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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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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


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


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.


Balancing conflictingforces

Differing driving forces


8/25

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


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


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


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)


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


12/25

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


Moderating influences


13/25

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).


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)


14/25

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


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


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


Commodity marketsN = 38

Competitive intensity 4.97

Technical dynamism 2.71Market dynamism 2.98Market growth 2.61Market orientation 4.62

Firms$41


Segmented marketsN = 34

Competitive intensity 4.62

Technical dynamism 3.32Market dynamism 3.86Market growth 2.74Market orientation 4.65

Firms$41


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


15/25

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


Differentiated marketsN = 33

Market orientation and:

Firm effectiveness 0.36*Growth/share 0.38*Profitability 0.40**


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


Firm effectiveness 0.27Growth/share 0.24Profitability 0.22

Commodity marketsN = 38


Firm effectiveness –0.15Growth/share 0.04Profitability 0.10

Segmented marketsN = 34


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


16/25

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


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


17/25

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.


Viable method

Results of partialcorrelation analysis


18/25

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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.


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


22/25

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.)



23/25

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