A Review of the Literature Essay

Introduction Because the focus on market orientation has steadily increased over the last decade, academicians and marketing managers have begun to debate the effectiveness of market orientation as a profit enhancing strategy. Researchers and marketing managers are attempting to measure the benefits and costs associated with the implementation of market orientation. For researches and managers, the key questions that surround market orientation are whether or not it increases performance, and if so, in which circumstances should market orientation be implemented. In order for market orientation to become a cornerstone of business practices in years to come, these questions must be answered. This review will focus on three articles which address these key questions: â€Å"Market Orientation and Company Performance: Empirical Evidence from UK Companies† by Greenley, G (1995), â€Å"Market Orientation: Antecedents and Consequences†, by Jaworski and Kohli (1993) and â€Å"The Effect of a Market Orientation on Business Profitability† by Narver and Slater (1990). Summary of â€Å"The Effect of a Market Orientation on Business Profitability† by Narver & Slater (1990) In â€Å"The Effect of a Market Orientation on Business Profitability† (1990), Narver and Slater address the lack of empirical evidence surrounding the effectiveness of market orientation. They begin the article by stating: â€Å"market orientation is the very heart of modern marketing management and strategy ? yet to date, no one has developed a valid measure of it or assessed its influence on business performance? as a result, business practitioners have had no specific guidance as to what precisely a market orientation is and what its actual effect on business performance may be. † Their study attempts to develop a valid measure of market orientation and its effect on the profitability of the firm. Narver and Slater’s study is designed to test the hypothesis that there is a strong correlation between market orientation and profit levels for both commodity and non-commodity businesses. Narver and Slater  hypothesize that market orientation is a one dimensional construct consisting of three behavioral components: customer orientation, competitor orientation and inter-functional coordination. Additionally, they hypothesize that there are two decision criteria: a long term focus and a profit objective. Based on these criteria, Narver and Slater developed a questionnaire which was given to a sample group of 140 strategic business units in the same division of a major Western corporation. They then used statistical analysis to try to determine the correlation between the adoption of market orientation and the increase in profit and overall performance. In order to obtain accurate results, the researchers attempted to limit the influence of the other forces that impact a business’s profit margin; by doing this, they were able to isolate two key variables and find the relationship between them. Based on their data and analysis, Narver and Slater concluded that there is a monotonic relationship between profit and market orientation for the non-commodity business, whereas the relationship with commodity business was only apparent above the stated median in market orientation. Narver and Slater also concluded that market orientation is economical in all environments, and the question was finding the optimal level of market orientation. Critique of â€Å"The Effect of a Market Orientation on Business Profitability† by Narver & Slater (1990). Narver and Slater’s study is one of the first major empirical studies on the subject of market orientation and its impact on the firm’s profit. This ground-breaking study offers empirical validation to theories that were unproven prior to the study. However, based on the results of Narver and Slater’s study, there are still many questions that remain unanswered. I found that the most significant problem with the study is that their sample was taken from a single corporation, meaning that the data they used was limited to only one industry and one region. As Narver and Slater noted in their conclusion, a sample this limited means that their results can be influenced and skewed by many variables, including corporate culture and regional practices. It is also possible that their findings are industry-specific and do not pertain to other companies outside of foresting. However, in the article’s conclusion, Narver and Slater acknowledge these shortcomings and are eager for others in different regions to conduct further research in this field. Although the limited nature of the study makes it difficult to draw any large scale conclusions about the effectiveness of market orientation, Narver and Slater have created a useful model for an empirical study of market orientation which can now be applied to other industries and regions. The most interesting part of the study is not necessarily the results, but the fact that they were able to design the first successful empirical study. Another problem with the study is that Narver and Slater concluded that an equilibrium existed: the point at which the level of market orientation reaches a point at which its cost is equal to its benefit. At this point, any increase of market orientation would only be detrimental to the firm’s profit margin. Although the study states that the equilibrium is present, the authors offer no guidance on how marketing managers can identify this critical point. Further studies should be dedicated to answering this question in order to make market orientation a more effective strategy for businesses. Additionally, in the article’s conclusion, Narver and Slater neglected to discuss a very key finding which surfaced in their data. Their study revealed that market orientation can have a detrimental effect on a company’s overall performance when certain market forces and internal conditions apply. In my opinion, this finding was largely ignored in the conclusion in order to validate their original hypothesis: that market orientation has a positive impact on the performance of an organization. Although this finding was acknowledged in the article, I felt the conclusion was somewhat misleading with regard to the outcome of the study in this respect. Summary of â€Å"Market orientation: Antecedents and consequences†, by Jaworski and Kohli (1993) In â€Å"Market orientation: Antecedents and consequences† (1993) Jaworski and Kohli set out to empirically build upon Narver & Slater’s study. Jaworski and Kohli attempt to study the relationship between market orientation and its effect on numerous aspects of the firm. The authors lay out a series of 13 hypotheses which they attempt to prove within their study. The four hypotheses that dealt directly with the key questions noted in the introduction of this review are: A. â€Å"The greater the market orientation of an organization, the higher its business performance. † B. â€Å"The greater the market orientation, the greater the (1) esprit de corps and (2) organizational commitment of employees. † C. â€Å"The greater the market turbulence, the stronger the relationship between market orientation and business performance. † D. â€Å"The greater the competitive intensity, the stronger the relationship between market orientation and business performance. † The other nine hypotheses are related to the antecedents of market orientation, including management’s role on market orientation and the impact the organization’s structure and communication has on market orientation. Although these questions are important, I am primarily interested in Jaworski and Kohli’s conclusions on whether or not market orientation affects overall performance and profit/return on equity. Jaworski and Kohli set up two samples from which they derived their data. The first sample was made up of executives from 102 companies; the second sample was made up of 230 executives taken from the membership roster of the American Marketing Association. The authors gathered data via a questionnaire that was sent to participants by mail. Based on the data reviewed, Jaworski and Kohli concluded that market orientation is an important determinant of overall performance regardless of factors such as market turbulence, competitive intensity or technological turbulence. However in both samples, the authors found little correlation between market orientation and return on equity and market share. Jaworski and Kohli also found that the commitment of top management towards implementing market orientation is an important factor on the strategy’s overall performance, as are the levels of interdepartmental coordination and interdepartmental conflict. Critique of â€Å"Market orientation: Antecedents and consequences†, by Jaworski and Kohli (1993) Jaworski and Kohli’s study measures the value that market orientation creates for a business. In their introduction, the authors state their intentions quite clearly: â€Å"The purpose of this research is to address the voids in knowledge [in the Narver and Slater study]. † (Jaworski &Kohli 1993) In this study, Jaworski and Kohli build upon and answer many of the questions left unanswered in Narver and Slater (1990). In my opinion, one of the most important aspects of Jaworski and Kohli’s article is that they attempted to explain their study in an accessible manner by including a section that dealt with the implications of their findings for market managers. Unlike Narver and Slater, I felt that Jaworski and Kohli went to great lengths to try to answer the key questions that managers might have and attempted to lay down guidelines that managers could use in the implementation of market orientation. Jaworski and Kohli also realized the importance of one of the findings Narver and Slater neglected in their conclusion: that market orientation could be detrimental to a business in certain circumstances. Jaworski and Kohli explained the relationships between market orientation and certain environmental contexts including market turbulence and competitiveness. The aspect of the study that I found most interesting was Jaworski and Kohli’s discovery that there is neither an association between market orientation and return on equity nor a relationship between market orientation and market share. Although the two authors still concluded that market orientation was beneficial for overall performance, the finding that it does not help return on equity is very significant. Return on equity, for many firms, is the guiding factor in the decision-making process, especially for private equity groups and investment banking firms. Having worked for a private equity firm, where return on equity is the principal goal, I can confidently say these findings are a huge blow to the advocacy of market orientation. However, I would not feel comfortable ruling out market orientation based on one study; further research must be done on this topic. Additionally, I found one aspect of Jaworski and Kohli’s conclusion problematic: the authors concluded that market orientation had a direct relationship with overall performance, organizational commitment and esprit de corps, yet they stated that it did not influence return on equity and market share. This finding seems to be contradictory to common business beliefs, which would suggest that if market orientation had a positive impact on commitment, overall performance and esprit de corps, it would therefore have an impact on profit or return on equity. This finding is either misleading or it indicates that common beliefs regarding performance and employee motivation are incorrect. Summary of â€Å"Market orientation and company performance: empirical evidence from UK companies† by Greenley, G (1995) In the article â€Å"Market orientation and company performance: empirical evidence from UK companies† Greenley identifies a clear need for an  empirical study in the United Kingdom. As of 1995, no major empirical research had taken place anywhere but the United States. Greenley created his study based upon this research gap. His basic hypothesis, that market orientation is positively associated with performance, is taken from the aforementioned studies by Narver and Slater (1990) and Jaworski and Kohli (1993). Greenley also tested additional hypotheses from Narver and Slater’s 1990 study. The hypotheses Greenley tested dealt with the relationship between market orientation and cost, size of the company, market entry, customer power and competitive hostility in the market. Additionally, he tested hypotheses pertaining to market growth, turbulence and technological change. To obtain his data, Greenley used a slightly altered version of Narver and Slater’s 1990 questionnaire, adapted for UK business culture. The questionnaires were sent to 280 top level managers, mainly CEOs. Of those 280 questionnaires, he received 240 usable responses, which made up the data for his study. Based on the analysis he conducted, Greenley concluded that â€Å"market orientation does not have a direct affect on performance. † (Greenley 1995) He also concluded that with high levels of market turbulence, market orientation is negatively associated with return on equity, whereas with low levels of market turbulence, market orientation is positively associated with return on equity. Critique of â€Å"Market orientation and company performance: empirical evidence from UK companies† by Greenley, G (1995) Greenley’s study is the first major empirical study of market orientation in the UK, and quite surprisingly, his results were very different than the previous findings of studies conducted in the United States. Any reader of Greenley’s study â€Å"Market orientation and company performance† must immediately question whether or not business culture and practices in the UK are so different from their United States counterparts that one strategy empirically proven to work in the United States will be rendered ineffective in the UK. If Greenley’s results are accurate, multinational corporations using a centralized control method would have to rethink using market orientation. This, however, does not seem to be the case. Proctor and Gamble (P&G) appear to successfully implement global strategies, including market orientation, profitably. Therefore, I propose that Greenley’s inability to find a positive relationship between market orientation and performance is a result of a problem in his data collection process. As Greenley stated in his conclusion, his data was gathered during a recession, and therefore a manager’s thoughts on a long-term profit schemes such as market orientation might have been skewed. Also, Greenley obtained nearly 60 percent of his data from top level CEOs and Chairmen, a different sampling base than previous studies in the United States. For instance, Narver and Slater used CPUs and Jaworski and Kohli primarily used market managers for their samples. The difference in sample bases significantly impacts the results of Greenley’s study; typically, CEOs and top management, like those that Greenley questioned, are not as involved in the day-to-day implementation of market orientation and tend to be short-term profit oriented. Managers lower on the organization’s hierarchy, such as marketing managers, might have a more direct involvement with the implementation of market orientation. For future research, I think it would be more prudent to take a broader sample of managers at all levels, thereby eliminating any bias that can occur when only sampling a certain section of the managerial hierarchy. Another problem that I found in Greenley’s conclusion was the fact that he did not make the individual participants aware of the study’s purpose. Although he intended for this to be a tool for gathering accurate and unbiased data from participants, I believe this strategy actually had the opposite effect, given the timing of his article. During a recession, CEOs and Chairmen are attempting to regain short term profitability and/or attempting to scale down costs in order to survive until the recession ends. At such a time, market orientation would not be a viable option and it is unlikely that the top management Greenley questioned would consider it a useful strategy. Therefore, the data collected by Greenley during this period would have little or no relevance for the measurement of the effectiveness of market orientation outside of a recession. Conclusion All three of the articles discussed deal with the task of empirically studying the relationship between market orientation and its effects on businesses. Narver and Slater produced the first major study in this field and their research became a significant starting point for future studies. Narver and Slater’s article stated that they found a direct relationship between marketing orientation and performance; however, the study also brought to light many holes in their research and aspects of this relationship which needed further study. Jaworski and Kohli’s 1993 study attempted to answer some of the key questions that arose from Narver and Slater’s article. The questions Jaworski and Kohli addressed included why some organizations are more market oriented then others and whether or not the linkage between market orientation and business performance depend on the environmental context. The Greenley study in 1995 was the first major study done outside the United States. Greenley followed Narver and Slater’s model in his attempt to empirically study market orientation in the United Kingdom. While his methods were the same, Greenley’s research produced very different results than that of Narver and Slater, and only agreed with some of Jaworski and Kohli’s conclusions. In my opinion, Greenley’s research only added to the confusion that surrounds the study of market orientation; the differences in his results can be attributed to many factors, including gaps in previous research, differences between the United States and the UK, or differences in the economy at the time of the studies. The ambiguous results of this study confirm the need for more research in order to answer the key question of market orientation’s relationship with performance and profit. Therefore, after reading and critically reviewing the above articles, my conclusion is that further empirical research must be done in order for there to be any confidence in the use of market orientation as a performance-enhancing strategy. A multi-national study or the study of multiple multinational companies would provide valuable insight into whether market orientation is exclusively suited to companies operating in the United States or if its implementation in different countries can also be profitable. Further research must also be done in order to affirm or refute Jaworski and Kohli’s claim that market orientation has no positive relationship with market share and return on equity. I believe that if Jaworski and Kohli’s claim is true, managers, especially those operating publically traded companies, will inevitably need to rethink the use of market orientation within their corporations. List of References Greenley, G. (1995). Market orientation and company performance: empirical evidence from UK companies. British Journal of Management, 6:1-13. Jaworski, B. and Kohli, A. (1993). Market orientation: antecedents and consequences. Journal of Marketing, 57(July): 53-70. Narver, J. and Slater, S. (1990). The effect of a market orientation on business profitability. Journal of Marketing 54(October): 20-35.