaviors.
Balancing the conflicting forces of importance of market orientation
compared with relative prevalence of those behaviors, we would expect a
stronger market orientation-performance relationship in differentiated and
fragmented markets quadrants, compared to commodity and segmented
markets quadrants. We expect that high levels of industry complexity anddynamism make marketing planning and execution extremely difficult. We
expect that, although it is logical to expect managers to foster market-
oriented behaviors in response to that difficulty, a technical orientation is
prevalent in many firms in these quadrants, offering a strong source of
sustainable competitive advantage to a highly market-oriented firm.
Therefore we offer the following hypotheses for the overall impact of
product and customer differentiation:
H1: Product differentiation is a positive and significant influence on the
strength of the market orientation-performance relationship.
H2: Customer differentiation is a positive and significant influence on the
strength of the market orientation-performance relationship.
Despite the expectation of a similar influence of product and customer
differentiation, we will examine the strength of the market orientation-
performance relationship in each quadrant, based on Sheth’s suggestions of
differing driving forces for success in each quadrant. It is possible that the
combination of industry environment influences in the differentiated markets
results in a stronger influence on the market orientation-performance
relationship than in the fragmented markets quadrant.
Method
We sought to avoid methodological problems which may have influenced
the results of previous studies of the impact of the market environment onthe market orientation-performance link. Among these problems are:
(1) confounding influence of the consumer goods/industrial products
dichotomy (Day et al., 1983; Hambrick and Lei, 1985),
(2) inadequate variance in environmental measures across respondents
(Calder et al., 1982),
(3) single measures of performance (Gupta and Govindarajan, 1983;
Venkatraman and Ramanujam, 1986),
(4) averaging the responses of firm critical informants without adequate
demonstration of high inter-rate reliability (Phillips and Bagozzi, 1986),
and using responses from the same respondents for both independent
and dependent variables.
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 281
Balancing conflictingforces
Differing driving forces
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Measures of constructs of interest
All agree/disagree or semantic differential measures utilized a seven-point
scale. A pilot study was conducted to determine the reliability and validity of
114 potential measures of constructs of interest. In addition to measures of
market orientation used by Narver and Slater (1990) and Kohli and Jaworski
(1990), other measures were included as suggested by other Kijewski and
Gross (1990) for a total of 42 initial measures. Based on the criteria of total
construct reliability and convergent/discriminant validity of the dimensions
of market orientation, nine market orientation measures were retained for the
final survey instrument.
Since one of this study’s purposes was to examine the differences across
quadrants in the levels and influences of the individual dimensions of market
orientation as well as the total construct of market orientation, convergent/
discriminant validity across market orientation dimensions was also important
to this study. This study’s dimensions of market orientation (customer
understanding orientation, customer satisfaction orientation, and competitor
orientation) are slightly different from Narver and Slater’s (1990) dimensions.For a theoretical discussion on why interfunctional coordination should be a
part of customer orientation and the problems with Jaworski’s (1990)
information processing dimensions see Deshpande et al. (1993). Customer
satisfaction orientation reflects those behaviors described by Narver and Slater
(1990) as building and maintaining a long-run, mutually beneficial
relationship with buyers by sharing the superior value created for them.
Higher levels of dimension convergent/discriminant validity were achieved
at the expense of reduced overall market orientation reliability score.
Measurement of convergent/discriminant validity was accomplished with
LISREL measurement model analysis (Anderson and Gerbing, 1988) which
provides a more stringent assessment method than conventional
confirmatory factor analysis. Market orientation and other measures are
provided in Tables I-V. Included in these Tables are the scores for coefficient
alpha/item correlations to total construct, LISREL reliability scores,
conventional confirmatory factor analysis loadings, and correlations between
the firm president and sales manager on the measure.
LISREL reliability scores reflect the requirement that there be only one path
from a measure to a dimension, despite the high correlations between the
dimensions of a construct such as market orientation. The LISREL
measurement model indicated that the market orientation dimensions are
highly correlated:
(1) customer understanding orientation with customer satisfaction
orientation (0.31) and with competitive orientation (0.41),
(2) customer satisfaction orientation with competitive orientation (0.67).
Despite these significant dimension correlations, discriminant validity (uni-
dimensionality) of dimension measures was achieved, as evidenced by the
reliability scores for these measures.
An indication of the convergent validity of the market orientation construct
is its high (0.23) and significant ( p = 0.01) correlation with growth/
differentiation strategy, compared to the correlation with low-cost strategy
(– 0.02; n.s.).
Twelve subjective performance measures were included in this study (based
on Covin et al., 1990; Gupta and Govindarajan, 1983) which assess the
282 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Measurement of convergent/discriminantvalidity
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respondents’ judgment as to satisfaction with their firm’s performance on the
criteria (relative to competitive firms). Since most of the firms sampled were
privately held, subjective measures of performance were used due to the
reluctance of private firm managers to divulge information considered
confidential. However, as noted by Narver and Slater (1990), previous
studies have found a strong correlation between subjective assessments andtheir objective counterparts (e.g. Dess and Robinson, 1984). The
performance dimensions resulting from factor analysis; profitability/cash
flow; market position/growth; firm effectiveness) were similar to those
found by Covin et al. (1990).
Tables I-V also provide measures of the industry environment: product and
customer differentiation, technical and market dynamism, and competitive
intensity. Product differentiation is measured by the similarity or difference in
industry products. Customer differentiation is measured by the extent of
customer differences in size, product-benefit needs, nature of the buying
process, and purchase criteria. Technical dynamism reflects the extent of
change in production/service technology and the number of new products form
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 283
Factor Correlation
Alpha/ LISREL analysis of
item corr. reliability loading respondents
Market orientation 0.88
Customer understanding orientation 0.88
1. Constantly monitors level of
commitment to customers 0.88 0.63 0.74 0.58 **
2. Strategy for competitive
advantage based on understanding
of customer needs 0.87 0.60 0.77 0.66 **
3. Managers understand how entire
business can create customer value 0.88 0.58 0.84 0.42 **
Customer satisfaction orientation 0.93
4. Amount of attention to after
sales service 0.90 0.33 0.67 0.50 **
5. Speed of response to negative
customer satisfaction information 0.94 0.50 0.74 0.36 **
6. Marketing strategy driven by
understanding of creating
customer value 0.95 0.47 0.60 0.42 **
Competitive orientation 0.90
7. Salespeople share competitiveinformation frequently 0.92 0.61 1.0 0.29 *
8. Top managers discuss
competitive strengths and
strategies frequently 0.92 0.40 0.35 0.44 **
9. Frequently take advantage of
targeted opportunities to take
advantage of our competitors’
weaknesses 0.88 0.38 0.37 0.41 **
Notes: Significance
* = p < 0.01;
** = p < 0.001
Table I. Measures of constructs
Measures of industryenvironment
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technological breakthroughs. Market dynamism reflects the extent of change in
customer product preferences and the extent that customers look for new
products. Competitive intensity is measured by the perception of competitive
intensity, the frequency of price wars and the frequency of competitive moves.
Critical informants
We used the responses of one firm respondent for measures of independent
variables and responses of the other firm respondent for dependent variables
to eliminate “halo effects,” the tendency of independent variable responses
to bias dependent variable responses.
We argue that, although other internal critical informants could provide
reliable assessments of the firm’s level of market orientation, sales managers
284 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Factor Correlation
Alpha/ LISREL analysis of
item corr. reliability loading respondents
Satisfaction with performanceTotal performance alpha 0.78
Firm effectiveness 0.78
1. Relative product quality 0.80 0.21 0.52 0.27 *
2. New product success 0.74 0.22 0.50 0.45 **
3. Customer retention rate 0.76 0.35 0.46 0.49 **
Growth/share 0.72
4. Sales level 0.71 0.80 0.92 0.55 **
5. Sales growth rate 0.69 0.78 0.83 0.53 **
6. Relative market share 0.76 0.20 0.48 0.48 **
Profitability 0.69
7. Return on equity 0.68 0.66 0.83 0.58 **
8. Gross profit margin 0.69 0.75 0.82 0.55 **
9. Return on investment 0.70 0.79 0.92 0.60 **Competitive intensity
Alpha 0.90
1. Intensity of competition 0.88 0.73 0.38 0.49 **
2. Frequency of price wars 0.91 0.76 0.48 0.47 **
3. Frequency of new competitive
moves 0.85 0.61 0.50 0.47 **
Technical/market dynamism
Alpha 0.75
4. Change in production/service
technology 0.72 0.50 0.39 0.49 **
5. Number of new products from
technological breakthroughs 0.65 0.39 0.50 0.41 **
6. Extent of change in customer
product preferences 0.77 0.67 0.55 0.42 **7. Extent customers look for new
products 0.80 0.85 0.43 0.41 **
Differentiation
Alpha 0.86
8. Customer differences in size, needs,
buying process, and purchase
criteria 0.85 0.16 0.58 0.24 *
9. Products similarity/differences 0.86 0.38 0.52 0.23 *
Notes: Significance
* = p < 0.01
** = p < 0.001;
Table II. Measures of performance and environment
Reliable assessments
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probably provide the most informed judgment of the firm’s level of market
orientation because their frequent contact with customers provides them with
comparisons of their firm’s market orientation level with the market
orientation levels of other firms, from the customers’ viewpoint.
We argue that, for small firms and privately-held firms, the president is the
preferred critical informant for profitability measures. In these firms, the useof other informants for measures of profitability introduces high levels of
random error because profitability data are often closely held information.
Although t -tests of the differences in critical informant responses
were not significant (with the exception of product differentiation) and the
correlations of their responses were significant (Tables I-V), the conclusion
of discriminant and multitrait multi-method analysis indicated that the
responses of the two critical informants should not be averaged.
Sampling frame
We included only small industrial manufacturing firms ($20 to $100 million)
in our study to reduce the confounding influences of firm (or SBU size),firm structure variables, and the differences between industrial and consumer
goods firms. The average size of responding (and nonresponding firms) was
$41 million. There were no significant interactions between firm size and
any independent variables.
Four-digit SIC code industry selection in the sampling frame was based on
expectation that the chosen industry would produce sufficient variance on the
key dimensions of product or customer differentiation as well as other key
variables. An examination of sample means and standard deviations indicated
that this objective was accomplished. Industry selection was aided by
Hambrick’s (1983a) study of the characteristics of industrial firms. Half of
the firms surveyed were in industries such as packaging, chemicals, and
metals industries which were expected to fit into Sheth’s (1985)classifications of commodity or segmented markets. Half of the firms
surveyed were in industries such as plastics, electronics, instrument, and
machinery industries which were expected to fit into Sheth’s classifications of
differentiated or fragmented markets. A total of 1,200 firms were drawn from
57 four-digit SIC codes listed in Ward’s Business Directory of US Private and
Public Companies (1992). Two-hundred-and-seventy-firms (22 per cent)
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 285
Standard
Mean deviation
Market orientation 4.74 0.97Growth/differentiation strategy 4.20 1.52
Low-cost strategy 4.23 1.49
Firm effectiveness 4.86 1.07
Growth/share 4.33 1.29
Profitability 4.40 1.53
Technical dynamism 3.39 1.35
Market dynamism 3.73 1.34
Product differentiation 3.54 1.50
Customer differentiation 4.44 1.54
Competitive intensity 4.85 1.06
Market growth 2.87 1.762
Table III. Descriptive statistics (for reviewers only)
Key dimensions
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returned questionnaires from the original 1,200 survey instruments mailed.
However, only 160 firms (14 percent) sent in responses from both the
president and sales manager, which was important for our purposes since we
used the sales managers’ responses for independent variables and presidents’
responses for dependent variables. This low response rate of firms with both
respondents may have been a function of the size of the firms in the sample,
the request for multiple respondents, the use of small firm presidents as
respondents, or resistance to academic survey completion due to the over
sampling of these respondents. To examine nonresponse bias we investigated
the commodity/specialty composition of responding firms versus the non-
responding firms. The composition of responding firms was 47 percent
commodity/segmented and 53 percent commodity/segmented, compared with
the 50/50 percent breakdown for nonresponding firms. An additional
comparison of responding and nonresponding firms on the basis of dollar
sales showed no significant difference.
Data analysis
The study of the moderating influences of the market orientation-performancerelationship followed procedures suggested by Prescott (1986) and Sharma
et al. (1981). An environmental variable would be a pure moderator if there is
a significant interaction between it and market orientation as a determinant of
performance, but no significant relationship between the environment
variable and performance or market orientation. There was only one
significant correlation between product or customer differentiation and
market orientation or performance. Product differentiation is positively (0.15)
and significantly ( p < 0.05) correlated with firm effectiveness.
All multiple regression models include the following variables: market
orientation, product differentiation, customer differentiation, competitive
intensity, market growth, low-cost strategy, growth/differentiation strategy,
technical dynamism and market dynamism.
We examined the means of levels of market orientation and other variables
to develop an understanding of the nature of competition in each of Sheth’s
(1985) quadrants. We then examined partial correlations (controling for the
influence of other independent variables) between market orientation and
performance dimensions in each of Sheth’s quadrants to determine if there
were significant differences in the strength of the relationship.
Results
Sheth’s typology
An examination of the means for variables of interest tended to confirm
Sheth’s typology of business markets. The mean for low-cost strategy incommodity markets (4.56) is significantly higher than in the other three
quadrants, with the lowest level (4.18) reported in the fragmented markets
quadrant. The mean for growth/differentiation strategy in differentiated
markets (4.43) is highest, while the mean in the commodity quadrant is
lowest (3.89). Differences in levels of strategies across quadrants are more
pronounced for larger firms as indicated in Figure 2. The growth level in
the commodity quadrant is lowest (2.61), while it is highest in the
fragmented quadrant (3.02). The level of technical dynamism is lowest
(2.7) in the commodity quadrant and highest in the fragmented quadrant
(3.9) The level of market dynamism is lowest in the commodity quadrant
(3.0) and highest in the differentiated markets quadrant (4.2). Product
differentiation has a stronger influence on technical dynamism (correlation
286 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Moderating influences
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of 0.35; p < 0.001) and market dynamism (correlation of 0.29; p < 0.001),
compared to customer differentiation (correlations of 0.21, p < 0.01; 0.13,
not significant).
There is little difference in market orientation levels across quadrants, with a
slightly higher level in the differentiated quadrants sector. However, splitting
sample firms in each quadrant by firm size indicated a more pronounced
difference for larger firms across quadrants, with lower levels in the
commodity and segmented quadrants.
An examination of the average 4-digit SIC industry sales levels in these
quadrants indicates much larger firms in the commodity quadrant ($22
million) quadrant and the segmented quadrant ($31 million), than in the
differentiated quadrant ($18 million) and fragmented quadrant ($15 million).
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 287
Pearson correlations of environmental variables
( N = 160)
(1) TD MD PD CD MG CI GDS LCS MO P GS MSE
TD 1.00
MD 0.56 1.00
(2) ****PD 0.35 0.29 1.00
**** ****
CD 0.21 0.13 0.26 1.00
*** ****
MG 0.15 0.21 0.16 0.07 1.00
* *** **
CI 0.05 0.01 –0.15 0.04 –0.10 1.00
**
GDS 0.17 0.33 0.11 –0.08 0.03 –0.05 1.00
** ****
LCS –0.14 –0.20 –0.09 –0.01 0.00 0.16 –0.08 1.00
* *** **
MO 0.05 0.02 0.07 –0.12 –0.02 0.20 0.22 –0.02 1.00
*** ***P –0.01 0.04 0.07 –0.08 0.13 0.02 0.22 0.03 0.21 1.00
*** ***
GS 0.03 0.00 –0.02 0.05 0.27 0.00 0.03 0.10 0.23 0.38 1.00
**** *** ****
FE 0.09 0.12 0.15 0.06 0.12 –0.07 0.03 0.20 0.20 0.31 0.41 1.00
* *** *** **** ****
TP 0.03 0.06 0.09 0.02 0.24 –0.01 0.12 0.15 0.28 0.79 0.75 0.71
**** * **** **** **** ****
Notes:
1. Variables are:
technical dynamism (TD) market dynamism (MD)
product differentiation (PD) customer differentiation (CD)
market growth (MG) competitive intensity (CI)growth/differentiation strategy (GDS) low-cost strategy (LCS)
market orientation (MO) profitability (P)
growth/share (S) firm effectiveness (FE)
total performance (TP)
2. Significance: * = 0.10; **= 0.05; ***= 0.01; **** = 0.001
3. Market growth: 1 = < 0 percent; 2 = 1-5 percent; 3 = 6-10 percent; 4 = 11-15
percent; 5 = 16-20 percent; 6 = 21-25 percent; 7 = >25 percent;
Table IV. Pearson correlations of environmental variables (n = 160)
(for reviewers only)
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Mapping of industries based on the dimension of product and customer
differentiation place the industry examples is noted in Figure 1 in the
appropriate quadrants.
Impact of product and customer differentiation
Although the parameters for interaction of market orientation with productdifferentiation approached significance ( p < 0.10), none was statistically
significant. The only statistically significant ( p < 0.01) interaction parameter
is the interaction of customer differentiation and market orientation (0.18
standardized) when the dependent variable is firm effectiveness, indicating a
pure moderating relationship. Based on moderated regression analysis, there
is no support for H1 and only partial support for H2.
However, as the results of partial correlation analysis presented in Figure 3
indicate, it is important to examine complex environmental relationships by
more detailed analysis incorporating the combination of environment
characteristics. This was done per Sheth’s typology of business markets.
Examination of the partial correlations for the performance variable of firmeffectiveness reveals relationships hidden by examination of the separate
influence of product and customer differentiation. Examination of the partial
correlations in the individual quadrants reveals the cause for lack of
288 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Differentiated marketsN = 33
Competitive intensity 4.77Technical dynamism 3.44
Market dynamism 4.16Market growth 2.89Market orientation 4.83
Firms$41
Market orientation 4.86 4.75Growth/differentiationstrategy 4.33 4.64Low-cost strategy 4.19 4.21
Customer differentiation
P r o d u c t d i f f e r e n t i a t i o n
High
Low
Low High
Fragmented marketsN = 40
Competitive intensity 4.97Technical dynamism 3.90
Market dynamism 3.94Market growth 3.02Market orientation 4.68
Firms$41
Market orientation 4.65 4.76Growth/differentiationstrategy 4.21 4.19Low-cost strategy 4.24 4.03
Commodity marketsN = 38
Competitive intensity 4.97
Technical dynamism 2.71Market dynamism 2.98Market growth 2.61Market orientation 4.62
Firms$41
Market orientation 4.82 4.36Growth/differentiationstrategy 3.98 3.77Low-cost strategy 4.33 4.86
Segmented marketsN = 34
Competitive intensity 4.62
Technical dynamism 3.32Market dynamism 3.86Market growth 2.74Market orientation 4.65
Firms$41
Market orientation 4.80 4.32Growth/differentiationstrategy 4.16 4.54Low-cost strategy 4.00 3.91
Notes: Firms were split on the mean level of sales of $41 millionThe strategy types are growth/differentiation strategy and low-cost strategy
Figure 2. Means of characteristics by differentiation quadrant
Mapping of industries
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significant moderating influences of individual environment variables. The
quadrant with the lowest partial correlation (–0.15) is the commodity
markets quadrant, as would be expected. But the highest partial correlation
(0.47) is in the segmented markets sector where customer differentiation is
high, but product differentiation is low. The reason for this strong
relationship may be due to the difficulty of positioning nondifferentiated
products across diverse customer groups and the relatively low level of
market orientation among larger firms in this quadrant. The second highest
partial correlation (0.36) is in the differentiated markets quadrant, which
may be due to the importance of focusing R&D competence toward areas of
value to customers and the difficulty of maintaining customer satisfaction
with diverse and complex products.
The highest partial market orientation-growth/share correlation (0.38) is in
the differentiated markets quadrant, while the lowest correlations are in the
commodity (0.04) and segmented markets (0.05) quadrants. A possible
explanation, beyond those given above, is the importance of satisfying a
limited set of customer segments when there are fewer opportunities to
diversify to other markets. An additional explanation may be the tendency of
top managers with technical backgrounds to foster a technically-oriented
culture in firms in this quadrant.
The highest market orientation-profitability partial correlation (0.40) is also
in the differentiated markets quadrant, compared to low partial correlations
in commodity and segmented markets sectors. In addition to the possible
explanations given above, it is possible that the impact of poor new product
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 289
Differentiated marketsN = 33
Market orientation and:
Firm effectiveness 0.36*Growth/share 0.38*Profitability 0.40**
Customer differentiation
P r o d u c t d i f f e r e n t i a t i o n
High
Low
Low High
Notes:Significance: * = p < 0.05; ** = p < 0.01; *** = p < 0.001
Partial correlation coefficients different across cell(s) atp < 0.05 (1 tailed) employing
Fisher’s Z -test (Hambrick and Lei, 1985)
Fragmented marketsN = 40
Market orientation and:
Firm effectiveness 0.27Growth/share 0.24Profitability 0.22
Commodity marketsN = 38
Market orientation and:
Firm effectiveness –0.15Growth/share 0.04Profitability 0.10
Segmented marketsN = 34
Market orientation and:
Firm effectiveness 0.47**Growth/share 0.05Profitability 0.05
Total highproductdifferentiation
0.30*0.37**(2)0.15
Total lowproductdifferentiation
0.25*0.090.18
Market orientationand:
Firm effectiveness 0.18 0.31*Growth/share 0.36**(2) 0.15Profitability 0.17 0.13
Total lowcustomer
differentiation
Total highcustomer
differentiation
Figure 3. Partial correlation coefficients: market orientation and performance
Highest correlation
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development and customer retention efforts on profitability is more severe in
this quadrant. A highly market-oriented firm in this quadrant should have
lower expenses associated with new product failures and correcting quality
control problems.
The lower partial correlations in the commodity and segmented quadrant is
consistent with expectations that market orientation would be a less
significant determinant of performance in markets where cost cutting and
economies of scale are the dominant source of sustainable competitive
advantage.
Although the correlations in differentiated markets are not significantly
higher than in the fragmented markets quadrant, it appears, contrary to
expectations, that the impact of market orientation in fragmented markets is
not at the highest level, but at a medium level. Perhaps, the fragmented
nature of these markets with smaller competitors and more growth options
reduces the importance of market orientation for small firms.
Discussion
The results of the analysis of partial correlations in Sheth’s (1985) industry
quadrants based on high and low product and customer differentiation
indicate the importance of treating the industry environment as a complexcombination of influences. Analysis of the impact of one industry
characteristic at a time does not provide a sufficient understanding of the
influence of the industry on determinants of firm performance. For
instance, in this study only one of six possible interactions between
product and customer differentiation is significant (at the p < 0.05) level,
which would lead us to conclude the industry environment has little
influence on the strength of the market orientation-performance
relationship.
Market orientation should be a strong source of sustainable competitive
advantage (SCA) in any industry situation because of the difficulty of
influencing corporate culture and potential ambiguity about the value of a
market orientation culture. Market orientation should be a strong source of
290 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997
Interaction beta coefficients (and standard errors)
Interaction of market
orientation with moderator Dependent variable
variable Firm effectiveness Growth/share Profitability
Product 0.10 0.08 0.04
Differentiation (0.08) (0.09) (0.09)
(2)
Customer 0.18** 0.01 0.06
Differentiation (0.09) (0.09) (0.10)
Model R2
Without interactions 0.16 0.16 0.10
With interactions 0.20 0.18 0.12
Notes:
1 Significance: * = p < 0.05; ** = p < 0.01; *** = p < 0.001
2 Significance of parameter; significance of addition of moderating variable:
F = 4.3, p < 0.05
Table V. Tests for moderator effects of competitive environment on market orientation-performance relationships (for reviewers only)
Market orientation
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SCA because a highly market-oriented firm should make better decisions
and better implement those decisions when all managers and employees
have a good understanding of customers’ needs, competitive strengths, and
have a strong motivation to achieve superior customer satisfaction. Market
orientation should be a strong source of market orientation in industrial firms
noted for orientations other than market orientations. Market orientation
should be an especially strong source of market orientation in small
industrial firms because small firms are noted for their low levels of formal
planning (Sexton and VanAuken, 1985) and formal market research
(McDaniel and Parasuraman, 1986).
But, the results of partial correlation analysis indicate that the market
orientation-performance relationship is strongest in differentiated markets
(characterized by low levels of customer differentiation and high levels of
product differentiation). This may be due to the decision difficulty under
conditions of uncertainty, complexity, and fast changing conditions. This
difficulty would seem to override the tendency of firms in these industries to
place more emphasis on fostering a market orientation culture.
The relationship between market orientation and firm effectiveness (relative
product quality, new product success, and customer retention) is much
stronger in segmented markets (with high customer differentiation, but low
product differentiation), compared to commodity markets. This may be due
to the difficulty of achieving high levels of success in firm effectiveness
because of the difficulty of understanding and satisfying very different
customer needs and because innovation through “partnering” with lead
customers is more difficult. This relationship may also be due to the
tendency to de-emphasize the importance of market orientation when the
firm has more customer segment options to market its product. This
relationship may be due to higher levels of market orientation for small
firms, compared to larger firms, which offers the small firm a competitiveadvantage over larger firms who only emphasize low price. In this quadrant,
large firms have the resources to organize operations by type of customer to
ensure that their product offering meets unique customer needs. Smaller
firms must rely on a market-oriented culture to deliver customer satisfaction
across diverse customer groups.
Although, the partial correlations between market orientation and
performance in the commodity segment were low and not statistically
significant, the relatively low level of larger firm market orientation, even
with the sampling frame of firms under $100 million, indicates a viable
method to compete in a cost-oriented industry quadrant.
Study limitations and research directions
Due to the nature of this study’s sampling frame, the generalizability of the
conclusions as to the moderating influences of customer differentiation is
limited to small industrial firms. Given the differences in levels of market
orientation between smaller and larger firms in commodity and segmented
markets, it is important to study the market orientation-performance
relationship across quadrants for large industrial firms. Future studies should
also study these relationships among consumer goods manufacturing firms
and service/retail firms.
Conclusions of a causal nature are limited by the cross-sectional nature of
this study. Future studies should employ longitudinal data, by type of
industry, to confirm the conclusions of this study.
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 291
Viable method
Results of partialcorrelation analysis
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Executive summary and implications for managers andexecutives
Market orientation may not be everything you need for success but it can
help any industrial firm
Small industrial firms often have a hit and miss approach to marketing. Mostly, these firms are led by engineers, scientists or finance people who
find marketing unscientific and, occasionally, distasteful. And customers in
these firms are assumed to share this mistrust of flash marketing people and
manipulative advertising. Yet, as Pelham shows here, industrial firms cannot
ignore marketing decision making nor can they operate their marketing on
the basis of copying competitors.
Market orientation represents the latest in a long line of concepts seeking to
explain why marketing communications and customer intelligence are
essential to any firm’s success. The response from those who mistrust
marketers and marketing is to say that conditions in some industries do not
justify the expense of developing market orientation. Chief among these
industries are the two extremes – commodity businesses and high-technology
firms.
For the commodity business, our cynics point out that the product differs
little from firm to firm and, in many cases, the customers are a pretty
homogeneous lot. Therefore the only focus worth taking is on cost reduction
and control since all commodities are brought on price.
On the other hand, our cynic says that high-tech business is so far ahead of
the market that the products are targeting possible rather than actual needs.
In such a situation understanding customer needs would slow down the
technological development needed to keep competitive.
Pelham shows how both these positions are both right and wrong. They are
right in that the value of market orientation appears less in these two
extreme situations and wrong in that market orientation does relate in some
way to performance.
The message for industrial firms is that you cannot ignore the needs and
opinions of your customers. It is not enough to say that all your customers
are the same – they are not. The customer may buy on price (although most
do not see this as the only criterion) and they may not fully understand the
possibilities of what you develop. But, when push comes to shove, it is the
customer who forks out to buy your product and makes it possible for your
firm to exist.
The idea that a low-cost-oriented strategy and detailed customer
intelligence are incompatible seems strange. And so does believing the best
way to develop high tech products is to put boffins in a room and have them
come up with wizzo ideas. Time and again it is shown that the customer will
pay a premium to do business with a firm they believe has their interests at
heart. And that means you must invest in the relationship with your
customers and in understanding the motivations and make-up of your
market.
So what does a more market-oriented approach mean to the two types of
firms discussed here? After all “market orientation” sounds ominously like
just another piece of mumbo jumbo intended to justify advertising or market
research budgets.
JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 12 NO. 5 1997 295
This summ ary has been
provided to al low
managers and execut ives
a rapid appreciat ion of
the conten t o f th is
art ic le. Those w ith a
part icular interest in the
topic covered may then
read t he art ic le in toto t o take advantage of the
more com prehensive
descript ion of the
research un dertaken and
its results to get the ful l
benef i t of the m aterial
present
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Commodity firms and market orientation
(1) Use your salespeople as a key source of market intelligence. Develop
systematic feedback about customer attitudes and expectations.
(2) Build in protection from price fluctuation by developing good customer
relationships. If your service and delivery are up to scratch the customer
may stay with you despite price changes because they trust you and donot want the hassle of finding and “bedding in” a new supplier.
(3) Where you depend on a relatively small number of customers set about
understanding their business. Study customers’ market trends since they
can affect demand for your product.
High-technology firms and market orientation
(1) Appreciate the gap between your technical knowledge and that of your
customers. Act as expert advisors as well as suppliers
(2) Develop close links between sales staff and technical staff. Avoid the
tendency for R&D to develop products and “chuck them over the wall”
for salespeople to promote.
(3) Involve marketing people in project planning activity for new products
rather than letting them follow the technical lead.
(4) Encourage salespeople to seek out technical problems and issues at
customer firms. Feed these challenges back to the technical areas.
Market orientation represents something more than simply good marketing
practice. Without the involvement of all staff in understanding customer
needs and problems there cannot be true market orientation.
Pelham confirms that, for some firms, orientations toward cost control or
technical advances matter as much as market orientation. But, he also
reminds us that understanding our customers does help to improve performance and the development of relationships with those customers
helps over the long term by reinforcing and protecting the firm against
competitive activity.
(A précis of the article “Market orientation and performance: the moderatingeffects of product and customer differentiation.” Supplied by Marketing
Consultants for MCB University Press.)
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