competitive strategy in the market-focused

8/9/2019 Competitive Strategy in the Market-Focused

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Journal of Market FocusedManagement, 1, 159-174 (1996)@ 1996Kluwer Academic Publishers.Boston. Manufactured n The Netherlands.

Competitive Strategy in the Market-FocusedBusinessSTANLEY E SLATERProfessorofStrategic ManagementandMarketing, CollegeofBusinessandAdministration, University of Coloradoat Colorado Springs, Colorado Springs, CO 80933-7150

JOHN C. NARVERProfessor ofMarketing, Graduate School of Business Administration, University of Washington, Seattle, WA 98195

Abstract. Market orientation s a business ulture which enlists the participation of ah employees or the purposeof creating superior value for its customers nd superiorperformance or itself. A substantialbody of research indsa positive relationship betweena business’smagnitudeof market orientation and ts performance.However, therehas been no research nto the competitive strategies hrough which a market-orientedbusinesscreatescustomervalue. This paper extends previous work by showing that market-orientedbusinesses ggressively develop newproducts and services, focus on opportunities n market segments ather than in the massmarket, and attempt toachieve competitive advantageboth by increasingcustomerbenefitsand by reducing costs.

Keywords: market orientation, competitive strategy,businessperformance

Introduction

Webster (1992) suggests that marketing has three dimensions that must be understoodindividually and collectively to realize marketing’s potential value to the organization.These dimensions are marketing as culture, marketing as strategy, and marketing as tactics.The contribution of a market-oriented culture is swiftly moving from being merely an article

of faith in marketing and management to being accepted as fact. The compelling logic ofits superiority as a business culture is strongly supported by the rapidly developing bodyof empirical evidence that demonstrates a positive relationship between market orientationand business performance (Narver and Slater, 1990; Ruekert, 1992; Deshpande, Farley, andWebster, 1993; Jaworski and Kohli, 1993; Slater and Narver, 1994).

Market orientation, as a key element in an organization’s culture (Deshpande, Farley,and Webster, 1993), provides strong norms for organizational behavior (Deshpande andWebster, 1989) including selection of the firm’s competitive strategy (Webster, 1992) andmay be a key success for some competitive strategies (Slater and Narver, 1993). However,

Day (1992) notes that the emerging body of work describing the relationship betweenmarket orientation and performance has not discussed the specific actions that managersof market focused firms take to create and sustain competitive advantage. Understandingthe link between marketing as culture (i.e., market orientation) and marketing as strategyis important to our comprehensive appreciation of market orientation’s contribution toorganizational effectiveness. In this study we identify the strategic skills and activities ofmarket-oriented businesses so that we can understand how market-oriented businesses turntheir culture into a competitive weapon.


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160 STANLEY E SLATER AND JOHN C. NARVER

What is a Market Orientation?

Narver and Slater (1990) describemarket orientation as the businessculture that commitsthe organization to the continuous creation of superior value for customersby encouragingthree key behaviors: customer orientation, competitor orientation, and interfunctional co-ordination. This createsan environment which maximizes opportunities for learning aboutmarkets, for sharing information among all functions in the organization so that commoninterpretations are reached,and for taking coordinated action. The result is that, “A marketorientation appears o provide a unifying focus for the efforts and projects of individuals anddepartmentswithin the organization, thereby leading to superior performance” (Kohli andJaworski, 1990). Numerous studies (Narver and Slater, 1990; Ruekert, 1992; Deshpande,

Farley, and Webster,1993; Jaworski and Kohli, 1993; Slater and Narver, 1994) find a pos-itive relationship between he magnitude of a business’smarket orientation and measuresof a businessperformance.

However, our understandingof the market-orientedbusiness s incomplete in that it doesnot encompass he relationship betweenmarket orientation and competitive strategy. Un-derstanding this relationship is the objective of this study. To accomplish this, we: (1)develop a database omposedof a diverse set of small to medium-sized, single-business,manufacturing companies; 2) retest he market orientation-performancehypothesis o con-firm market orientation’s importance o the businessesn this sample;and (3) determine the

strategic profile of a market-orientedbusiness.In the following sections we discuss the theoretical relationships between market ori-entation and performance and between market orientation and three key dimensions ofcompetitive strategy: (1) product innovation (Miles and Snow, 1980;Lieberman and Mont-gomery, 1988); (2) strategic argeting (Porter, 1980); and (3) basis for strategic advantage(Porter, 1980; Day, 1990) which collectively represent he Miles and Snow (1978), Porter(1980), and order-of-entry strategy ypologies, the most widely referenced rameworks(seeWalker and Ruekert, 1987; Kerin, Varadarajan,and Peterson, 1992; and VaradarajanandPride, 1994) n strategy esearch.

Theory and Hypotheses

Market Orientation and Performance

To establish the foundation for the importance of analyzing the strategic profile, we firstexamine the relationship betweenmarket orientation and businessperformance. The theo-retical foundation for a positive relationship betweenmarket orientation and performance

is well developed e.g., Day, 1990,1994a&b; Kohli and Jaworski, 1990;Narver and Slater,1990; Ruekert, 1992; Jaworski and Kohli, 1993; Slater and Narver, 1994). We brieflyreview the major elementsof this theory.

Through its customer-valueoriented activities, the market-orientedbusiness s well posi-tioned to develop productsand ancillary services hat costeffectively satisfy customerneeds(Deshpande,Farley, and Webster,1993). Employees hroughout the organization developa thorough understandingof the customers’expressedand latent needs, requently discuss


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COMPETlTIVE STRATEGY 161

customers’ satisfaction with their products and with competitors’ products, and act quicklyto take advantage of market opportunities. A market orientation, by enabling a deeperunderstanding of customers’ needs and perspectives, enhances a business’s ability to createsuperior value for customers and thereby superior performance for itself. Furthermore, as aform of culture its basis for superior value is difficult to imitate (Barney, 1986; Day, 1994b),leading to sustainability of competitive advantage.

The market-oriented business will realize its performance potential by either: 1) maxi-mizing profit at the expense of expanded sales, 2) maximizing sales at the expense of profitmargin, or 3) balancing the trade-off between profitability and sales growth for superior over-all performance (Donaldson, 1985; Fruhan, 1984). This decision is most clearly illustratedin the choice between using a skimming pricing strategy or a penetration pricing strategy

for a superior value product. If a business elects a skimming strategy, it necessarily limitsits initial sales volume to non-risk-averse (or low price sensitivity) early adopters. Thesebuyers are willing to pay premium prices for the perceived substantial product improve-ment, which increases margins and profitability to the seller. The alternative is penetrationpricing which establishes a sufficiently low price to overcome the buyer’s perceived riskassociated with the innovation, leading to increased sales volume, but usually at lower initialprofit margins and return on investment to the seller. Finally, if the seller creates substantialbenefits for buyers, it may be possible to set a price that captures a substantial share of themarket while yielding a relatively high margin for the business. Therefore, we expect that,

depending on a business’s objectives and strategies, market orientation will be positivelyrelated to business profitability and/or sales growth.

Hl. There is a positive relationship between magnitude of market orientation andbusiness performance.

Market Orientation and Product Innovation

Product development is one of business’s most important activities. At 3M, products lessthan 5 years old account for 25% of sales. During the 1980’s, profits from new productsgrew from one-fifth of corporate profits to one-third (Takeuchi and Nonaka, 1986). Booz,Allen, and Hamilton (1982) found a similar role for new products in a study of 700 firmscompeting in industrial and consumer markets. However, product development is a highrisk activity. For example, several studies have reported failure rates in the 20-40% range(Calantone, di Benedetto, and Bhoovaraghavan, 1994).

A common representation of product development strategy is the innovativeness of newproducts introduced into new or existing markets (e.g., Kerin et al., 1992; Varadarajan and

Clark, 1994). Developing innovative products or being the first-mover with a new productconcept is the most risky product development strategy due to the difficulty of correctlyidentifying new product opportunities, uncertain technological standards, existence of com-petitors with established products that fulfill the same generic need, and buyer resistance toinnovation. Early followers are imitators that reduce risk by observing pioneers’ successesand failures, and by taking advantage of free-rider effects through lower development andmanufacturing costs. Late followers or defenders are the most risk averse in that they prefer


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162 STANLEY F. SLATER AND JOHN C. NARVER

to grow by further penetrating their traditional markets, and postpone new product devel-opment and market entry until the market’s potential is demonstrated and technologicalstandards are well established (e.g., Miles and Snow, 1978; Lieberman and Montgomery,1988; Kerin et al., 1992; Slater, 1993).

A market-oriented culture and the associated behaviors reduce many of the risks associatedwith product development (Dougherty, 1990; Calantone et al., 1994). Market-orientedbusinesses continuously monitor their external environments for new product opportunitiesand for product development threats from competitors. By focusing on customers’ latentneeds, market-oriented businesses are well positioned to recognize emerging needs andrapidly assesscustomer response to new products (von Hippel, 1986).Through their market-scanning efforts, they are able to discover underdeveloped market niches and segments(Day, 1994b), and also are able to identify opportunities created by competitors’ miscues.Market-oriented businesses exploit their capabilities by being innovators or early followers.

H2. There is a positive relationship between magnitude of market orientation andproduct development innovativeness.

Market Orientation and Strategic Targeting

Porter (1980) explains that there are two generic alternatives for how a business might targetits strategic market opportunities. First is a “market-wide” definition which implies thatbuyers’ needs are relatively undifferentiated and that the benefits to the seller from produc-ing a standard product and using mass market distribution provide the greatest opportunityfor buyer-value creation. At the other end of the spectrum is “market focus” which impliesthat the market is composed of a number of heterogeneous market segments. Each marketsegment has a relatively unique utility function, with some segments placing greater im-portance on quality, service, advanced features, or price, respectively. “The focuser selectsa segment or group of segments in the industry and tailors its strategy to serving them,”

(Porter, 1985)Where differences exist among segments in a market, the fundamental choice for sellersis between the efficiency of a market-wide approach and the increased benefits to buyersfrom a market-focused approach. Market-oriented businesses have well developed skills inboth broadly scanning existing and related markets and establishing deep relationships withkey customers. These skills enable market focused businesses to segment their markets todetermine where the greatest opportunities for profitable growth are. Their commitment tointelligence sharing, achieving a shared interpretation, and joint problem solving enhancestheir ability to profitably develop products and services targeted to relatively fine customer

definitions (Day, 1994b). These market sensing and customer linking capabilities (Day,1994b) complement a market-focused approach when it recognizes that buyers’ needsdiffer and that tailoring the offering to specific needs will make the offering more attractive,resulting in either or both additional sales in the target market and premium pricing.

Moreover, as Porter notes (1985), a focus strategy does not constrain the market drivenbusiness to competing in one segment. Market-driven businesses may pursue opportuni-ties in numerous segments, a multi-focus strategy, by adapting products to specific market


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COMPETITIVE STRATEGY 163

needs through addition of important product features or ancillary services. This providesopportunities for cost control and reduction via economies of scope. On the other hand,market-driven businesses recognize that focusing on efficiency through a market wide ap-proach necessarily limits the extent to which a seller can customize or augment the productwith features or services without jeopardizing its cost position. The result is that a market-wide definition may force the seller into price competition. Thus, we hypothesize:

H3. There is a positive relationship between magnitude of market orientation andmarket focus activities.

Market Orientation and Basis or Strategic Advantage

In today’s value-oriented environment, market-oriented businesses recognize that buyershave come to expect benefits such as high quality and superior service, but at a low price aswell (e.g., Sherman, 1992; Rice, 1992; Jacob 1993). A market orientation is fundamentallyconcerned with developing an in-depth understanding of buyers’ expressed and latent needs.Differentiation, when it provides superior customer benefits, is entirely consistent withmarket orientation’s external focus on customer needs and competitor capabilities. Thus,

we expect a strong relationship between market orientation and emphasis on differentiationeffects such as quality and service.

However, as Porter (1985) notes, “Many firms have discovered ways to reduce costs notonly without hurting their differentiation but while actually raising it.” Market-focusedbusinesses understand that lowering the buyer’s total life-cycle cost is an important compo-nent of creating superior customer value. Thus, they strive for continuous cost improvementby investing in new technologies such as flexible manufacturing, mass customization, andcomputer integrated manufacturing. These investments enable the business to offer vari-ety and rapid new product development while maintaining low cost and high productivity

(e.g., Zammuto and O’Connor, 1992; Pine, Victor, and Boynton, 1993). Consequently, themarket-oriented competitor is well positioned to create superior customer value, at a profit,by providing important benefits at a low price.

Consistent with Porter’s (1980) perspective on the generic focus strategy (similar to H3),the market-oriented business “achieves differentiation from better meeting the needs of theparticular target, or lower costs in serving the target, or both” (our emphasis). He alsoemphasizes (1985) that, “If a firm can achieve cost leadership and differentiaton simultane-ously, the rewards are great because the benefits are additive.” We hypothesize that becauseof an in-depth understanding of the totality of their customers’ needs:

H4. There is a positive relationship between magnitude of market orientation anddifferentiation activities and

H5. There is a positive relationship between magnitude of market orientation and low-cost activities.


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164 STANLEYF.SLATERANDJOHNC.NARVER

Research Design

The Sample

The samplewasdrawn from a directory of manufacturers n a midwesternstate. We selectedall businesses hat met the following criteria:

1) Salesvolume between $1 million and $50 million,

2) 10 or more employees,and

3) In business or 5 or more years.

While these businessesare headquartered n one geographical region, they compete na-tionally and internationally, thus reducing concern about generalizability. The directoryidentified the president or general manager. Each president or general manager receiveda cover letter and a questionnaire. The cover letter explained that we were conducting astudy on “Business Practices,”and the questionnaire contained the items to measure hesepractices in the business’s principal served market”.The screen resulted in a samplingframe of 977 independentbusinesses. 228 useable surveys were returned for an effectiveresponse ate of 23% which is in the typical range for mail surveys. We compared he re-

sponsesof the last 10% of respondents o the earlier majority respondentson performanceand market orientation and found no significant differences, hus minimizing concern aboutnon-responsebias.

Measures

Market Orientation: We use 12 tems from Narver and Slater’s ( 1990) measureof marketorientation (see appendix). Each of a business’scustomer orientation, competitor orien-

tation, and interfunctional coordination activities is representedby four items in the scale(a = .784). We used a reduced tem set to minimize the length of the questionnaire andencouragea higher response ate, and selected he four items representingeachactivity thathad the strongest tem-to-total correlations in their reliability analysis. Narver and Slater(1990) offer evidence of discriminant validity, convergentvalidity, and concurrent validityfor the measureof market orientation.

Performance: Businessperformance s top management’s ssessment f return on assetsand sales growth rate relative to all other competitors n the principal served market overthe past year. We select these two indicators as: (1) they are two of the most commonly

used indicators of business-level performanceby both managersand researchers Hofer,1983; Venkatraman and Remanujam, 1986); (2) they have been demonstrated o have apositive effect on the economic value of the firm (Varaiya, Kerin, and Weeks, 1987); and(3) managersoften make trade-offs between pursuing one or the other (Donaldson, 1985;Fruhan, 1984).

Each is measuredon a 1 to 7 scale with each increment representing about 15% of thecompetition in the principal servedmarket. For example, f a managerbelieves his firm’s


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performance is greater than that of 60% of competitors, performance would be rated 5.Respondents were asked to consider return on investment, return on assets, and return onnet assets as equivalent, for a business’s relative performance on each of these should bevery similar.

Measuring performance as relative performance controls for performance differencesamong the businesses’ different industries and served markets. Subjective measures of per-formance are commonly used in research on private companies or on business units of largecompanies. Previous studies have found a strong correlation between subjective assess-ments and their objective counterparts (e.g., Dess and Robinson, 1984; Pearce, Robbins,and Robinson, 1987; Venkatraman and Remanujam, 1987).

Product Development Innovativeness: Consistent with the relative risk associated with

different product development strategies, we measured this construct based on a business’srelative emphasis on [l] developing innovative new products; [2] analyzing competitiveofferings and offering imitative new products; and [3] defending existing products fromcompetitive attack. We employ a multi-item, continuous scale to counter some of the lim-itations of nominal scales for strategy research (Venkatraman and Grant, 1986; Conant etal., 1990). Following Gupta and Govindarajan (1984), we constructed a weighted aver-age strategy index based on each strategy’s importance to the SBU and its magnitude ofaggressiveness.

Respondents were asked to rate the importance of each strategy to the SBU’s overall

competitive strategy during the previous year using a 1 to 7 Likert-type scale. Sinceproduct defense is the least innovative growth strategy, it was assigned an innovativenessvalue of 1. Developing imitative new products was assigned a value of 4, and introductionof innovative new products was assigned a value of 7. Weighed average innovativenessvalues (C(innovativeness value x importance of strategy)/( C innovativeness values)) foreach SBU were then computed. High scores indicate an innovation oriented strategy.

To assess the validity of the innovativeness measure, we examined its relationship withthe importance to the business of sales growth and return on investment, respectively, forassessing performance. We expect a positive relationship between innovativeness and sales

growth as an emphasis on sustained product innovation should be reflected in a greateremphasis on sales growth as a business objective than for a late entrant whose growthis primarily from additional market penetration. With respect to ROI, businesses acrossthe innovativeness continuum should value profitability highly. Thus, there should be norelationship between innovativeness and importance of ROI as a business objective. Theserespective emphases should be reflected in a business’s planning system (Veliyath andShortell, 1993). We find a correlation coefficient of .14 (p < .05) between innovativenessand emphasis on sales growth and a coefficient of -.Ol (ns) between innovativeness andemphasis on ROI, which provides evidence of discriminant validity for the innovativeness

measure.Strategic Targeting: Strategic targeting is measured with a four item (l-7 Likeit type)

scale (a = .639) composed of: [l] segments markets; [2] systematically tracks opportuni-ties and threats in served market segments; [3] develops unique products or marketing pro-grams for groups of buyers with similar needs; and [4] uses marketing research. Extensiveuse of these practices (a high score) implies that the business concentrates on understanding


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the structure of markets and the opportunities therein, and thus a focusedstrategy, whilea low score mplies low appreciation for segmentdifferences, and thus a broad or marketwide strategy.

Basis for Strategic Advantage: Drawing on Porter (1980), Dessand Davis (1984), andMiller (1988), we developed6-item and 5-item scales o measuredifferentiationstrategy(CX .641) and low-cost strategy (a = .796). The differentiation scale describesbenefit-oriented activities including: [l] provides extensiveservice before and after sale; [2]adoptsnew marketing techniques; [3] differentiates products; [4] offers broad product line; [5]emphasizesbrand name; and [6] offers high quality products. Low-cost was assessedbasedon: [l] optimize capacity utilization; [2] raw material value analysis; [3] modernizemanufacturing; [4] plant efficiency; and [5] low manufacturing cost. Respondentswere

asked o rate he mportanceof eachof these11competitive methods o the business’soverallcompetitive strategyduring the past year using a 7-point Likert scale. A high score mpliesan emphasis on the particular approach to strategic advantage. A similar measurementapproach was employed by Govindarajan and Fisher (1990) and was demonstrated o bereliable and to have convergentvalidity.

Control Variables: The following variablesare ncluded in the analysis o control for theirinfluence of profitability and salesgrowth (Scherer,1980;Capon,Farley, and Hoenig, 1990)and because f their potential influence on strategyselection.For example,a relatively smallbusinessmight be forced nto a follower strategydue to its inability to invest n the high-risk

product and processdevelopmentactivities required of an innovator. This influence mustbe controlled to understand he fundamental relationship between market orientation andproduct development nnovation strategy.Relative Cost: Relative cost is the average otal operating costs of a businessrelative tothose of its largestcompetitor in its principal servedmarket segment on a 1 to 8 Likert typescale).Relative Size: Relative size may be an important influence on performance, particularlywhere there is a wide disparity in size of businessunit, as is the case with this sample.Using an 8 point scale (from 1 = less than one-quarter o 8 = greater han or equal to twice

as arge), respondentswere asked o indicate the volume of their revenuescompared o theirlargest competitor.Relative Quality: Basedon numerousstudies (e.g., Buzzell and Gale, 1987; JacobsonandAaker, 1987), the influence of product quality on performancehas becomewell accepted.Using a 1 to 7 (1 = very inferior, 4 = equivalent, 7 = very superior) scale, espondentswereasked o rate buyers’ perceptionsof their business’s elative product quality.Murket Growth: Respondentswere asked o estimate “the averageannual growth rate oftotal sales n your principal servedmarket segment,”over the past 3 years.Easeof Entry: Easeof entry is the likelihood of a new entrant being able to earn satisfactoryprofits in the principal served market segmentwithin three years after entry. Easy entryimplies a disadvantage o current competitors (Porter, 1980).Competitor Concentration: Respondentswere asked o estimate the proportion of salesrevenue n the business’sprincipal servedmarket segmentaccounted or by the four largestfirms, including the subject business f appropriate,using a 1 to 7 scale with 1 being lessthan 10% and 7 being more than 85%. According to economic theory, high concentration


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Table 1. Descriptive Statistics and Correlation Coefficientsn = 228

Mean(Std Dev) 1 2 3 4 5 6 I

1. Market 5.19 1 ooOrientation (0.71)

2. Return on 4.41 0.051 1.00Investment (1.77)

3. Sales 3.95 0.2063 0.4413 1 ooGrowth (1.89)

4. Market 4.65 0.3733 -0.014 0.058 1 oo

Focus (1.16)

5. Market 4.80 0.2643 -0.048 -0.032 0.4363 1 ooProactiveness (1.24)

6. Differentiation 5.15 0.3373 0.019 0.118’ 0.6443 0.5693 1 ooStrategy (0.90)

7. Low-Cost Strategy 4.49 0.2273 -0.033 0.2933 0.229” 0.184* 0.2803 1.00

1. p-.05; 2. p-.01; 3. p-001

should result in higher performance for the major competitors as they mutually recognizethe advantages of avoiding price competition.Buyer-Power: Respondents were asked to estimate “the extent to which buyers are successfulin negotiating lower prices” on a 1 to 7 scale with 1 being “not at all” and 7 being “toan extreme extent”. Porter (1980) argues that high buyer power negatively influencesprofitability.

Analysis and Results

Table 1 contains descriptive statistics for the variables involved in the hypothesized rela-tionships.

Hypothesis 1 is tested by regressing profitability and sales growth on market orientationand the full set of control variables. Hypotheses 2-5 are by regressing market proactiveness,market focus, differentiation strategy, and low-cost strategy on the same set of independentvariables. Results are shown in Table 2.

The coefficient for market orientation is positive and significant with sales growth as thedependent variable, providing partial support for Hl. Consistent with hypotheses 2 through5, the coefficient for market orientation is positive and significant in each case.


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Discussion and Implications

The results of this study suggest that market-oriented businesses are product innovators andfocus on opportunities in individual market segments by emphasizing both differentiationand low-cost strategies, as appropriate. It should be noted that the presence of a marketdriven culture is the only variable that is significantly related to all four of the strategydimensions examined and that it is the strongest predictor in any of the equations. Based onthe extant theory and the evidence to date, we believe that a market driven culture is stronglyrelated to performance and to strategic choice. These findings build on previous workexamining internal characteristics of market-oriented businesses (Jaworski and Kohli, 1993;Ruekert, 1992) and processes for developing a market orientation (Narver and Slater, 1991).

In conjunction with the earlier findings, the present results contribute to the developmentof a comprehensive picture of the market-oriented business.

Market Orientation and Performance

The results of this study are consistent with previous findings that there is a significant marketorientation-performance relationship. We conclude that the market orientation-sales growthrelationship is significant and robust across business types and competitive settings. And,

while the finding of no relationship between market orientation and profitability is contraryto the findings of Narver and Slater (1990) and Slater and Narver (1994), this could be dueto managers making a conscious trade-off between profitability and growth. It is possiblethat the small to medium-sized businesses in this sample see greater long-term benefitsat this stage from the market power they may achieve through growth in size (size is thestrongest predictor of profitability) than from maximizing current profitability.

The finding of no relationship between market orientation and ROI may also be due to thediversity of businesses and industries represented in the sample, in contrast to the Narverand Slater (1990) sample. This also would contribute to the relatively low R*s in all of the

regression equations, Focusing on individual industries (e.g., McKee et al., 1987; Slater,1995) leads to higher R*s due to greater control of industry-level phenomena and to the‘relativity of strategy’ (Snow and Hambrick, 1980) which says that strategy constructs,including market orientation, have greater meaning within an industry environment thanacross environments. Thus, a multi-industry study introduces a variety of uncontrollableenvironmental factors that have the potential to make a relationship appear weak.

Market Orientation and Competitive Strategy

As expected, this study provides evidence that a market-oriented culture is associated withspecific strategic activities. This demonstration of a relationship between market orientationand competitive strategy furthers our understanding of the behaviors of the market focusedbusiness.

The finding that market driven businesses tend to be innovative, focused, and flexible intheir selection of basis for strategic advantage begs the question of what this means for the


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strategies of less market-oriented businesses. Arc they merely less innovative, less focused,less differentiation driven, and less low-cost driven than their market-oriented competitors’?We do not believe the answer is that simple. Kotler (1994) suggests that there are at leastfive alternative company orientations toward doing business. For example, he suggeststhat a production-oriented organization would “concentrate on achieving high productionefficiency and wide distribution coverage”, analogous to a defensive, market-wide, low-coststrategy in our discussion. While we do not test specifically for the strategic profiles of otherorientations (see Kahn and Mentzer, 1994 for an example of work in this area), we believethat a study comparing the strategic profiles of different orientations would be interestingand useful to their more complete understanding.

Another interesting issue concerns the existence of an interaction between market orienta-

tion and competitive strategy. In other words are market-driven businesses more successfulwith the prototypical strategy than businesses with a technology orientation or a productionorientation? While this issue is beyond the scope of this paper, researchers interested inthis issue should consider the potential moderating influence of environment (e.g., Dayand Wensley, 1988; Prescott, 1988; Kohli and Jaworski, 1990). Although the researchto date (Jaworski and Kohli, 1993; Slater and Narver, 1994) has found little evidence ofenvironment influencing the market orientation-performance relationship, it is possible thata market-oriented culture facilitates successful execution of particular strategies in someenvironments and not in others. For example, Slater and Narver (1993) found that a mar-

ket orientation contributed to success for prospectors and analyzers in the forest productsindustry, but not for defenders. Future studies should specify a more comprehensive modelof organizational features and market characteristics to understand market orientation’scontribution to the implementation of business strategies.

Another fruitful area for research concerns whether market-oriented businesses employtools such as market segmentation and targeting differently from the way that more in-ternally driven businesses employ them? Do market-oriented businesses tend to employcustomer need based approaches to segmentation rather than customer characteristic (e.g.,demographic) approaches? How do market-oriented businesses make the trade-off between

being customer-oriented and competitor-centered in their market monitoring activities (Dayand Wensley, 1988)?

Market-oriented businesses may create customer value by reducing customers’ acquisitionand use costs based on internal efficiencies or they may create customer value by addingcustomer benefits through a differentiation strategy. We believe there are other importantissues to be investigated here as well. For example, how do market-oriented businessescompete by reducing costs to the customer without encouraging price competition? How dothe most successful businesses manage the tension, which Porter (1980) refers to as “stuck-in-the-middle”, between a constant focus on satisfying customer needs and a commitment tocontinuous cost reduction? Also, how do market-oriented businesses create relationshipswith key constituencies including customers and suppliers that are sources of long-termcustomer benefits?

Finally, the issue of low R2s must be considered. A low R2 means that market orientationexplains only a small proportion of the variation in the strategy variables. As discussed,this may be a function of the multi-industry sample which confounds the results due to


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the ‘relativity of strategy’ (Snow and Hambrick, 1980) and the introduction of unmeasuredindustry-level factors (Slater, 1995). This could be addressed through a single-industrystudy. It also must be recognized that a market oriented business does not have a uniqueclaim on these strategic characteristics (Kotler, 1994). A technology-driven business that isnot very market-oriented may also perceive itself as innovative. The presence of businesseslike that in the sample would weaken the market orientation-innovation relationship. Fi-nally, it must be acknowledged that market-focused businesses may choose different ‘valuedisciplines’ (Treaty and Wiersema, 1995). What we believe we have found is the mostlikely set of strategic characteristics for a market-focused business.

Conclusion

Judging from the managerial and academic literature, the desirability of developing amarket-oriented culture and translating its potential into market success has become con-ventional wisdom. However, a thorough understanding of the strategic characteristics ofmarket-oriented businesses has been lacking. This study has added to the picture of themarket-oriented business so that managers and scholars now have a better understandingof the competitive actions of market-oriented businesses. However, there is much work tobe done to understand how market orientation interacts with competitive strategy and corecompetencies to produce competitive advantage and superior performance.

Appendix: Market Orientation Scales (Items are scored on a l-7 scale)

Customer Orientation

Our business objectives are driven primarily by customer satisfaction

Our customers are important sources of new product/service ideas

We constantly monitor our level of commitment and orientation to serving customers’ needs

We measure customer satisfaction systematically and frequently

Competitor Orientation

Our salespeople regularly share information within our business concerning competitors’strategies

We rapidly respond to competitive actions that threaten us

Top management regularly discusses competitors’ strengths and strategies


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172 STANLEY E SLATERAND JOHN C. NARVER

In responding to competitive opportunities, our businessdevelopsnew capabilities as theyare required

Interfunctional Coordination

We freely communicate nformation about our successfuland unsuccessfulcustomerexpe-riences acrossall business unctions

All of our business unctions (e.g.,marketing/sales,manufacturing,R&D, finance/accounting,etc.) are integrated n serving the needsof our target markets

All of our managersunderstand how everyone in our business can contribute to creat-ing customer value

In the event of conflict between unctions in our business, he involved parties are expectedto work out a mutually acceptablesolution

Acknowledgments

We gratefully acknowledge he support and encouragement f the Marketing Science nsti-tute and he financial supportof the Center or Research nd CreativeWorksat the Universityof Coloradorolorado Springs.

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