Theories of Marketing – Summary Week 1 Author: Huisingh
MA Summary Article 1.1 Naver & Slater (1990)
The Effect of a Market Orientation on Business Profitability
Abstract
Marketing academicians and practitioners have been observing for more than three decades that
business performance is affected by market orientation, yet to date there has been no valid
measure of a market orientation and hence no systematic analysis of its effect on a business's
performance.
The authors report the development of a valid measure of market orientation and analyze its effect
on a business's profitability.
Using a sample of 140 business units consisting of commodity products businesses and
noncommodity businesses, they find a substantial positive effect of a market orientation on the
profitability of both types of businesses.
Market orientation and performance: the conceptual model
For an organization to achieve consistently above-normal market performance, it must create a
sustainable competitive advantage (SCA). That is, it must create sustainable superior value for its
customers.
The value of a seller's offering to a buyer is the difference between what the buyer perceives as the
offering's expected benefits and what the buyer perceives as its expected total acquisition and use
costs.
The desire to create superior value for customers and attain SCA drives a business to create and
maintain the culture that will produce the necessary behaviors.
Market orientation is the organization culture that most effectively and efficiently creates the
necessary behaviors for the creation of superior value for buyers and, thus, continuous superior
performance for the business.
On the content of market orientation
We infer from the literature that market orientation consists of three behavioral components:
- customer orientation
- competitor orientation
- interfunctional coordination
and market orientation consists of two decision criteria:
- long-term focus is vital in creating and keeping sustained competitive.
- profitability perceived as a component of market orientation. It’s a business objective.
Customer orientation and competitor orientation include all of the activities involved in acquiring
information about the buyers and competitors in the target market and disseminating it throughout
the business(es).
Interfunctional coordination refers to the coordinated utilization (integration) of company resources
in creating superior value for target customers.
1
,On developing a valid measure of market orientation
Hypothesis of the content of market orientation
Developing a valid measure: We hypothesize a one-
dimension construct because the three behavioral components
and two decision criteria are conceptually closely related. For a
business to maximize its long-run profits, it must continuously
create superior value for its target customers. To create
continuous superior value for customers, a business must be
customer oriented, competitor oriented, and interfunctionally
coordinated. From the literature review, we infer that the three
behavioral components are, on average, of equal importance:
market orientation is represented in Figure 1 as an equilateral
triangle.
The sample
A sample is used of 140 strategic business units (SBU). SBU is defined as an organizational unit
with a defined business strategy and a manager with sales and profit responsibility. SBUs consist of
commodity products businesses and noncommodity businesses:
- Commodity businesses sell physical products such as dimension lumber, plywood, wood
chips, and logs, all of which are essentially identical in quality and performance to those of
competitors (difficult to differentiate - low price elasticity). In trying to create superior value
for buyers, these businesses usually are unable to adapt their "generic product" (Levitt
1980); rather, they must add various customer benefits to the generic product and/or reduce
the buyers' nonprice costs. (“normal” products – e.g. koffiebonen, koper, thee)
- Noncommodity businesses are ones that, in trying to create superior value for buyers,
can adapt their generic product (or service) somewhat as well as add customer benefits to
their generic product and/or reduce the customers' nonprice costs (relatively easy to
differentiate – high price elasticity). (“special” products – e.g. stereo)
Two types of noncommodity businesses are in the sample: specialty products businesses &
distribution businesses.
Within each SBU, each member of the top management team received a questionnaire with
questions relating to the competitive practices and strategies, competitive environment, and
performance of the SBU in its principal served market.
Reliability analysis / construct validity
Tests were conducted on the sample/data to assess reliability and validity.
The long-term orientation and profit objective measures had low reliability scores. So we cannot
draw conclusions about the empirical relationship of these 2 decision criteria with the 3 behavioral
components of market orientation (see table 1 in article).
Evidence has been found of convergent validity , discriminant validity, and concurrent validity, and
thus we found support for the 3-component model of market orientation.
The effect of market orientation on business performance
analysing the effect of market orientation on profitability/performance
2
, Expected Relationships Between Market Orientation and Profitability
To market their products, some forest products companies rely primarily on field salesforces to call
on the retail dealers and other prospective customers, whereas other companies rely more heavily
on a sales-centre approach.
- Non-commodity Sales-centre approach most contact with customer is via telephone.
- Commodity Field sales force approach visit a customer frequently to gain customer
knowledge and increase to increase buyer-value. In a commodity business it is more difficult
to create superior value for buyers through a telemarketing approach than through a field
salesforce approach. Two reasons: over the telephone a seller has more difficulty identifying
value-increasing opportunities that the buyer has not already thought of. Also, a telephone
approach to selling may increases the price sensitivity of buyers.
Important notes:
- Commodity businesses are traditionally more internally oriented whilst non-commodity
businesses are traditionally more externally oriented.
- There’s a stronger relationship between market orientation and a differentiation strategy
(external orientation) as opposed to a low-cost strategy (internal orientation).
- Larger SBU’s are more internally oriented (and inflexible) while smaller SBU’s are more
externally oriented.
Controlling for other influences on business profitability
Control variables Industrial organization and marketing strategy literatures place considerable
emphasis on eight situational variables that may affect a Business's profitability. The relationships
among the primary elements in the theory of market orientation—the components of market
orientation, the business-level and market-level variables, and performance—are shown in the
independent effects model in Figure 2. The other 8 variables are the control variables.
Discussion
Conclusion They find a substantial positive effect of a market orientation on the profitability of
both types of businesses.
Market orientation is an important determinant of profitability in both types of businesses!
3
MA Summary Article 1.1 Naver & Slater (1990)
The Effect of a Market Orientation on Business Profitability
Abstract
Marketing academicians and practitioners have been observing for more than three decades that
business performance is affected by market orientation, yet to date there has been no valid
measure of a market orientation and hence no systematic analysis of its effect on a business's
performance.
The authors report the development of a valid measure of market orientation and analyze its effect
on a business's profitability.
Using a sample of 140 business units consisting of commodity products businesses and
noncommodity businesses, they find a substantial positive effect of a market orientation on the
profitability of both types of businesses.
Market orientation and performance: the conceptual model
For an organization to achieve consistently above-normal market performance, it must create a
sustainable competitive advantage (SCA). That is, it must create sustainable superior value for its
customers.
The value of a seller's offering to a buyer is the difference between what the buyer perceives as the
offering's expected benefits and what the buyer perceives as its expected total acquisition and use
costs.
The desire to create superior value for customers and attain SCA drives a business to create and
maintain the culture that will produce the necessary behaviors.
Market orientation is the organization culture that most effectively and efficiently creates the
necessary behaviors for the creation of superior value for buyers and, thus, continuous superior
performance for the business.
On the content of market orientation
We infer from the literature that market orientation consists of three behavioral components:
- customer orientation
- competitor orientation
- interfunctional coordination
and market orientation consists of two decision criteria:
- long-term focus is vital in creating and keeping sustained competitive.
- profitability perceived as a component of market orientation. It’s a business objective.
Customer orientation and competitor orientation include all of the activities involved in acquiring
information about the buyers and competitors in the target market and disseminating it throughout
the business(es).
Interfunctional coordination refers to the coordinated utilization (integration) of company resources
in creating superior value for target customers.
1
,On developing a valid measure of market orientation
Hypothesis of the content of market orientation
Developing a valid measure: We hypothesize a one-
dimension construct because the three behavioral components
and two decision criteria are conceptually closely related. For a
business to maximize its long-run profits, it must continuously
create superior value for its target customers. To create
continuous superior value for customers, a business must be
customer oriented, competitor oriented, and interfunctionally
coordinated. From the literature review, we infer that the three
behavioral components are, on average, of equal importance:
market orientation is represented in Figure 1 as an equilateral
triangle.
The sample
A sample is used of 140 strategic business units (SBU). SBU is defined as an organizational unit
with a defined business strategy and a manager with sales and profit responsibility. SBUs consist of
commodity products businesses and noncommodity businesses:
- Commodity businesses sell physical products such as dimension lumber, plywood, wood
chips, and logs, all of which are essentially identical in quality and performance to those of
competitors (difficult to differentiate - low price elasticity). In trying to create superior value
for buyers, these businesses usually are unable to adapt their "generic product" (Levitt
1980); rather, they must add various customer benefits to the generic product and/or reduce
the buyers' nonprice costs. (“normal” products – e.g. koffiebonen, koper, thee)
- Noncommodity businesses are ones that, in trying to create superior value for buyers,
can adapt their generic product (or service) somewhat as well as add customer benefits to
their generic product and/or reduce the customers' nonprice costs (relatively easy to
differentiate – high price elasticity). (“special” products – e.g. stereo)
Two types of noncommodity businesses are in the sample: specialty products businesses &
distribution businesses.
Within each SBU, each member of the top management team received a questionnaire with
questions relating to the competitive practices and strategies, competitive environment, and
performance of the SBU in its principal served market.
Reliability analysis / construct validity
Tests were conducted on the sample/data to assess reliability and validity.
The long-term orientation and profit objective measures had low reliability scores. So we cannot
draw conclusions about the empirical relationship of these 2 decision criteria with the 3 behavioral
components of market orientation (see table 1 in article).
Evidence has been found of convergent validity , discriminant validity, and concurrent validity, and
thus we found support for the 3-component model of market orientation.
The effect of market orientation on business performance
analysing the effect of market orientation on profitability/performance
2
, Expected Relationships Between Market Orientation and Profitability
To market their products, some forest products companies rely primarily on field salesforces to call
on the retail dealers and other prospective customers, whereas other companies rely more heavily
on a sales-centre approach.
- Non-commodity Sales-centre approach most contact with customer is via telephone.
- Commodity Field sales force approach visit a customer frequently to gain customer
knowledge and increase to increase buyer-value. In a commodity business it is more difficult
to create superior value for buyers through a telemarketing approach than through a field
salesforce approach. Two reasons: over the telephone a seller has more difficulty identifying
value-increasing opportunities that the buyer has not already thought of. Also, a telephone
approach to selling may increases the price sensitivity of buyers.
Important notes:
- Commodity businesses are traditionally more internally oriented whilst non-commodity
businesses are traditionally more externally oriented.
- There’s a stronger relationship between market orientation and a differentiation strategy
(external orientation) as opposed to a low-cost strategy (internal orientation).
- Larger SBU’s are more internally oriented (and inflexible) while smaller SBU’s are more
externally oriented.
Controlling for other influences on business profitability
Control variables Industrial organization and marketing strategy literatures place considerable
emphasis on eight situational variables that may affect a Business's profitability. The relationships
among the primary elements in the theory of market orientation—the components of market
orientation, the business-level and market-level variables, and performance—are shown in the
independent effects model in Figure 2. The other 8 variables are the control variables.
Discussion
Conclusion They find a substantial positive effect of a market orientation on the profitability of
both types of businesses.
Market orientation is an important determinant of profitability in both types of businesses!
3
