THE RELATIONSHIP BETWEEN MARKET ORIENTATION ... - Anzmac

THE RELATIONSHIP BETWEEN MARKET ORIENTATION, SUPPLIER PARTNERSHIP, AND FIRM PERFORMANCE IN A RETAIL CONTEXT Agus W. Soehadi Prasetiya Mulya Business School Track: Market Orientation and Relationship Marketing Keywords: Market Orientation, Supplier Partnership, Firm Performance, Competitive intensity, Retail Industry, Indonesian Market, Modeling, Structural Equation Modeling Abstract The purpose of this study is to examine the consequences of market orientation in a retail context. In this context, this study presents a systematic framework to test the postulated “market orientation -supplier partnership – firm performance” chain. Data used for testing the model were collected by sending a questionnaire to a sample of retail industries in Indonesia. The findings show that market orientation positively affects both supplier partnership and firm performance. The effect of supplier partnership on firm performance is insignificant. Contrary to expectation, competitive intensity negatively affects market orientation and supplier partnership. Introduction There has been continuous interest among marketing scholars in investigating market orientation constructs, their consequences, and factors that might moderate or mediate the relationship (Kohli and Jaworski 1990; Narver and Slater 1990; Jaworski and Kohli 1993; Diamantopoulos and Hart 1993; Slater and Narver 1994; Greenley 1995; Cadogan et al 1999 1995). Despite the study of market orientation has made intensively, unfortunately, the study of market orientation did not focus the potential impact of market orientation on performance in a supplier partnership context. Competitive pressures encourage retailers to increase their capabilities not only in satisfying customers but also managing their relationship with suppliers (Page 1994). Retailers that have good relationship with their suppliers achieve better competitive position by reducing lead times, information on new and best-selling products and competitive activity, best allowable prices, and advertising and mark-down allowances (Dawson and Shaw 1987; Ganesan 1994). In this perspective, it would be seem that the study of market orientation in a supplier partnership context are interesting to be investigated. This article is organised as follows: the conceptual framework of antecedents and consequences of market orientation will be described. This is followed by a description of the methodology and empirical analysis. Then, it concludes with a discussion of the key results, limitations, and directions of the research. A Model of Conceptual Framework Figure 1 visually describes the conceptual relationship of the proposed study. Briefly, the model is comprised of four sets of factors: (1) the market orientation, (2) firm performance, (3) supplier partnership and (4) competitive intensity. The underlying rationale comes from the coalignment principle, which advocates the environment firm behaviour performance paradigm (Cavusgil and Zou 1994; Li and Calantone 1998).

Market Orientation and Relationship Marketing Track

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Further, in their market orientation study, Avlonitis and Gounaris (1999) found competitive intensity to be a determinant of market orientation. In this model, market orientation has an impact on firm performance in terms of financial and non-financial performance. Supplier partnership will mediate the effect of market orientation on firm performance. Finally, competitive intensity will be an antecedent of market orientation and supplier partnership. Figure 1. Model of Relationship between Market Orientation, Firm Performance, Supplier Partnership and Competitive intensity

Market Orientation

(+)

(+)

(+)

Competitive Intensity

Firm Performance

(+)

(+) Supplier Partnership

The basic question in this study was, “To what extent does market orientation affect firm performance?”. Based on a theoretical approach, market orientation positively affects performance. The rational behind this approach is that market orientation appears to provide a unifying focus for the efforts and projects of individuals and departments within an organisation in order to create superior value for customers, thereby leading to superior performance (Kohli and Jaworski 1990; Narver and Slater 1990); therefore we propose: Hypothesis 1: The overall market orientation positively affects the firm performance of Indonesian retailers. The market orientation definition emphasises the ability of the firm to learn about customers and competitors in order to determine more clearly the best responses to retain or attract consumers. In the retailing context, suppliers and retailers clearly have separate knowledge about consumers. Suppliers have specialist knowledge of their product groups across the full range of consumers whilst retailers have a broad understanding of their own customers. When these two elements are combined a more complete picture of consumer

ANZMAC 2003 Conference Proceedings Adelaide 1-3 December 2003

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needs should emerge (McGrath 1997, p.7). In this way, the stable relationship will help market-oriented retailers implement marketing ideas more effectively. Thus, Hypothesis 2: Overall market orientation positively affects supplier partnerships. Stuart and Mueller (1994) found that supplier-partnering activity correlated positively with improvements in productivity and quality of services. Further, Gorves and Valsamakis (1998) noted that supply chain literature strongly emphasised the benefits associated with partnerships. The benefits include: better quality of products and services, increased flexibility and responsiveness to customer requirements, lower inventory levels across the supply chain, and reduction of total costs to the benefit of all members of the supply chain. It is argued that these benefits ultimately lead to better financial performance (Saunders 1994), thus: Hypothesis 3: The overall level of supplier partnerships positively affects firm performance of Indonesian retailers The environments of firms are a major source of contingencies faced by organisations (Tosi and Slocum 1984). According to Kwandalla (1977). In competitive environments, firms require more devoted analytical effort to understand and master threats. The greater the competition in a market, the more aggressive a firm must be in discovering additional customer desires and creating superior value for customers. Further, as a market became more competitive, Teece (1992) suggested that firms started to abandon the use of power to coordinate marketing channels (whether retailer or supplier). The motivation behind this is to enhance the value of the channel’s market offering to its customers and/or to lower the total channel costs (Stern and El-Ansary 1992). Therefore, Hypothesis 4a: Competitive intensity positively affects market orientation. Hypothesis 4b: Competitive intensity positively affects supplier partnership. Methods To test the model presented in Figure 1; data were collected to assess the relationship between market orientation and firm performance. Pre-coded questionnaires were mailed to all informants along with a cover letter on university stationary explaining the purpose of the study, and the confidentiality of responses. Surveys were returned to the researcher by preaddressed, postage-paid envelopes enclosed with the questionnaires. Three or four field follow-ups by telephoning were conducted. Their purpose was to explain the benefit of joining this project, to make sure that respondents understood the questionnaire, and to remind them to return the questionnaire. These procedures resulted in responses from a total of 172 retail firms, a response rate of 36.5 percent. After initial screening, however, only 159 fully completed questionnaires were used for analysis. All measures were analysed for validity and reliability following the guidelines offered by Jaworski and Kohli (1993). The results of the measurement model for market orientation χ2(70) was 88.40 (p = .068), supplier partnership χ2(71) was 83.82 (p = .124), performance measurement χ2(30) was 37.909 (p = .15), and competitive intensity χ 2(6) was 9.213 (p = .162).


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Results and Discussion The study used structural equation modeling (SEM) to examine the hypothesised relationships among the constructs. The model shows a good fit to the empirical data. The chisquare statistic, 71.836 with 60 degrees of freedom, is insignificant. This indicates that the data fit the model. The comparative fit index (CFI) is .983, goodness–of-fit (GFI) is .935, adjusted goodness-of-fit index (AGFI) is .902, and the Tucker–Lewix index (TLI) is .983. All the goodness-of-fit statistics are within the acceptable level (more than .90) (Hair et al. 1998). The result of the SEM analysis reveals that market orientation has a significant effect on performance (b1 = .675; p < .01). This finding lends substantial support to the previous findings (e.g. Jaworski and Kohi 1993; Slater and Narver, 1994; Pelham 2000), confirming that market orientation has a significantly positive effect on performance. The effect of market orientation on supplier partnership is positive (bmo-p = .516; p < .01). In other words, the market-oriented retailers are more likely to have close relationships with suppliers. According to Stern and El-Ansary (1992), the motivation behind this is to enhance the value of the retailer’s market offering to its customers and/or to lower the retailer’s total cost. Surprisingly, supplier partnership has a weak relation to firm performance (bsp-p = .170; p > .05). This lends support to Slater and Narver’s , and Jaworski and Kohli’s work that market orientation alone is an important determinant of firm performance. However, this analysis does not suggest that supplier partnership is unimportant. In a separate analysis, the effect of supplier partnership on performance was positively significant (see Exhibit 2). Supplier partnership had a positive correlation with firm performance, however its effect was negligible once other variables were taken into account. It would also seem appropriate to suggest that more work needs to be done on establishing supplier partnership as a possible determinant of firm performance. The effect of competitive intensity on market orientation is negative (bci-mo = -.498; p < .01), which is contradictory to the hypothesised relationship. This means that in a more competitive market situation, retail firms feel that the benefit of applying market orientation is not effective as in the low competitive situation. Li and Simerly (1998) asserted that a competitive environment may force top managers to perform a limited search in their assessment of the environment situation, develop solutions by taking concrete actions quickly, and attempt less integration of various emergent responses. Contrary to expectations, competitive intensity negatively affects supplier partnership (bci-sp = -.190; p < .05). One possible explanation is retail firms tend to use price and promotion strategies as competitive weapons in a highly competitive market. The success of this strategy depends on the extent to which they can negotiate with their key suppliers to gain concessions. Conclusion This research is intended to replicate the study of market orientation within Indonesian retail businesses. It advances our understanding of market orientation by proposing and testing a comprehensive model that integrates market-oriented behaviour, supplier partnership, competitive intensity and firm performance. This study gives an additional point of view to the supplier partnership literature. The evidence from this study demonstrates that market orientation increases the degree of supplier partnership. As Smith et al. (1995) suggested, retailers not only engage in activities that support their own strategy, they also choose suppliers who support their strategy. According to Baker et al. (1999), suppliers have a similar point of view. A supplier that perceives a retailer as being market oriented is likely


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to preserve the relationship with the retailer. Therefore, it can be suggested that suppliers and market-oriented retailers tend to view one another as partners. The research findings offer several important managerial implications. Firstly, the present study clearly supports a positive effect of market orientation on firm performance. Consequently, retail firms are encouraged to continue their efforts in becoming ever more market-oriented enterprises. Secondly, by increasing market orientation activities, retailers can improve their relationships with suppliers. Baker et al. (1999) found that the supplier tends to place a higher value on relationships with market-oriented retailers. As a result, market-oriented retailers may be able to wield power in the relationship and obtain special concessions. This research inevitably has several inherent limitations. The first limitation of the research concerns the use of single key informant per unit analysis. The use of information from only a single source to generalise about an organisation’s condition may be misleading. Such information is selective, if not biased, owing to the informant’s position or other characteristics or his/her way of using and weighting the information when making judgements (Philips 1981). The second limitation involves research design issue. It should be noted that the results reported in this study could be attributable to common method variance between level of supplier partnership and firm performance. Consequently, the hypotheses put forth in this study should be re-tested by collecting data from matched supplier-retailer dyads; the retailers could provide a market orientation measure, and the suppliers could provide measures of the supplier partnership constructs (Baker et al. 1999). Bibliography Achrol, R.S., (1991), “Evolution of the Marketing Organisation: New Forms of Turbulent Environments,” Journal of Marketing, 55 (Oct), 77-93. Avlonitis, George J., and Spiros P. Gounaris (1999), Marketing Orientation and Its Determinants: An Empirical Analysis, European Journal of Marketing, 33 (11/12), 1003-37. Baker, T.L., P.M. Simpson, and J.A. Siguaw, (1999), “The Impact of Suppliers’ Perceptions of Reseller Market Orientation on Key Relationship Constructs,” Academy of Marketing Science, 27 (1), 50-57. Cadogan, John W., and Adamantios Diamantopoulos, and Charles P. de Mortanges (1999), A Measure of Export Market Orientation: Scale Development and Cross-Cultural Validation, Journal of International Business Studies, 30 (4), 689-704. Cavusgil, S. Tamer, and Shaoming Zou (1994), Marketing Strategy-Performance Relationships: An Investigation of the Empirical Link in Export Market Ventures, Journal of Marketing, 58 (Jan), 1-21. Diamantopoulos, A, and S. Hart (1993), “Linking Market Orientation and Company Performance: Preliminary Evidence on Kohli and Jaworki’s Framework,” Journal of Strategic Marketing, 1(2), 93-122. Ganesan, Shankar (1994), “Determinants of Long-Term Orientation in Buyer-Seller Relationships,” Journal of Marketing, 58 (April), 1-19. Greenley, G.E., (1995), “Market Orientation and Company Performance: Empirical Evidence from UK Companies,” British Journal of Management 6 (Mar) 1-13.


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Groves, G., and V. Valsamakis, (1998), “Supplier-Customer Relationships and Company Performance,” International Journal of Logistics Management, 9 (2), 51-64. Hair, J.F., R.E. Anderson, R.L. Tatham, and W.C. Black, (1995), Multivariate Data Analysis, 5th ed. Prentice-Hall: New Jersey. Jaworski, B.J., and A.K. Kohli (1993), “Market Orientation: Antecedents and Consequences,” Journal of Marketing 57 (July). Kalwani, M.U., and N. Narayandas (1995), “Long-term Manufacturer-Supplier Relationships: Do They Pay Off for Supplier Firms?” Journal of Marketing, 59 (April), 1-16. Kohli, A.K., and B.J. Jaworski, (1990), “Market Orientation: The Construct, Research Propositions, and Managerial Implications,” Journal of Marketing 54 (April), 1-18. Li, T., and J. Calantone, (1998), “The Impact of Market Knowledge Competence on New Product Advantage: Conceptualisation & Empirical Examination,” Journal of Marketing, 62 (Oct), 13-29. Li, M.ingfang, and Roy L. Simerly (1998), “The Moderating Effect of Environmental Dynamism on the Ownership and Performance Relationship,” Strategic Management Journal, 19, 169-79. McGrath, Mary (1997), A Guide to Category Management, Institute of Grocery Distribution. 6-48. Pelham, Alfred M., (2000), “Market Orientation and Other Potential Influences on Performance in Small Medium-Sized Manufacturing Firms, Journal of Small Business Management, 38 (1), 48-67. Phillips, L.W., (1981), “Assessing Measurement Error in Key Informant Reports: A Methodological Note an Organisational Analysis in Marketing,” Journal of Marketing Research, 17 (Nov), 395-415. Saunders, M.J. (1994), Strategic Purchasing and Supply Chain Management, London, England: Pitman Publishing. Siguaw, J.A., P.M. Simpson, and T.L. Baker, (1998), “Effects of Supplier Market Orientation on Distributor Market Orientation and the Channel Relationship: The Distributor Perspective,” Journal of Marketing, 62 (July), 99–111. Smith, G. E., M.E. Venkatraman, and L.H. Wortzel (1995), “Strategic Marketing Fit in Manufacturing-Retailer Relationships: Price Leaders Versus Merchandise Differentiators,” Journal of Retailing, 71(3), 297-315. Stern, L.W., and A.I. El-Ansary, (1992), Marketing Channels. 4th ed. Englewood Cliffs, NJ: Prentice-Hall. Stuart, F.I., and P. Mueler Jr, (1994), “Total Quality Management and Supplier Partnerships: A Case Study,” International Journal of Purchasing and Materials Management, 30 (Winter), 14-21. Teece, J.B., (1992), “The Lessons GM could Learn for its Suppliers Shake-up,” Business Week, August 31, 29. Tosi, H. J., and J.W. Slocum, (1984), “Contingency Theory: Some Suggested Directions,” Journal of Management, 10, 9-26.


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Exhibit 1.

Relationship between Market Orientation, Supplier

Partnership,

Firm Performance and Competitive Intensity

CUS T

COMP

COO R

PRO F

MARKO R .498*

CI1 CI2

.516* FP

COMPET

CI3

PERFO R

.548*

CI4

.192* 2

c = 71.836 .978 df = 60 .983 GFI = .935 .035

Exhibit 2.

TLI

=

CFI

=

NFP

.170

SUPPA R

RMSEA =

RSE

IS

Relationship between Supplier

JD

Partnership, Firm Performance and

Competitive Intensity

CI1 FP CI2

COMPE T

CI3 CI4 2

c = 32.746 .966 df = 25 .976 GFI = .958 .044

SUPPA R

.478* TLI

=

CFI

=

IS

RSE

.543*

PERFO R

NFP

JD

RMSEA = Market Orientation and Relationship Marketing Track

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