Market Orientation & Performance 1

MARKET ORIENTATION & FIRM PERFORMANCE

Market Orientation’s Relation to Firm Performance

Karl R. Knapp

Anderson University
 Market Orientation & Performance 2

Market Orientation and Firm Performance

Based on the overwhelming evidence presented in the literature, an organizational

philosophy of market-orientation is related to firm performance and subsequently the

maximization of stockholder/owner wealth.

Market orientation is the organizationwide generation of market intelligence pertaining to

current and future customer needs, dissemination of the intelligence across the organization, and

organizationwide responsiveness to it (Kohli & Jaworski, 1990). According to the seminal

research by Kohli & Jaworski, there are three antecedents, two moderators and three

consequences to market orientation (1990).

The three antecedents to a market orientation include senior management factors,

interdepartmental dynamics and organizational systems (Kohli & Jaworski, 1990). These factors

directly affect the market orientation of the firm.

Kohli & Jaworski theorize that the consequences of a market orientation include higher

business performance, greater espirit de corps, greater job satisfaction, greater organizational

commitment of employees, and greater customer satisfaction and repeat business (1990). These

consequences of a market orientation may be moderated by supply-side and demand-side

moderators (Kohli & Jaworski, 1990).

Kohli & Jaworski theorize that as market turbulence and competition increase, so does

the relationship between market orientation and business performance (1990). Conversely, as

technological turbulence increases and as the economy weakens, these factors weaken the

relationship between market orientation and business performance (Kohli & Jaworski, 1990).

Obviously, the most important consequence proposed is between market orientation and

business performance. Several articles in the literature have empirically studied this relationship.
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Studies reject the causal relationship between a firm’s market orientation and performance where

others find this causal relationship to be statistically significant.

Of those studies rejecting increased business performance as a consequence of increased

market orientation, most seem to be limited to specific industry types. A review of the literature

reveals three empirical studies that reject the consequence of increased business performance.

The three dissenting studies focus on the non-profit sector (Liao, Foreman & Sargeant, 2000),

newspapers (Beam, 2001), and the UK hotel sector (Sargeant & Mohamad, 1999). While the

results of the studies are certainly valid, the industry types seem to be unique. These three studies

directly contrast with the majority of the studies that support a different finding.

A review of the literature yields twelve studies that find empirical support for the

consequence of market orientation. This majority of studies, representing a broad centrality of

industry types, find statistical support for increased business performance as a consequence of

increased market orientation.

Of these twelve studies, seven include: a study of automotive distribution channels in

Finland and Poland (Chang, Mehta, Chen, Polsa, & Mazur, 1999); a study of companies with

strong brands (Cravens & Guilding, 2000); a study of firms in the UK (Harris, 2001); a study of

hospitals (Kumar, 2001); a study of South African organizations (Loubser, 2000); a study of

small manufacturing firms (Pelham, 2000); and a study of Australian firms (Pulendran, Speed &

Widing, 2000).

Four studies that support increased business performance as a consequence of market

orientation also provide additional findings that advance the theory of market orientation.

A study from a broad cross-section of industries found that a learning orientation is an

enhancement to the effect of a market orientation (Baker & Sinkula, 1999).

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A study of Australian firms found that a competitor orientation has the strongest

statistical relationship with enhanced business performance (Dawes, 2000).

A study of the different layers of the organizational culture of market orientation finds

that the relationship between market orientation and business performance is stronger in highly

dynamic markets (Homburg & Pflesser, 2000).

A study found that business strategy type is a moderator of the strength of the

relationship between market orientation and business performance (Matsuno & Mentzer, 2000).

Business performance ultimately translates into higher valuations for the firm and for the

firm’s stock. Higher business performance provides higher net income, which provides for

higher dividends and distributions to shareholders. These distributions directly effect firm value

because the value of the firm’s stock can be viewed as the discounted value of all expected cash

dividends provided by the issuing firm until the end of time (Van Horne & Wachowicz, 1998).

The last of the thirteen studies provides direct support for not only the consequential

theory of market orientation, but also to the linkage to firm valuation. A study of British Telecom

found that a market orientation leads to improved business performance, that is recognized in

higher valuations, translating to higher share prices and wealth creation for the owners of the

firm (McNaughton, Osbourne, Morgan & Kutwaroo, 2001).

In summary, with few limited exceptions, the empirical studies found in the literature

support the hypothesized consequence of improved business performance and valuation for firms

employing a market orientation.

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Beam, R. A. (2001). Does it pay to be a market-oriented daily newspaper? Journalism and Mass

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Bennett, R. C. & Cooper, R. G. (1979). Beyond the marketing concept. Business Horizons.

Chang, T. Z., Mehta, R., Chen, S. J., Polsa, P. & Mazur, J. (1999). The effects of market

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New Jersey: Prentice-Hall Inc.