Journal of Market FocusedManagement,1, 159-174 (1996)

@ 1996Kluwer Academic Publishers.Boston. Manufacturedin The Netherlands.

Competitive Strategy in the Market-Focused

Business
STANLEY

E SLATER

ProfessorofStrategic ManagementandMarketing, CollegeofBusinessandAdministration,

at Colorado Springs, Colorado Springs, CO 80933-7150

University of Colorado

JOHN C. NARVER

Professor ofMarketing,

Graduate School of Business Administration, University of Washington, Seattle, WA 98195

Abstract. Market orientation is a businessculture which enlists the participation of ah employeesfor the purpose
of creating superiorvalue for its customersandsuperiorperformancefor itself. A substantialbody of researchfinds
a positive relationship betweena businesssmagnitudeof marketorientation and its performance.However, there
has been no researchinto the competitive strategiesthrough which a market-orientedbusinesscreatescustomer
value. This paper extends previous work by showing that market-orientedbusinessesaggressively develop new
products and services, focus on opportunities in market segmentsrather than in the massmarket, and attempt to
achieve competitive advantageboth by increasingcustomerbenefitsand by reducing costs.
Keywords: market orientation, competitive strategy,businessperformance

Introduction
Webster (1992) suggests that marketing has three dimensions that must be understood
individually and collectively to realize marketings potential value to the organization.
These dimensions are marketing as culture, marketing as strategy, and marketing as tactics.
The contribution of a market-oriented culture is swiftly moving from being merely an article
of faith in marketing and management to being accepted as fact. The compelling logic of
its superiority as a business culture is strongly supported by the rapidly developing body
of empirical evidence that demonstrates a positive relationship between market orientation
and business performance (Narver and Slater, 1990; Ruekert, 1992; Deshpande, Farley, and
Webster, 1993; Jaworski and Kohli, 1993; Slater and Narver, 1994).
Market orientation, as a key element in an organizations culture (Deshpande, Farley,
and Webster, 1993), provides strong norms for organizational behavior (Deshpande and
Webster, 1989) including selection of the firms competitive strategy (Webster, 1992) and
may be a key success for some competitive strategies (Slater and Narver, 1993). However,
Day (1992) notes that the emerging body of work describing the relationship between
market orientation and performance has not discussed the specific actions that managers
of market focused firms take to create and sustain competitive advantage. Understanding
the link between marketing as culture (i.e., market orientation) and marketing as strategy
is important to our comprehensive appreciation of market orientations contribution to
organizational effectiveness. In this study we identify the strategic skills and activities of
market-oriented businesses so that we can understand how market-oriented businesses turn
their culture into a competitive weapon.

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What is a Market Orientation?

Narver and Slater (1990) describemarket orientation as the businessculture that commits
the organization to the continuous creation of superior value for customersby encouraging
three key behaviors: customerorientation, competitor orientation, and interfunctional coordination. This createsan environment which maximizes opportunities for learning about
markets, for sharing information among all functions in the organization so that common
interpretations are reached,and for taking coordinatedaction. The result is that, A market
orientation appearsto provide a unifying focus for the efforts andprojectsof individuals and
departmentswithin the organization, thereby leading to superior performance (Kohli and
Jaworski, 1990). Numerous studies (Narver and Slater, 1990; Ruekert, 1992; Deshpande,
Farley, and Webster,1993;Jaworski and Kohli, 1993; Slater and Narver, 1994) find a positive relationship betweenthe magnitude of a businesssmarket orientation and measures
of a businessperformance.
However, our understandingof the market-orientedbusinessis incomplete in that it does
not encompassthe relationship betweenmarket orientation and competitive strategy. Understanding this relationship is the objective of this study. To accomplish this, we: (1)
develop a databasecomposedof a diverse set of small to medium-sized, single-business,
manufacturing companies;(2) retestthe market orientation-performancehypothesisto confirm market orientations importanceto the businessesin this sample;and (3) determine the
strategic profile of a market-orientedbusiness.
In the following sections we discuss the theoretical relationships between market orientation and performance and between market orientation and three key dimensions of
competitive strategy: (1) product innovation (Miles and Snow, 1980;Lieberman andMontgomery, 1988); (2) strategictargeting (Porter, 1980); and (3) basis for strategic advantage
(Porter, 1980; Day, 1990) which collectively representthe Miles and Snow (1978), Porter
(1980), and order-of-entry strategytypologies, the most widely referencedframeworks(see
Walker and Ruekert, 1987; Kerin, Varadarajan,and Peterson,1992; and Varadarajanand
Pride, 1994) in strategyresearch.
Theory and Hypotheses

Market Orientation and Performance

To establish the foundation for the importance of analyzing the strategic profile, we first
examine the relationship betweenmarket orientation and businessperformance. The theoretical foundation for a positive relationship betweenmarket orientation and performance
is well developed(e.g., Day, 1990,1994a&b; Kohli and Jaworski, 1990;Narver and Slater,
1990; Ruekert, 1992; Jaworski and Kohli, 1993; Slater and Narver, 1994). We briefly
review the major elementsof this theory.
Through its customer-valueoriented activities, the market-orientedbusinessis well positioned to developproductsand ancillary servicesthat costeffectively satisfy customerneeds
(Deshpande,Farley, and Webster,1993). Employeesthroughout the organization develop
a thorough understandingof the customersexpressedand latent needs,frequently discuss

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customers satisfaction with their products and with competitors products, and act quickly
to take advantage of market opportunities. A market orientation, by enabling a deeper
understanding of customers needs and perspectives, enhances a businesss ability to create
superior value for customers and thereby superior performance for itself. Furthermore, as a
form of culture its basis for superior value is difficult to imitate (Barney, 1986; Day, 1994b),
leading to sustainability of competitive advantage.
The market-oriented business will realize its performance potential by either: 1) maximizing profit at the expense of expanded sales, 2) maximizing sales at the expense of profit
margin, or 3) balancing the trade-off between profitability and sales growth for superior overall performance (Donaldson, 1985; Fruhan, 1984). This decision is most clearly illustrated
in the choice between using a skimming pricing strategy or a penetration pricing strategy
for a superior value product. If a business elects a skimming strategy, it necessarily limits
its initial sales volume to non-risk-averse (or low price sensitivity) early adopters. These
buyers are willing to pay premium prices for the perceived substantial product improvement, which increases margins and profitability to the seller. The alternative is penetration
pricing which establishes a sufficiently low price to overcome the buyers perceived risk
associated with the innovation, leading to increased sales volume, but usually at lower initial
profit margins and return on investment to the seller. Finally, if the seller creates substantial
benefits for buyers, it may be possible to set a price that captures a substantial share of the
market while yielding a relatively high margin for the business. Therefore, we expect that,
depending on a businesss objectives and strategies, market orientation will be positively
related to business profitability and/or sales growth.
Hl.

There is a positive relationship between magnitude of market orientation and

business performance.

Market Orientation and Product Innovation

Product development is one of businesss most important activities. At 3M, products less
than 5 years old account for 25% of sales. During the 1980s, profits from new products
grew from one-fifth of corporate profits to one-third (Takeuchi and Nonaka, 1986). Booz,
Allen, and Hamilton (1982) found a similar role for new products in a study of 700 firms
competing in industrial and consumer markets. However, product development is a high
risk activity. For example, several studies have reported failure rates in the 20-40% range
(Calantone, di Benedetto, and Bhoovaraghavan, 1994).
A common representation of product development strategy is the innovativeness of new
products introduced into new or existing markets (e.g., Kerin et al., 1992; Varadarajan and
Clark, 1994). Developing innovative products or being the first-mover with a new product
concept is the most risky product development strategy due to the difficulty of correctly
identifying new product opportunities, uncertain technological standards, existence of competitors with established products that fulfill the same generic need, and buyer resistance to
innovation. Early followers are imitators that reduce risk by observing pioneers successes
and failures, and by taking advantage of free-rider effects through lower development and
manufacturing costs. Late followers or defenders are the most risk averse in that they prefer

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to grow by further penetrating their traditional markets, and postpone new product development and market entry until the markets potential is demonstrated and technological
standards are well established (e.g., Miles and Snow, 1978; Lieberman and Montgomery,
1988; Kerin et al., 1992; Slater, 1993).
A market-oriented culture and the associated behaviors reduce many of the risks associated
with product development (Dougherty, 1990; Calantone et al., 1994). Market-oriented
businesses continuously monitor their external environments for new product opportunities
and for product development threats from competitors. By focusing on customers latent
needs, market-oriented businesses are well positioned to recognize emerging needs and
rapidly assesscustomer response to new products (von Hippel, 1986). Through their marketscanning efforts, they are able to discover underdeveloped market niches and segments
(Day, 1994b), and also are able to identify opportunities created by competitors miscues.
Market-oriented businesses exploit their capabilities by being innovators or early followers.
H2. There is a positive relationship between magnitude of market orientation and
product development innovativeness.

Market Orientation and Strategic Targeting

Porter (1980) explains that there are two generic alternatives for how a business might target
its strategic market opportunities. First is a market-wide definition which implies that
buyers needs are relatively undifferentiated and that the benefits to the seller from producing a standard product and using mass market distribution provide the greatest opportunity
for buyer-value creation. At the other end of the spectrum is market focus which implies
that the market is composed of a number of heterogeneous market segments. Each market
segment has a relatively unique utility function, with some segments placing greater importance on quality, service, advanced features, or price, respectively. The focuser selects
a segment or group of segments in the industry and tailors its strategy to serving them,
(Porter, 1985)
Where differences exist among segments in a market, the fundamental choice for sellers
is between the efficiency of a market-wide approach and the increased benefits to buyers
from a market-focused approach. Market-oriented businesses have well developed skills in
both broadly scanning existing and related markets and establishing deep relationships with
key customers. These skills enable market focused businesses to segment their markets to
determine where the greatest opportunities for profitable growth are. Their commitment to
intelligence sharing, achieving a shared interpretation, and joint problem solving enhances
their ability to profitably develop products and services targeted to relatively fine customer
definitions (Day, 1994b). These market sensing and customer linking capabilities (Day,
1994b) complement a market-focused approach when it recognizes that buyers needs
differ and that tailoring the offering to specific needs will make the offering more attractive,
resulting in either or both additional sales in the target market and premium pricing.
Moreover, as Porter notes (1985), a focus strategy does not constrain the market driven
business to competing in one segment. Market-driven businesses may pursue opportunities in numerous segments, a multi-focus strategy, by adapting products to specific market

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needs through addition of important product features or ancillary services. This provides
opportunities for cost control and reduction via economies of scope. On the other hand,
market-driven businesses recognize that focusing on efficiency through a market wide approach necessarily limits the extent to which a seller can customize or augment the product
with features or services without jeopardizing its cost position. The result is that a marketwide definition may force the seller into price competition. Thus, we hypothesize:

H3. There is a positive relationship between magnitude of market orientation and

market focus activities.

Market Orientation and Basisfor Strategic Advantage

In todays value-oriented environment, market-oriented businesses recognize that buyers
have come to expect benefits such as high quality and superior service, but at a low price as
well (e.g., Sherman, 1992; Rice, 1992; Jacob 1993). A market orientation is fundamentally
concerned with developing an in-depth understanding of buyers expressed and latent needs.
Differentiation, when it provides superior customer benefits, is entirely consistent with
market orientations external focus on customer needs and competitor capabilities. Thus,
we expect a strong relationship between market orientation and emphasis on differentiation
effects such as quality and service.
However, as Porter (1985) notes, Many firms have discovered ways to reduce costs not
only without hurting their differentiation but while actually raising it. Market-focused
businesses understand that lowering the buyers total life-cycle cost is an important component of creating superior customer value. Thus, they strive for continuous cost improvement
by investing in new technologies such as flexible manufacturing, mass customization, and
computer integrated manufacturing. These investments enable the business to offer variety and rapid new product development while maintaining low cost and high productivity
(e.g., Zammuto and OConnor, 1992; Pine, Victor, and Boynton, 1993). Consequently, the
market-oriented competitor is well positioned to create superior customer value, at a profit,
by providing important benefits at a low price.
Consistent with Porters (1980) perspective on the generic focus strategy (similar to H3),
the market-oriented business achieves differentiation from better meeting the needs of the
particular target, or lower costs in serving the target, or both (our emphasis). He also
emphasizes (1985) that, If a firm can achieve cost leadership and differentiaton simultaneously, the rewards are great because the benefits are additive. We hypothesize that because
of an in-depth understanding of the totality of their customers needs:

H4. There is a positive relationship between magnitude of market orientation and

differentiation activities and
H5. There is a positive relationship between magnitude of market orientation and lowcost activities.

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Research Design
The Sample

The samplewasdrawn from a directory of manufacturersin a midwesternstate. We selected

all businessesthat met the following criteria:
1) Salesvolume between$1 million and $50 million,
2) 10 or more employees,and
3) In businessfor 5 or more years.
While these businessesare headquarteredin one geographical region, they compete nationally and internationally, thus reducing concern about generalizability. The directory
identified the president or general manager. Each president or general managerreceived
a cover letter and a questionnaire. The cover letter explained that we were conducting a
study on Business Practices,and the questionnairecontained the items to measurethese
practices in the businesssprincipal served market. The screenresulted in a sampling
frame of 977 independentbusinesses.228 useablesurveys were returned for an effective
responserate of 23% which is in the typical range for mail surveys. We comparedthe responsesof the last 10% of respondentsto the earlier majority respondentson performance
and market orientation and found no significant differences,thus minimizing concern about
non-responsebias.
Measures
Market Orientation: We use 12 items from Narver and Slaters ( 1990)measureof market
orientation (see appendix). Each of a businessscustomer orientation, competitor orientation, and interfunctional coordination activities is representedby four items in the scale
(a! = .784). We used a reduced item set to minimize the length of the questionnaire and
encouragea higher responserate, and selectedthe four items representingeachactivity that
had the strongestitem-to-total correlations in their reliability analysis. Narver and Slater
(1990) offer evidence of discriminant validity, convergentvalidity, and concurrent validity
for the measureof market orientation.
Performance: Businessperformanceis top managementsassessmentof return on assets
and sales growth rate relative to all other competitors in the principal servedmarket over
the past year. We select these two indicators as: (1) they are two of the most commonly
used indicators of business-levelperformanceby both managersand researchers(Hofer,
1983; Venkatramanand Remanujam, 1986); (2) they have been demonstratedto have a
positive effect on the economic value of the firm (Varaiya, Kerin, and Weeks, 1987); and
(3) managersoften make trade-offs betweenpursuing one or the other (Donaldson, 1985;
Fruhan, 1984).
Each is measuredon a 1 to 7 scale with each increment representingabout 15% of the
competition in the principal servedmarket. For example, if a managerbelieves his firms

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165

performance is greater than that of 60% of competitors, performance would be rated 5.

Respondents were asked to consider return on investment, return on assets, and return on
net assets as equivalent, for a businesss relative performance on each of these should be
very similar.
Measuring performance as relative performance controls for performance differences
among the businesses different industries and served markets. Subjective measures of performance are commonly used in research on private companies or on business units of large
companies. Previous studies have found a strong correlation between subjective assessments and their objective counterparts (e.g., Dess and Robinson, 1984; Pearce, Robbins,
and Robinson, 1987; Venkatraman and Remanujam, 1987).
Product Development Innovativeness: Consistent with the relative risk associated with
different product development strategies, we measured this construct based on a businesss
relative emphasis on [l] developing innovative new products; [2] analyzing competitive
offerings and offering imitative new products; and [3] defending existing products from
competitive attack. We employ a multi-item, continuous scale to counter some of the limitations of nominal scales for strategy research (Venkatraman and Grant, 1986; Conant et
al., 1990). Following Gupta and Govindarajan (1984), we constructed a weighted average strategy index based on each strategys importance to the SBU and its magnitude of
aggressiveness.
Respondents were asked to rate the importance of each strategy to the SBUs overall
competitive strategy during the previous year using a 1 to 7 Likert-type scale. Since
product defense is the least innovative growth strategy, it was assigned an innovativeness
value of 1. Developing imitative new products was assigned a value of 4, and introduction
of innovative new products was assigned a value of 7. Weighed average innovativeness
values (C(innovativeness value x importance of strategy)/( C innovativeness values)) for
each SBU were then computed. High scores indicate an innovation oriented strategy.
To assess the validity of the innovativeness measure, we examined its relationship with
the importance to the business of sales growth and return on investment, respectively, for
assessing performance. We expect a positive relationship between innovativeness and sales
growth as an emphasis on sustained product innovation should be reflected in a greater
emphasis on sales growth as a business objective than for a late entrant whose growth
is primarily from additional market penetration. With respect to ROI, businesses across
the innovativeness continuum should value profitability highly. Thus, there should be no
relationship between innovativeness and importance of ROI as a business objective. These
respective emphases should be reflected in a businesss planning system (Veliyath and
Shortell, 1993). We find a correlation coefficient of .14 (p < .05) between innovativeness
and emphasis on sales growth and a coefficient of -.Ol (ns) between innovativeness and
emphasis on ROI, which provides evidence of discriminant validity for the innovativeness
measure.
Strategic Targeting: Strategic targeting is measured with a four item (l-7 Likeit type)
scale (a = .639) composed of: [l] segments markets; [2] systematically tracks opportunities and threats in served market segments; [3] develops unique products or marketing programs for groups of buyers with similar needs; and [4] uses marketing research. Extensive
use of these practices (a high score) implies that the business concentrates on understanding

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the structure of markets and the opportunities therein, and thus a focused strategy, while
a low score implies low appreciation for segmentdifferences,and thus a broad or market
wide strategy.
Basis for Strategic Advantage: Drawing on Porter (1980), Dessand Davis (1984), and
Miller (1988), we developed6-item and 5-item scalesto measuredifferentiation strategy
(CX= .641) and low-cost strategy (a = .796). The differentiation scale describesbenefitoriented activities including: [l] provides extensiveservicebefore and after sale; [2] adopts
new marketing techniques; [3] differentiates products; [4] offers broad product line; [5]
emphasizesbrand name; and [6] offers high quality products. Low-cost was assessed
basedon: [l] optimize capacity utilization; [2] raw material value analysis; [3] modernize
manufacturing; [4] plant efficiency; and [5] low manufacturing cost. Respondentswere
askedto ratethe importanceof eachof these11competitivemethodsto the businesssoverall
competitive strategyduring the pastyear using a 7-point Likert scale. A high scoreimplies
an emphasis on the particular approach to strategic advantage. A similar measurement
approach was employed by Govindarajan and Fisher (1990) and was demonstratedto be
reliable and to have convergentvalidity.
Control Variables: The following variablesareincluded in the analysisto control for their
influence of profitability andsalesgrowth (Scherer,1980;Capon,Farley,andHoenig, 1990)
andbecauseof their potential influence on strategyselection. For example,a relatively small
businessmight be forced into a follower strategydue to its inability to invest in the high-risk
product and processdevelopmentactivities required of an innovator. This influence must
be controlled to understandthe fundamental relationship between market orientation and
product developmentinnovation strategy.
Relative Cost: Relative cost is the averagetotal operating costs of a businessrelative to
those of its largestcompetitor in its principal servedmarket segment(on a 1 to 8 Likert type
scale).
Relative Size: Relative size may be an important influence on performance, particularly
where there is a wide disparity in size of businessunit, as is the case with this sample.
Using an 8 point scale (from 1 = less than one-quarterto 8 = greaterthan or equal to twice
aslarge), respondentswere askedto indicate the volume of their revenuescomparedto their
largest competitor.
Relative Quality: Basedon numerousstudies(e.g., Buzzell and Gale, 1987; Jacobsonand
Aaker, 1987), the influence of product quality on performancehas becomewell accepted.
Using a 1 to 7 (1 = very inferior, 4 = equivalent,7 = very superior) scale,respondentswere
askedto rate buyers perceptionsof their businesssrelative product quality.
Murket Growth: Respondentswere askedto estimate the averageannual growth rate of
total salesin your principal servedmarket segment,over the past 3 years.
Easeof Entry: Easeof entry is the likelihood of a new entrantbeing able to earn satisfactory
profits in the principal served market segmentwithin three years after entry. Easy entry
implies a disadvantageto current competitors(Porter, 1980).
Competitor Concentration: Respondentswere askedto estimate the proportion of sales
revenuein the businesssprincipal servedmarket segmentaccountedfor by the four largest
firms, including the subject businessif appropriate,using a 1 to 7 scale with 1 being less
than 10% and 7 being more than 85%. According to economic theory, high concentration

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COMPETITIVE STRATEGY

Table 1. Descriptive Statistics and Correlation Coefficientsn = 228

Mean
(Std Dev)

1.

Market
Orientation

5.19
(0.71)

1.oo

2.

Return on
Investment

4.41
(1.77)

0.051

1.00

3.

Sales
Growth

3.95
(1.89)

0.2063

0.4413

1.oo

4.

Market
Focus

4.65
(1.16)

0.3733

-0.014

0.058

1.oo

5.

Market
Proactiveness

4.80
(1.24)

0.2643

-0.048

-0.032

0.4363

1.oo

6.

Differentiation
Strategy

5.15
(0.90)

0.3373

0.019

0.118

0.6443

0.5693

1.oo

7.

Low-Cost Strategy

4.49

0.2273

-0.033

0.2933

0.229

0.184*

0.2803

1.00

1. p-.05; 2. p-.01; 3. p-001

should result in higher performance for the major competitors as they mutually recognize
the advantages of avoiding price competition.
Buyer-Power: Respondents were asked to estimate the extent to which buyers are successful
in negotiating lower prices on a 1 to 7 scale with 1 being not at all and 7 being to
an extreme extent. Porter (1980) argues that high buyer power negatively influences
profitability.

Analysis and Results

Table 1 contains descriptive statistics for the variables involved in the hypothesized relationships.
Hypothesis 1 is tested by regressing profitability and sales growth on market orientation
and the full set of control variables. Hypotheses 2-5 are by regressing market proactiveness,
market focus, differentiation strategy, and low-cost strategy on the same set of independent
variables. Results are shown in Table 2.
The coefficient for market orientation is positive and significant with sales growth as the
dependent variable, providing partial support for Hl. Consistent with hypotheses 2 through
5, the coefficient for market orientation is positive and significant in each case.

0.192
(0.11)

Low-Cost Strategy

1. p-05
2. p-.01
3. p-.001

0.07
(0.06)

0.07
(0.W
0.18
(0.03)

0.02
(0.02)

0.253
(0.08)

-0.05
(0.W
-0.07
(0.00)

0.192
(0.06)
0.02
(0.09)

0.00
(0.W

-0.01
(0.W

0.02
(0.03)

Differentiation
Strategy

-0.03
(0.06)

0.263
(0.11)

Market
Proactiveness

-0.05
(0.00)

0.12
(0.08)

-0.02
(0.03)

0.11
(0.06)

0.313
(0.10)

Market
Focus

0.202
(0.01)

0.09
(0.13)

0.13
(0.05)

0.05
(0.09)

0.13
(0.17)

Sales
Growth

0.12
(0.01)

-0.04
(0.12)

0.243
(0.05)

0.00
(0.08)

0.01
(0.03)

Return on
Assets

Market
Growth

Relative
Quality

Relative
Size

Market
Orientation

Dependent
Variable

Relative
cost

Table 2. Results of Regression Analysis

Standardized Regression Coefficients (Standard Errors)
n = 228

-0.141
(0.05)

-0.01
(0.06)

0.04
(0.W

0.02
t0.w

0.08
(0.04)
-0.02
(0.03)

-0.03
(0.05)

-0.07
(0.08)

-0.02
(0.07)
0.06
(0.04)

-0.01
(0.08)

Competition
Concentration

0.03
(0.06)

Ease of
Entry

-0.03
(0.07)

0.04
(0.05)

0.12
(0.07)

0.00
(0.06)

0.00
(0.10)

-0.06
(0.02)

Buyer
Power

3.703
.09

4.213
.lO

2.65
.06

4.513
0.11

3.3g3
0.08

2.08
a4

F-Value
Adjusted R*

2
m

Y
zi

COMPETITIVE STRATEGY

169

Discussion and Implications

The results of this study suggest that market-oriented businesses are product innovators and
focus on opportunities in individual market segments by emphasizing both differentiation
and low-cost strategies, as appropriate. It should be noted that the presence of a market
driven culture is the only variable that is significantly related to all four of the strategy
dimensions examined and that it is the strongest predictor in any of the equations. Based on
the extant theory and the evidence to date, we believe that a market driven culture is strongly
related to performance and to strategic choice. These findings build on previous work
examining internal characteristics of market-oriented businesses (Jaworski and Kohli, 1993;
Ruekert, 1992) and processes for developing a market orientation (Narver and Slater, 1991).
In conjunction with the earlier findings, the present results contribute to the development
of a comprehensive picture of the market-oriented business.

Market Orientation and Performance

The results of this study are consistent with previous findings that there is a significant market
orientation-performance relationship. We conclude that the market orientation-sales growth
relationship is significant and robust across business types and competitive settings. And,
while the finding of no relationship between market orientation and profitability is contrary
to the findings of Narver and Slater (1990) and Slater and Narver (1994), this could be due
to managers making a conscious trade-off between profitability and growth. It is possible
that the small to medium-sized businesses in this sample see greater long-term benefits
at this stage from the market power they may achieve through growth in size (size is the
strongest predictor of profitability) than from maximizing current profitability.
The finding of no relationship between market orientation and ROI may also be due to the
diversity of businesses and industries represented in the sample, in contrast to the Narver
and Slater (1990) sample. This also would contribute to the relatively low R*s in all of the
regression equations, Focusing on individual industries (e.g., McKee et al., 1987; Slater,
1995) leads to higher R*s due to greater control of industry-level phenomena and to the
relativity of strategy (Snow and Hambrick, 1980) which says that strategy constructs,
including market orientation, have greater meaning within an industry environment than
across environments. Thus, a multi-industry study introduces a variety of uncontrollable
environmental factors that have the potential to make a relationship appear weak.

Market Orientation and Competitive Strategy

As expected, this study provides evidence that a market-oriented culture is associated with
specific strategic activities. This demonstration of a relationship between market orientation
and competitive strategy furthers our understanding of the behaviors of the market focused
business.
The finding that market driven businesses tend to be innovative, focused, and flexible in
their selection of basis for strategic advantage begs the question of what this means for the

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strategies of less market-oriented businesses. Arc they merely less innovative, less focused,
less differentiation driven, and less low-cost driven than their market-oriented competitors?
We do not believe the answer is that simple. Kotler (1994) suggests that there are at least
five alternative company orientations toward doing business. For example, he suggests
that a production-oriented organization would concentrate on achieving high production
efficiency and wide distribution coverage, analogous to a defensive, market-wide, low-cost
strategy in our discussion. While we do not test specifically for the strategic profiles of other
orientations (see Kahn and Mentzer, 1994 for an example of work in this area), we believe
that a study comparing the strategic profiles of different orientations would be interesting
and useful to their more complete understanding.
Another interesting issue concerns the existence of an interaction between market orientation and competitive strategy. In other words are market-driven businesses more successful
with the prototypical strategy than businesses with a technology orientation or a production
orientation? While this issue is beyond the scope of this paper, researchers interested in
this issue should consider the potential moderating influence of environment (e.g., Day
and Wensley, 1988; Prescott, 1988; Kohli and Jaworski, 1990). Although the research
to date (Jaworski and Kohli, 1993; Slater and Narver, 1994) has found little evidence of
environment influencing the market orientation-performance relationship, it is possible that
a market-oriented culture facilitates successful execution of particular strategies in some
environments and not in others. For example, Slater and Narver (1993) found that a market orientation contributed to success for prospectors and analyzers in the forest products
industry, but not for defenders. Future studies should specify a more comprehensive model
of organizational features and market characteristics to understand market orientations
contribution to the implementation of business strategies.
Another fruitful area for research concerns whether market-oriented businesses employ
tools such as market segmentation and targeting differently from the way that more internally driven businesses employ them ? Do market-oriented businesses tend to employ
customer need based approaches to segmentation rather than customer characteristic (e.g.,
demographic) approaches? How do market-oriented businesses make the trade-off between
being customer-oriented and competitor-centered in their market monitoring activities (Day
and Wensley, 1988)?
Market-oriented businesses may create customer value by reducing customers acquisition
and use costs based on internal efficiencies or they may create customer value by adding
customer benefits through a differentiation strategy. We believe there are other important
issues to be investigated here as well. For example, how do market-oriented businesses
compete by reducing costs to the customer without encouraging price competition? How do
the most successful businesses manage the tension, which Porter (1980) refers to as stuckin-the-middle, between a constant focus on satisfying customer needs and a commitment to
continuous cost reduction? Also, how do market-oriented businesses create relationships
with key constituencies including customers and suppliers that are sources of long-term
customer benefits?
Finally, the issue of low R2s must be considered. A low R2 means that market orientation
explains only a small proportion of the variation in the strategy variables. As discussed,
this may be a function of the multi-industry sample which confounds the results due to

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171

STRATEGY

the relativity of strategy (Snow and Hambrick, 1980) and the introduction of unmeasured
industry-level factors (Slater, 1995). This could be addressed through a single-industry
study. It also must be recognized that a market oriented business does not have a unique
claim on these strategic characteristics (Kotler, 1994). A technology-driven business that is
not very market-oriented may also perceive itself as innovative. The presence of businesses
like that in the sample would weaken the market orientation-innovation relationship. Finally, it must be acknowledged that market-focused businesses may choose different value
disciplines (Treaty and Wiersema, 1995). What we believe we have found is the most
likely set of strategic characteristics for a market-focused business.

Conclusion
Judging from the managerial and academic literature, the desirability of developing a
market-oriented culture and translating its potential into market success has become conventional wisdom. However, a thorough understanding of the strategic characteristics of
market-oriented businesses has been lacking. This study has added to the picture of the
market-oriented business so that managers and scholars now have a better understanding
of the competitive actions of market-oriented businesses. However, there is much work to
be done to understand how market orientation interacts with competitive strategy and core
competencies to produce competitive advantage and superior performance.

Appendix:

Market Orientation

Scales (Items are scored on a l-7 scale)

Customer Orientation
Our business objectives are driven primarily by customer satisfaction
Our customers are important sources of new product/service ideas
We constantly monitor our level of commitment and orientation to serving customers needs
We measure customer satisfaction systematically and frequently

Competitor Orientation
Our salespeople regularly share information within our business concerning competitors
strategies
We rapidly respond to competitive actions that threaten us
Top management regularly discusses competitors strengths and strategies

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STANLEY E SLATERAND JOHNC. NARVER

In responding to competitive opportunities, our businessdevelopsnew capabilities as they

are required

Interfunctional

Coordination

We freely communicateinformation about our successfuland unsuccessfulcustomerexperiences acrossall businessfunctions

All of our businessfunctions (e.g.,marketing/sales,manufacturing,R&D, finance/accounting,
etc.) are integrated in serving the needsof our target markets
All of our managersunderstand how everyone in our businesscan contribute to creating customervalue
In the event of conflict betweenfunctions in our business,the involved parties are expected
to work out a mutually acceptablesolution
Acknowledgments

We gratefully acknowledgethe supportand encouragementof the Marketing ScienceInstitute andthe financial supportof the Centerfor ResearchandCreativeWorksat the University
of Coloradorolorado Springs.
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