COMPARING THE INDUSTRIAL ORGANIZATION VIEW AND MARKET ORIENTATION. Jon W Chin, Robert E.Widing II and Angela Paladino The University of Melbourne

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1 COMPARING THE INDUSTRIAL ORGANIZATION VIEW AND MARKET ORIENTATION Jon W Chin, Robert E.Widing II and Angela Paladino The University of Melbourne Track: Market Orientation and Relationship Marketing Abstract This paper establishes the Industrial Organization (IO) view and Market Orientation (MO) as distinct externally oriented strategies that influence firm behaviours and. This paper proposes a conceptual framework, which elaborates upon both perspectives divergent impact on performance and considers the effect of supplier power (asymmetric interdependence) as a moderator of the orientation-performance relationship. The findings would have important theoretical and managerial implications. This paper aims to ignite further research and debate with regards to these two views as means of explaining firm performance. Introduction Scholars consistently strive to understand why some firms persistently outperform others. Economic approaches have contributed to this discussion (Porter 1980; 1985) and recently Makhija (2003) revisited this question by contrasting the resource-based view (RBV), with what she termed the market-based view (MBV). The MBV is based on the I/O economics perspective (e.g. Porter 1980) to explain firm performance. In order to avoid the confusion between MO and MBV, this research uses the term I/O perspective rather than MBV. An alternate perspective known as MO has been widely discussed in the marketing literature (e.g., Narver and Slater 1990; Jaworski and Kohli 1990). A substantial body of scholarship on antecedents and consequences of MO has emerged. Both the I/O and MO have been used to explain superior market performance. Empirical studies examining the relationship between MO and performance have produced results that are, in the main, supportive of MO s positive effect on. However, several studies analysing the performance consequences of MO in international settings (e.g. Bhuian 1998 and Han. Kim and Srivastava 1998), have found no significant effect. Even in the founding pieces of MO, performance varied on the basis of the business context (Narver and Slater 1990). From these findings, it appears that more work is needed to understand the range of factors influencing the relationship between MO and performance. Moreover it would be useful to compare MO to other orientations such as the I/O perspective. This working piece is positioned to address this; further more elevate the status of the ongoing environmental determinism/strategic choice and seek to understand whether there is a single strategic orientation that leads to superior performance in all environmental conditions. This paper outlines the research issues involved in a study that will compare the I/O and MO to better understand business performance. Market Orientation and Relationship Marketing Track 1109

2 Industrial Organisation Approach (I/O) Research Background The industry-based theory of strategy, as exemplified by Porter (1980; 1985) turns industrialorganisation economics upside-down (Barney and Ouchi 1986: 374). That is what is considered anti-competitive and socially-undesirable under neo-classical, industrialorganisation economics, forms the basis for normative competitive strategy. Porter (1980) identified five external forces, which should be considered when making strategic decisions including, the threat of new entrants, bargaining power of buyers and suppliers, the threat of substitute products, and the degree of rivalry amongst existing competitors. To manage these environmental forces, Porter suggested strategies such as the development of barriers to entry (e.g. product differentiation, promoting favourable government policy), raising switching costs to buyers and eliminating switching costs with respect to suppliers. Porter also linked these strategies to the evolutionary stages of industry development. In this view, the essence of this perspective is that if superior financial performance results primarily from industry factors, choosing the industries in which to compete and/or altering the structure of the chosen industries should be a consideration in strategic decision making. That is, this approach is concerned with managing the competitive environment and not necessary providing superior value to customers. Market Orientation (MO) Narver and Slater (1990) have defined MO as an organisational orientation that contains three behavioural components: (1) a customer orientation (understanding the target market), (2) competitor orientation (understanding the strengths, weaknesses, capabilities, and strategies of key competitors), and (3) interfunctional coordination, which means using resources of all departments in a firm in order to create value for target customers. MO, then, presumes an outward focus on customers and competitors. For example, through a customer orientation, firms can gain knowledge and customer insights in order to generate superior innovations (Varadarajan, Jayachandran and White 2001). Also, through interfunctional coordination, teams may be formed and empowered to respond to specific customer requests and solve complicated problems that span across functional areas (Tansik 1990). The essence of this perspective is that, to achieve a competitive advantage and thereby, superior financial performance, firms should systematically (1) acquire information on present and potential customers and competitors and (2) bring into play such information in a coordinated way across departments to guide strategy recognition, understanding, selection, implementation and modification (Hunt and Morgan 1995). That is the fundamental objective of MO is to provide superior value to customers relative to the competition. Comparison of Industrial Organisation (I/O) and Market Orientation (MO) I/O takes the view of manipulating power asymmetries and the development of market power (Makhija 2003), which is to minimise impact of industry rivals, minimise impact of ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

3 substitutes, reduce probability of entry and maximise leverage relative to suppliers; including employees and maximise impact relative to buyers/customers. MO on other hand adopts a view of serving the market by understanding customers and competitors (Narver and Slater 1990). Proponents of the I/O view would argue that market power provides a valuable defensible position against the industry forces. In contrast, in order to compete, MO dictates the path to success lies in inculcating a system of shared values and beliefs that place the customer first in the business planning process in its quest of delivering superior customer value relative to competition. (Deshpandé 1993; Steinman, Deshpandé and Farley 2000). This paper examines the views from a behavioural perspective thereby enabling us to observe which elements have the strongest connections on performance. The conceptual framework is presented in Figure 1. Figure 1 : The Conceptual Framework of I/O & MO Strategic Orientation Industrial Organization (I/O) Market Orientation (MO) Moderator Supplier Power (Power Asymmetric Interdependence) Financial Outcomes - ROA - Sales Growth - Profitability Customer Outcomes - Customer Satisfaction - Customer Value - Customer Loyalty Employee Outcomes - Employee Satisfaction - Employee Commitment Research Hypotheses This research uses multiple measures to operationalise performance, which guided by the service-profit chain include: employee, customer and financial. Figure 1 depicts these ideas. Supplier power is proposed to have a moderating effect on the relationship between each orientation and. In general, where supplier power is high, for example, in monopoly contexts, we expect little payoff to MO and a large one to the IO view. Likewise, when supplier power is low, the benefits of MO should provide superior value to customers, whereas organisations using the IO orientation would be expected to perform less well. Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices (Porter 1980; 1985). Power will also be enhanced when the costs to customers of switching suppliers are high (faced with high information and negotiating costs). In this case, the supplier s product is an important input to the buyer s business (resource asymmetry). Therefore, in purchasing, the underlying principle and goal is to find mechanisms to offset or Market Orientation and Relationship Marketing Track 1111

4 surmount these sources of supplier power. The benefit of adopting an I/O orientation by the supplier is expected to increase as the supplier power increases. In contrast, when supplier power is low we would expect MO by the supplier to increase (Slater and Narver 1994). Thus following previous research, we would expect the benefit of MO to be higher when the supplier power is low. Note, however, that past research has not demonstrated a moderating effect between supplier power and. Nevertheless, we will again test this hypothesis in order to fully compare MO with the I/O view. Theory suggests that firms, in deciding how to compete, will prioritise tasks according to the situation they are in. Following this, two alternative hypotheses are proposed: H1: The greater the extent of supplier power, the greater the positive relationship of I/Ofinancial. H2: The lesser the extent of supplier power, the greater the positive relationship of MOfinancial. Customer and Employee Outcomes The extant marketing literature has supported the notion that successful companies are ones that recruit and retain the desired employees who in turn provide outstanding service to customers. This will help to attract and retain valuable customers, resulting in greater shareholder wealth (Reichheld 1996; Heskett 1994, 2002). Thus a virtuous cycle is set up whereby success with one audience generates in the others. MO is consistent with this view (Narver and Slater 1990; Day 1994 and 1999; Heskett 1997), because higher customer value will have a positive impact on customer loyalty and profitability (Reichheld 1996). Customers and employees are viewed as partners in which sales/profits are maximised over time. Following this, we present the following hypotheses: H3: The greater the extent of supplier power, the greater the positive relationship of MOcustomer H4: The greater the extent of supplier power, the greater the positive relationship of MOemployee An I/O view does not attempt to link employee, customer and investor. Indeed, the goal is to enhance bargaining power with customers and employees to gain and exert leverage (Porter 1985). In this sense, employees and customers are competitors for organisational wealth, not the sources of it, in which the organisation views them as opponents from whom sales/profits are to be maximised in each instance. Therefore, the greater the supplier power, the greater the negative relationship between I/O and customer. As supplier power increases, there is less need to be responsive to customers (e.g. in monopoly situations). H5: The greater the extent of supplier power, the greater the negative relationship of I/Ocustomer H6: The greater the extent of supplier power, the greater the negative relationship of I/Oemployee ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

5 Implications The conceptual framework that has been presented proposes that supplier power is a key determinant of the relationship between and market and I/O orientations. This research would enable managers to understand the conditions when one should: (1) execute either an I/O or MO; (2) focus resource deployment more effectively; and (3) provide the general basis for a more rational division of effort between adapting and changing the organisation s environment. This research will be the first to contrast the two perspectives. In doing so, this study seeks to understand whether there is a single strategic orientation that leads to superior performance in all environmental situations. References Barney, Jay and William G. Ouchi. (1986), Organizational Economics, San Francisco: Jossey-Bass Bhuian, S.N. (1998), An Empirical Examination of Market Orientation in Saudi Arabian Manufacturing Companies. Journal of Business Research, 43 (1), Day, G.S. (1994), The Capabilities of Market-Driven Organisations, Journal of Marketing, 58 (October), Day, G.S. (1999), The Market Driven Organisation Understanding, Attracting and Keeping Valuable Customers, New York: The Free Press. Deshpandé, R. and Farley J.U. and Webster F.E. Jr. (1993), Corporate Culture, Customer Orienation, and Innovativeness in Japanese Firms: A Quadrad Analysis. Journal of Marketing, 57 (January), Han, J.K., Namwoon K., and Rajendra K.S (1998), Market Orientation and Organisational Performance: Is Innovation a Missing Link? Journal of Marketing, 62 (October), Heskett, J. L., Schlesinger, L.A. and Sasser, W.E (1997), The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value New York: The Free Press. Jaworski, B.J. and Kohli, A.K. (1993), Market Orientation: Antecedents and Consequences Journal of Marketing, 57 (July), Makhija, M. (2003), Comparing the Resource-Based and Market-Based Views of the Firm: Empirical Evidence from Czech Privatization Strategic Management Journal, 24, McGahan, A.M, Porter M. (1997), How Much Does Industry Matter, Really?, Strategic Management Journal, Summer Special Issue 18, Narver, J.C. and Slater, S.F. (1990), The Effect of a Market Orientation on Business Profitability Journal of Marketing, 54 (4), Market Orientation and Relationship Marketing Track 1113

6 Porter, Michael (1980), Competitive Strategy New York: The Free Press. Porter, Michael (1985), Competitive Advantage New York: The Free Press. Reichheld, F. F. and Teal, T. (1996), The Loyalty Effect: the Hidden Force Behind Growth, Profits, and Lasting Value Harvard Business School Press. Slater, S. F. and Narver, J.C (1994), Does Competitive Environment Moderate the Market Orientation Performance Relationship? Journal of Marketing, 58 (January), Steinman, C., Deshpandé, R. and John U. F. (2000), Beyond Market Orientation: When Customers and Suppliers Disagree Academy of Marketing Science, 28 (1), Tansik, D.A (1990), Balance in Service Systems Design, Journal of Business Research, 20 (1), Varadarajan P.R; Jayachandran S.; White J.C. (2001), Strategic interdependence in organisations: Deconglomeration and Marketing Strategy Journal of Marketing, 65 (1), ANZMAC 2003 Conference Proceedings Adelaide 1-3 December