Detailed summary of all articles for the course Theories of Marketing (Master Business Administration). The summary also includes all the important images.
Summary Theories of Marketing ‘Article 1; The Effect of a Market Orientation on Business
Profitability (Narver & Slater)’
Introduction
Business performance is affected by market orientation, but there is no valid measure of effect market
orientation on business performance.
Market orientation and performance: the conceptual model
To achieve consistently above-normal market performance, organization must create sustainable
competitive advantage (SCA): sustainable superior value for customers -> expected value of offering
exceeds expected value of any alternative solution. Value to customer: difference between offering’s
expected benefits and expected total acquisition and use costs. Market orientation: organization
culture that most effectively and efficiently creates the necessary behaviours for the creation of
superior value for buyers and thus continuous superior performance of business. There are many
potential sources of SCA -> market-oriented business continuously examines alternative sources of
SCA to see how it can be effective in creating sustainable superior value and maintain long-run
performance.
Behavioural components market orientation:
1. Customer orientation: activities involved in acquiring information about buyers in target market
and disseminating it throughout the businesses -> understanding of target buyers to be able to
create superior value for them continuously. Seller creates value by increasing benefits in
relation to costs and by decreasing costs in relation to benefits.
2. Competitor orientation: activities involved in acquiring information about competitors in target
market and disseminating it throughout the businesses -> understanding short-term strengths
and weaknesses and long-term capabilities and strategies of key current and key potential
competitors.
3. Interfunctional coordination: business’s coordinated efforts, which is based on customer and
competitor information, to create superior value for the buyers. So, any individual in any
function in seller firm can contribute to creation of value for buyers -> creating value is more
than a marketing function. Effective interfunctional coordination requires alignment of
functional areas’ incentives and creation of interfunctional dependency so that each area
perceives its own advantage in cooperating closely with the others.
Behavioural components of market orientation comprehend activities of market information acquisition
and dissemination and coordinated creation of customer value.
Decision criteria market orientation:
1. Long-term focus: market orientation has primarily a long-term focus both in relation to profits
and in implementing each of behavioural components. Business cannot avoid long-run
perspective for long-term survival in presence of competition -> business must constantly
discover and implement additional value for its customers.
2. Profitability: overriding objective in market orientation is profitability (economic wealth). For
non-profit organizations, objective is survival (revenues sufficient to cover long-run expenses).
On developing a valid measure of market orientation
Study hypothesize that market orientation is a one-dimension construct consisting of three behavioural
components and two decision criteria and that each of five can be measure reliably with a multi-item
scale. One-dimension construct because behavioural components and decision criteria are closely
related -> business must continuously create superior value to maximize long-run profits, so it must be
customer oriented, competitor oriented, and interfunctionally coordinated.
Exploratory study consisted of 140 strategic business units (SBUs:
organizational unit with defined business strategy and manager with sales
and profit responsibility) of a major western corporation. Each member of
top management team received questionnaire with questions relating to
competitive practices and strategies, competitive environment, and
performance of SBU in served market (371 questionnaires).
,Types of businesses:
• Commodity businesses: sell physical products (lumber, plywood, wood chips, logs) that are
essentially identical in quality and performance to those of competitors. Businesses must add
various customer benefits to generic products and/or reduce buyers’ costs to create superior
value. Customers are wholesale distributors and outside retailers.
• Noncommodity businesses: businesses that can adapt their generic product or service
somewhat as well as add customer benefits to generic product and/or reduce customers’
costs to create superior value for buyers. Two types: speciality products businesses
(hardwood cabinets, laminated doors) and distribution businesses (buy products from within
corporation and sell them to retailers and exporters).
Sources of competitive advantage can be characterized as low cost or differentiation. Differentiation:
additional product benefits that can take many forms (brand image, product features, customer
service, technology) -> external emphasis (attempt to shift business’s demand curve upward). Low
cost advantage: internal efficiencies that can be passed on to buyers as lower acquisition and use
costs that relies on economies of scale, volume, and scope that result in cost reductions in activities
(R&D, production, service, advertising). SBU with strong market orientation -> differentiation strategy
(higher correlation between market orientation components and differentiation than between
components and low-cost strategy).
The effect of market orientation on business performance
Three behavioural components are equally important -> study assumes equal weights for the three
components -> SBU’s score for market orientation is average of sums of scores on three components.
SBU’s profitability is top managers’ assessment of SBU’s return on assets (ROA) in relation to that of
all other competitors in SBU’s principal served market over past year.
Study hypothesize that the greater a business’s market orientation, the greater the business’s
profitability will be, other things being equal -> general positive relationship between market orientation
and business profitability within all three types of businesses. Relationship between market orientation
and profitability will be stronger for distribution and specialty businesses than for commodity
businesses. Within company itself, commodity businesses are less effective than specialty and
distribution businesses in creating superior value for buyers, other things being equal. Therefore, given
the commodity businesses’ remoteness from buyers and their more price-oriented marketing strategy,
the study expect that commodity businesses have a lower mean score on market orientation and on
each of the three components of market orientation, and have lower average relative profitability than
speciality or distribution businesses. Many of largest businesses will have lowest mean market
orientation scores, because they may perceive that increasing market orientation could be
substantially costly and thus unattractive.
Implication is that relationship between market orientation and profitability for commodity businesses
may be U-shaped -> low and high market orientation businesses show higher profitability that
businesses in midrange of market orientation. Study expect the business with highest market
orientation to have highest profitability and those with lowest market orientation to have second
highest profitability, because businesses lowest in market orientation are most internally oriented
businesses and may be very consistent and efficient in what they do -> achieve some profit success
through low cost strategy.
, Eight situational variables that may affect business’s profitability and that must be controlled in
analysing effect of market orientation on business’s profitability:
1. Rate of market growth. When market demand is growing, it’s easier for sellers to acquire and
retain customers and earn profits, but there are reasons why business may not profit from
short-run demand growth:
o Some of short-term demand change is unexpected and business may be unprepared
to respond.
o Considerable amount of business’s production and marketing capacity in short-term
may be fixed in quantity and quality -> adjustments to demand changes are slow.
o New competitors will easily enter when there is easy entry by new sellers and will
capture some of profits and drive profitability to negative level.
o Business may choose to capture its gain from short-run demand increases in form of
increased sales at current prices.
➔ Hypothesis: positive relation between market growth and business’s profitability.
2. Seller concentration: degree to which sales in a market are accounted for by the four or eight
firms with largest sales. High levels of seller concentration are associated with high
profitability, because high concentration of sellers may encourage tacit or explicit joint-
maximizing monopoly behaviour and it may be proxy for firms with largest sales capturing
substantial scale and volume economies -> seller concentration implies benefits to business if
business is among four largest sellers.
➔ Hypothesis: positive relation between seller concentration and business’s profitability.
3. Entry barriers: unique incremental costs required of firm to enter and become competitively
viable in market. Greater ease of entry -> greater competitive pressure from current
competitors and potential entrants.
➔ Hypothesis: negative relation between ease of entry and business’s profitability.
4. Buyer power: degree to which buyer can negotiate lower prices or higher value from seller.
➔ Hypothesis: negative relation between buyer power and business’s profitability.
5. Supplier power: degree to which supplier can negotiate higher prices or value from buyer.
➔ Hypothesis: negative relation between supplier power and business’s profitability.
6. Technological change. Greater technological change in market -> more diverse opportunities
to create value for buyers. Required investment for R&D may produce negative profits.
➔ Hypothesis: negative relation between short-term technological change and profitability.
7. Relative cost: average total operating cost of business in relation to that of largest competitor
-> cost advantage effects.
➔ Hypothesis: positive relation between cost advantage for business and business’s
profitability.
8. Relative size: size of business in relation to largest competitor in market -> advantages
associated with large relative market share.
➔ Hypothesis: positive relation between business’s relative size advantage and its
profitability.
Results:
• Nonlinear relationship between market orientation and ROA -> consistent with expectation
that commodity businesses with medium market orientation will earn lower ROA than
commodity businesses that have either least or most market orientation.
• Negative relation market growth and business’s profitability -> hypothesis not supported.
• Positive relation buyer power and business’s profitability, because commodity businesses are
attentive to buyer’s needs when powerful buyers command their attention -> hypothesis not
supported.
• Differences in mean overall scores for market orientation and scores of three components
among three groups of commodity businesses (low, medium, and high market orientation).
High market orientation group has highest ROA and highest customer retention rate ->
excellently managed businesses and shortest longevity (most able and willing to adapt). Stuck
in middle medium group consists of smallest businesses and have least power over suppliers.
Low market orientation group consists of largest businesses in size and have greater
management longevity.
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