The role of organizational

competencies in the
market-orientation-performance
relationship
An empirical analysis
Ram Subramanian
School of Business, Montclair State University, Montclair,
New Jersey, USA, and
Kamalesh Kumar and Karen Strandholm
School of Management, The University of Michigan-Dearborn, Dearborn,
Michigan, USA
Abstract
Purpose The purpose of this paper is to examine the specic ways in which market orientation of
an organization contributes to the creation of organizational competencies that lead to superior
performance.
Design/methodology/approach Survey data from 159 acute care hospitals were statistically
analyzed to test the research hypotheses.
Findings Market orientation makes a signicant contribution to the creation of a number of
organizational competencies which, in turn, lead to superior performance in the areas of cost
containment, growth in revenue, success in retaining patients, and success of new services.
Originality/value Given the changing competitive landscape in the health care industry,
managers of these organizations are increasingly being forced to recognize organizational
competencies so that they can leverage them for market success. A set of competencies leads to the
organization becoming market orientated. Market orientation, in turn, leads to organizational success
in a variety of areas.
Keywords Market orientation, Competences, Organizational performance
Paper type Research paper
The creation and sustainability of a market orientation has long been recognized in the
marketing literature as important to the achievement of superior organizational
performance (Levitt, 1960; Kotler, 1977). However, only with the efforts made by Kohli
and Jaworski (1990) and Narver and Slater (1990) to operationalize the
market-orientation construct has there been a systematic and rigorous examination
of the relationship between market orientation and performance (Kirca et al., 2005).
Extant research in this area has established this relationship under various
environmental conditions (Harris, 2001; Greenley, 1995; Kumar et al., 1998;
Subramanian and Gopalakrishna, 2001) and context specic settings (Ho and
Huang, 2007; Asmat-Nizam et al., 2006; Appiah-Adu and Ranchhod, 1998; Carauna
et al., 1999; Pelham, 2000). However, while this research suggests that market
orientation is a means of obtaining a sustainable competitive advantage, it does not
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1056-9219.htm
Role of
organizational
competencies
7
International Journal of Commerce
and Management
Vol. 19 No. 1, 2009
pp. 7-26
qEmerald Group Publishing Limited
1056-9219
DOI 10.1108/10569210910939645
provide empirical evidence as to how market orientation inuences organizational
activities, which could result in superior performance and a sustainable competitive
advantage (Atuahene-Gima, 1996).
Arm has a sustainable competitive advantage when it implements a value-creating
strategy that current and potential competitors are not simultaneously implementing,
and when other companies are unable to duplicate the benets of its strategy. Since a
seller, any seller, has myriad alternative opportunities for creating buyer value by
increasing a buyers benets and/or decreasing a buyers total acquisition and use costs,
a business has to create and maintain the culture that will produce the necessary
behaviors to create superior value for customers (Zeithaml, 1988). According to
Narver and Slater (1990, p. 21):
[. . .] market orientation is the organizational culture that most effectively and efciently
creates the necessary behaviors for the creation of superior value for buyers and, thus,
continuous superior performance for the business.
A market-oriented rm, therefore, has superior performance because it continuously
examines alternative sources of sustainable competitive advantage to determine how it
can be most effective in creating superior value for its present and future target buyers
(Kotler, 1977; Levitt, 1960).
Objectives of the study
Based on the above discussion, it seems reasonable to think that the general positive
relationship between market orientation and organizational performance is perhaps the
result of those activities involved in becoming market oriented that provide a unifying
focus for efforts of individuals within the organization. The activities involved in
becoming market oriented can be considered organizational competencies, the creation
of which will lead to superior organizational performance. The objective of this study
was to examine the impact of market orientation in terms of the creation of specic
organizational competencies that may lead to superior organizational performance. It is
argued that through the pursuit of a market orientation an organization develops
certain competencies, which in turn facilitate the implementation of value creating
strategy, resulting in superior performance. The market orientation-organizational
competencies-performance linkages were examined through a path analytic model
using a sample of acute care hospitals.
Research framework
The market-orientation construct
Kohli and Jaworski (1990, p. 3) dened market orientation as the organization-wide
generation of market intelligence, dissemination of intelligence across departments,
and organization-wide response to it. In their seminal study, Narver and Slater (1990)
found that market orientation consists of three behavioral components (customer
orientation, competitor orientation, and inter-functional coordination) and two decision
criteria (long-term focus and prot emphasis). Customer and competitor orientation
include all the activities involved in acquiring information about the customers and
competitors in the target market and disseminating this information throughout the
organization (Narver and Slater, 1990). Inter-functional coordination involves
coordinated efforts, which typically involves more than the marketing department,
IJCOMA
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8
to use this information to create superior customer value (Narver and Slater, 1990;
Kumar et al., 1998). A long-range investment perspective is implied in market
orientation due to the need to prevent the organizations competitors from overcoming
the superior customer value created by the organization (Narver and Slater, 1990;
Kumar et al., 1998). Finally, protability ensures resources necessary to pursue a
market orientation (Kohli and Jaworski, 1990; Narver and Slater, 1990). For non-prot
organizations, an analogous objective would be survival and growth (Kumar
et al., 1997).
Following the guidelines of previous researchers, in this study market orientation is
viewed as a continuous rather than a dichotomous either-or construct. Because of the
close conceptual linkage among the different dimensions of market orientation, earlier
researchers (Kohli and Jaworski, 1990; Narver and Slater, 1990) treated market
orientation as a single construct composed of different dimensions. In other words,
organizations may differ in the extent of their orientation toward different
market-orientation components. Subsequently, Kumar et al. (1998) statistically
examined this assertion and found that the ve components of market orientation
are indeed closely linked, with the correlations between the ve components of market
orientation ranging from 0.42 to 0.67, and all correlations being signicant. Based on
these ndings, it appears reasonable to treat the ve components of market orientation
as parts of a common construct and to aggregate the ve dimensions into a single
indicator, i.e. market orientation.
Market orientation and creation of organizational competencies
Organizational competencies include the particular set of skills and resources an
organization possesses as well as the way those resources are used to produce
outcomes (Fiol, 2001, p. 691). It is generally agreed that these competencies must be
superior to the resources of rival organizations, as well as imperfectly imitable if they
are to be a source of sustainable advantage (Fiol, 2001). Conceptualized this way, it is
argued in this paper that as the organization successfully pursues a market orientation,
it will develop organizational competencies that will lead to a sustainable competitive
advantage. More specically, if the organization is able to successfully generate market
intelligence, disseminate it across departments and then respond to it, it should result
in the development of a particular set of skills and resources (or organizational
competencies) that will produce the outcome of superior performance.
Although there may be a number of different competencies that could be developed
in the pursuit of market orientation, this study focused on the competencies in the areas
of market effectiveness, operating efciency, domain protection, domain expansion,
employee education and creativity, and personnel policy effectiveness. The rationale
for selecting these competencies comes from the more recent literature on market
orientation in which researchers have examined various kinds of organizational
learning that facilitate the implementation of market orientation (Baker and Sinkula,
1999; Hurley and Hult, 1998).
Market effectiveness and operating efciency. As indicated previously,
customer-focused organizations have a thorough understanding of their target
buyers in order to create superior value for them (Narver and Slater, 1990; Slater and
Narver, 1998). A seller can create superior value for customers in two ways: by
increasing benets to the buyer in relation to the buyers costs and by decreasing the
Role of
organizational
competencies
9
buyers costs in relation to the buyers benets (Narver and Slater, 1990, p. 21; Slater
and Narver, 1998). Increasing the buyers benets in relation to the buyers costs can be
accomplished through market effectiveness. Such an objective requires that the seller
organization focus its effort on helping the buyer differentiate its product.
Differentiation can be accomplished in a number of ways such as improvements in
brand image, product features, customer service, dealer network, and technology
(Narver and Slater, 1990, p. 26). If the organization is effective at differentiation, this
will create value for the customer by increasing the buyers benets relative to the
buyers costs. By focusing on operational efciency, the organization may be able to
achieve low-cost advantages that can be passed on to buyers. Such an initiative creates
value to the customer by decreasing the buyers costs in relation to the buyers benets
(Slater and Narver, 1994).
Domain protection and expansion. A competency in domain protection and
expansion involves having the resources and skills to guard against threats and take
advantage of opportunities. As part of this competency, the organization will need to
generate information about the external environment in order to be able to identify
opportunities and threats (Mintzberg, 1973; Ansoff, 1975; Hrebiniak and Joyce, 1985;
Snyder, 1981; Jennings and Lumpkin, 1992). Note that because opportunities and
threats can come from any part of the environment, the generation of this information
is not limited to just the customer and competitor sectors of the environment. Such an
information collection effort is consistent with the intelligence gathering activity of
market orientation where it has been noted that generating market intelligence is a
broad-based activity which includes monitoring those sectors of the environment that
could inuence buyer preferences (Kumar et al., 1998). Through the generation of
this information, the organization should develop a thorough understanding of the
strengths, weaknesses, long-term capabilities and long-term strategies of current and
potential competitors (Narver and Slater, 1990; Slater and Narver, 1998). Obtaining this
information is key to domain protection and expansion because customers could view
these competitors as alternative suppliers (Slater and Narver, 1994). Based on the
information obtained about competitors and the threats they pose, contingency plans
can be developed to protect and expand the organizations domain with the end result
being that the organization becomes more competitor-focused.
The generation of this information also should result in a thorough understanding
of the buyers needs as they exist today and how they may evolve over time.
By utilizing this information to satisfy their current customer needs, the organization is
guarding against the threat that the customers will take their business elsewhere.
By anticipating changing needs and meeting these, the organization is expanding its
domain. This is the essence of being customer-focused.
Employee education and creativity and personnel policy effectiveness. At any point in
the customers value chain, customer value can be created and, as such, there is a
possibility that any person within the seller organization can contribute value (Slater
and Narver, 1994; Porter, 1985). Thus, it is important for all employees to recognize that
they have a role in creating superior value for their customers (Slater and Narver, 1994).
In fact, researchers in this area have noted that employees are a major barrier to the
successful implementation of a market orientation (Kelley, 1990; Harris, 1999). The lack
of employee understanding of the concept of market orientation and the inability to
translate their individual responsibilities into added customer value are among the
IJCOMA
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reasons that organizations are unable to achieve a market orientation (Harris, 1999;
Lichtenthal and Wilson, 1992; Masiello, 1988). Thus, employee education is an important
competency for successful implementation of a market orientation. Employees need to
be trained as to the implications and complexities of a market orientation, as well as
how they can translate their individual responsibilities to added customer value
(Harris, 1999).
Effective personnel policies also are necessary to the successful implementation of a
market orientation. Since employees have the power to change structures and systems
that are required to implement a market orientation, the attitude and actions of
employees will have a strong inuence on market orientation (Harris, 1999).
Consequently, in order to facilitate the development of a market orientation, it will
be necessary to develop a competency in the selection of employees with the appropriate
attitudes and the development of effective systems that reward appropriate employee
behavior. Therefore, the rst hypothesis for this study was:
H1. An organizations efforts to become market oriented will facilitate the creation
of organizational competencies in the areas of: market effectiveness,
operational efciency, domain protection, domain expansion, employee
education and creativity, and personnel policy effectiveness.
Market orientation and performance
Initial studies conducted by Narver and Slater (1990) and Kohli and Jaworski (1990)
found unequivocal support for a positive relationship between market orientation and
performance. However, as research has progressed on the market-orientation-
performance relationship, ndings suggest that this relationship may be inuenced by
certain environmental and organizational contexts. For example, Kumar et al. (1998)
found that competitive hostility and market turbulence positively moderated the
market-orientation-performance relationship, but supplier power negatively moderated
this relationship. Using a sample of rms from the UK, Greenley (1995) found that
market orientation has a different impact on alternative measures of performance for
different environmental conditions. Also using a UK sample, Harris (2001) found that
when subjective performance measures are utilized, under certain environmental
conditions, market orientation is associated with performance. However, when
objective measures of performance were utilized there was a much narrower range of
environmental conditions where market orientation and performance were related.
Using a sample of manufacturing and service rms located in India, Subramanian and
Gopalakrishna (2001) found a relationship between market orientation and
performance and also found that the environment did not moderate this
relationship. Thus, in the context of the developing economy, there is evidence that
the environment does not impact the market-orientation-performance relationship.
Researchers also have examined the impact that context has on the market-
orientation-performance relationship. For example, Appiah-Adu and Ranchhod (1998)
found a relationship between market orientation and performance in a sample
of biotechnological rms. Carauna et al. (1999) found this relationship in a sample of
governmental ofces and Pelham (2000) found this relationship using a sample of
SMEs. However, Tse (1998) found no such relationship between market orientation and
performance using a sample of rms from the Hong Kong real estate market.
Role of
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11
Based on these research ndings, it appears that market orientation does not by
itself contribute to superior performance; rather it may facilitate the creation of
organizational processes and activities which, in turn, could contribute to
organizational effectiveness. To the extent that a high level of market orientation
leads to the creation of certain types of organizational competencies, it could impact
both efcient internal operations (reected in growth in revenue and cost containment)
and effective demand management and customer needs fulllment (reected in success
in retaining customers/patients and success of new services/facilities). Also, to the
extent that the total impact of market orientation is leveraged through the creation of
organizational competencies, one would expect that the creation of organizational
competencies would have a moderating effect on market-orientation-performance
relationships. Therefore, the second hypothesis for this study was:
H2. Internal competencies developed by an organization in the process of
becoming market oriented would impact both efcient internal operations
(reected in growth in revenue and cost containment) and effective demand
management and customer needs fulllment (reected in success in retaining
customers/patients and success of new services/facilities).
Method
Context
The study examined the market orientation-organizational competencies-performance
relationships using a sample of acute care hospitals. The choice of the health care
industry as a setting for this research was considered particularly appropriate for
many reasons. First, this industry has a major impact on the US economy. The health
care industry is currently a $1.3 trillion industry, accounting for 13 percent of GDP
(Leonhardt, 2001). By the end of the decade, these numbers are expected to rise to $2.6
trillion and 16 percent of GDP (Leonhardt, 2001). Since the overall well-being of this
industry will have a large impact on the overall well-being of the economy, it is
important to understand those things that will help this industry improve their
performance. However, improving performance has been a problem in this industry.
The average prot margin for hospitals declined from 2 percent in 1984 to 20.2
percent in 1990 (Vogel et al., 1993). According to the State of the Hospital Industry:
2001 Edition, this deteriorating nancial condition continues into the present time
(Taylor, 2001). The second reason why the health care industry is an appropriate
research setting is that the health care industry has gone through what many
observers feel are quantum changes, and these changes have resulted in a shift from
health care as a social good to health care as an economic good, from a production
orientation to a market orientation (Kumar et al., 1998). These changes have also
affected industry protability (Anonymous, 2000). Finally, recent studies have shown
that in response to the changes in the industry environment, hospitals have adopted
different strategic orientations (Lamont et al., 1993), and that a large number of
hospitals have developed at least a moderate degree of market orientation (Raju et al.,
1996). As such, the health care industry should provide an appropriate research setting
for examining the market orientation-organizational competencies-performance
relationship.
By examining the market-orientation-performance relationship in a
context-specic setting using a large number of hospitals as the sample, the present
IJCOMA
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study would not only extend the generalizability of ndings generated in context-free
(Blair and Boal, 1991) situations, but also provide evidence for the applicability of an
important marketing concept to the eld of health care marketing. The importance of
market orientation to business performance has been underscored in the marketing
literature for many years; ascertaining its applicability to health care organizations
would provide important insights to health care professionals as they try to make their
organizations more effective and efcient.
Sample
A pre-notication letter was rst mailed to the chief administrators of 600 acute care
hospitals listed in the American Hospital Association Guide to the Health Care Field,
informing them of the study being conducted and its importance to academicians and
health care professionals. Two weeks later, a questionnaire titled Business Practices
Survey together with a personal letter was mailed to the same 600 chief
administrators. In the letter, respondents were told that the aim of the survey was
to investigate current business practices and the importance of certain performance
criteria among hospitals. Respondents were assured of anonymity. A total response of
171 was obtained, yielding a usable response of 159 fully completed questionnaires and
a response rate of 26.5 percent.
The comparison of the prole of sample organizations with institutional level
measures of organizational demographics obtained from secondary sources (www.aha.
org/resource) showed a reasonable similarity in terms of prot orientation, size, location,
and age. About 34 percent of the hospitals that responded were non-prot organizations;
66 percent were for-prot. In terms of location, 35 percent of the hospitals were located in
towns of less than 100,000 people, 28 percent in towns of over 100,000 people, 21 percent
were located in the suburb of a large city, and 16 percent were located in large cities.
More than half (55 percent) of the hospitals that responded were over 25-years old,
31 percent were between 11 and 24-years old, and 14 percent were less than 11-years old.
Finally, 37 percent of the hospitals were small independent hospitals, 15 percent were
mid-sized independent hospitals, 9 percent were large independent hospitals, and
39 percent were part of a larger system of hospitals.
Since the sample included in the study was a small subset of the total population
(159 out of 4,915), sample bias was further assessed using the time-trend extrapolation
test (Armstrong and Overton, 1977). The assumption underlying this test is that
non-respondents are more like late respondents than early respondents. No differences
were apparent between these two groups (early respondents and later respondents) in
terms of size (F 0.15, p . 0.70), location (F 1.79, p . 0.18), age (F 3.62,
p . 0.06), and prot orientation (F 0.03, p . 0.87).
Measures used in the study
Market orientation. Market orientation was measured using the scale originally
constructed and validated by Narver and Slater (1990), and later revised, rened,
expanded, and modied to suit the health care industry by Kumar et al. (1998). This
scale measures the ve components of market orientation through ve multi-item
sub-scales. The revised scale has a total of 25 items: ve each for interdepartmental
coordination, long-term focus, and survival and growth/prot emphasis; six items for
customer orientation; and four items for competitor orientation.
Role of
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13
Both the original authors (Narver and Slater, 1990) and the authors (Kumar et al.,
1998) of the revised version of the scale have provided very extensive evidence of the
validity and reliability of the scale. In their exploratory analysis of the
market-orientation construct, Narver and Slater (1990) found a one-factor solution
explaining 44.8 percent of the variance. Subsequently, Kumar et al. (1998) conducted
further analysis on the ve subscales of market orientation. Since they too found that
one single factor had a very high-Eigen value (10.51) and explained 42.1 percent of the
variance, they concluded that the factors identied through factor analysis are
conceptually closely related to each other and linked to the common construct of
market orientation. They further examined this conclusion by looking at the
intercorrelations between the ve subscales and their correlation with market
orientation (sum of the ve components). Results showed that the correlations between
the ve components of market orientation ranged from 0.42 to 0.67, and all correlations
were signicant at p , 0.01. Each of the factors was also noted to be highly correlated
(0.74 and above) with market orientation. The conclusion was further supported by the
high Cronbach a (0.94), when scores on the ve components were combined into
one scale. Based on the above evidence, it was concluded that the items included in the
scales that measure the ve components of market orientation are all related to a
common construct, i.e. the magnitude of market orientation. Reliability for each of the
ve scales far exceeded the recommended 0.7 threshold (Nunnally, 1978, p. 345).
Operating efciency and market effectiveness. Operating efciency and market
effectiveness were measured in terms of an organizations strategic focus on cost
leadership and differentiation. Based on the activities associated with differentiation
and cost leadership strategies, Narver and Slater (1990) developed scales to measure
the extent to which an organization uses these two strategies. Narver and Slater (1990)
have reported satisfactory reliability for the scales and have provided evidence of
validity. This study used a modied (to suit the hospital environment) version of this
scale. Marketing effectiveness was measured using a four-item scale while operating
efciency was measured through a six-item scale. The reliability of the two scales for
this study was 0.085 and 0.86 and far exceeded the recommended 0.7 threshold
(Nunnally, 1978). The item-total correlation for the items in the two scales ranged
between 0.65 and 0.85, with the majority of correlations being 0.70 and above,
indicating that the items included in the scale were all related to a common construct.
Domain protection and domain expansion. An organizations domain protection and
domain expansion activities were measured in terms of the two commonly accepted
dimensions of environmental scanning, opportunities and threats (Mintzberg, 1973;
Ansoff, 1975; Hrebiniak and Joyce, 1985; Snyder, 1981; Jennings and Lumpkin, 1992).
The scales used for measuring the two dimensions were developed by Jennings and
Lumpkin (1992). Subsequent use of the scale by other researchers also has established
its reliability and validity (Abdalla and Amin, 1995). This study used a modied (to suit
the hospital environment) version of this scale. The internal reliability of the scales for
this study was 0.74 and 0.78; which exceeds the recommended level (Nunnally, 1978).
Effective personnel policies and employee education and creativity. These two
constructs were measured using items derived from the human resource management
practices scale constructed by Hitt and Ireland (1986). This scale examines the importance
that an organization attaches to innovation and creativity, formulation of effective
personnel policies, organizational learning, improvement of employee attitudes,
IJCOMA
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optimizing turnover, and motivating and rewarding employees. The respondents
were asked to indicate on a 7-point Likert-type scale, where 1 of little importance and
7 of extreme importance, the importance their organization attaches to various issues.
Three-item scales were used to measure effectiveness of personnel policies and emphasis
on employee education and creativity. Reliability for the two scales was 0.89 and 0.79,
respectively.
Organizational performance. The commonly employed measures of performance
(growth in revenue, return on investment, prot margin, etc.) used to test the
market-orientation-performance relationship in the general industry context, may not
be the most appropriate and comprehensive measures in the specic context of the
health care industry due to two reasons. One is that players in the health care industry
come from both for-prot and not-for-prot orientations, thereby limiting the use of
protability measures to compare performance. The second reason is that there is a
compelling need for health care managers to focus on both efciency and effectiveness
in order to satisfy the demands of the myriad stakeholders (Fottler, 1987). Efciency is
important since competition for patients has been intensifying, and much of the future
health care business will be determined through competitive bidding (Fottler, 1987,
p. 373). Effectiveness is important to elicit and retain economic and political support for
the organization from external and internal stakeholders (Fottler and Lanning, 1986).
To test the market-orientation-performance relationship among hospitals in a
comprehensive and industry-relevant way, this study employed four performance
criteria. While growth in revenue and success of new services/facilities are similar to
the measures used by previous researchers, two additional performance measures were
utilized to account for the uniqueness of the industry. First, a hospitals ability to
control operational expenditures was used as the surrogate measure of efciency.
A market-oriented hospital is expected to use its market information to achieve
operating efciency because it is likely that such a rm understands that value can be
created for buyers not only by additional benets to them but also by reducing their
acquisition and use costs. Internal efciency is, thus, the springboard to reducing the
cost of the service to buyers. Second, the ability to retain patients, which is a function of
clinical quality, patient satisfaction, and employee attitudes and behavior, was used as
the other performance criteria. As noted earlier, effectiveness in this category is critical
because continued economic and political support for a hospital depends considerably
upon the hospitals success in satisfactorily meeting the expectations of stakeholders
on these measures (Fottler, 1987). A market-oriented hospital, by virtue of knowing
what patients want and preparing the organization to act on patients needs, is
expected to be highly effective on this performance measure.
The approach adopted for measuring organizational performance consisted of
asking respondents for their assessment of their organizations performance on the
four measures (Kumar et al., 1998). In contrast, an objective approach to measuring
business performance uses absolute values of performance measures (Chakravarthy,
1986; Cronin and Page, 1988). Previous studies that have used both the subjective
approach and objective measures have found a strong correlation between the two
approaches (Venkatraman and Ramanujam, 1986; Pearce et al., 1987; Robinson and
Pearce, 1988). Dess and Robinson (1984) concluded that it is appropriate to use
subjective measures where objective measures were inappropriate or unavailable.
Role of
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15
For this study, a subjective, rather than an objective approach was used for several
reasons. First, many of the organizations in the sample were not-for-prot
organizations and, thus, lacked the conventional performance measures used by
for-prot organizations (Subramanian et al., 1994). Second, absolute scores on nancial
performance criteria are known to be affected by industry-related factors (Miller and
Toulouse, 1986). As such, nancial performance measures obtained from health care
organizations would have made it misleading to compare the results of this study with
other studies, all of which have been conducted with samples from manufacturing
industries or mixed samples of manufacturing and service industries. Finally, a
number of organizations included in the study were small organizations. Such
organizations are noted to be reluctant to provide hard nancial data (Fioritto and
LaForge, 1986; Covin et al., 1990).
Business performance was measured using a modied version of an instrument
developed by Gupta and Govindarajan (1984). The respondents were rst asked to
indicate on a 7-point Likert-type scale, where 1 of little importance and 7 of
extreme importance, the importance their organization attaches to the two performance
criteria. The respondents were then asked to indicate on a second 7-point Likert-type
scale, where 1 highly dissatised and 7 highly satised, the extent to which
their organization was currently satised with their performance on each of the same
performance criteria. For each performance measure, a weighted average was
computed by multiplying the satisfaction score with the importance score.
Controlling for other inuences on performance
Marketing researchers have identied the need to control for the effects of additional
determinants of performance when testing the market-orientation-performance
relationship (Dawes, 2000; Jaworski and Kohli, 1993; Narver and Slater, 1990;
Pelham, 1997). Based on a review of the health care strategy literature (Blair and Boal,
1991; Topping and Hernandez, 1991; Zallocco and Joseph, 1991; Zajac et al., 2000), four
variables specic to the health care industry were identied as variables that should be
controlled for when analyzing the market orientation-organizational competencies-
performance relationship. These were: hospital size, prot orientation, location, and
age. It is argued that each one of these variables can inuence a hospitals performance
and, therefore, each need to be controlled.
Prior research indicates that larger organizations have better technological, human,
and nancial resources to pursue certain strategies (Liu, 1995). In addition, the size of a
hospital may help it obtain economies of scale in various activities, thereby positively
affecting its performance (Scherer, 1980; Robinson and Pearce, 1988). In terms of prot
orientation, hospitals were classied as either for-prot or not-for-prot. Prot
orientation was controlled since it affects the ability of the hospital to obtain resources
(Fottler et al., 1989) and hence could be critical for strategy implementation.
For example, while for-prot hospitals can obtain capital from the public, not-for-prot
hospitals have a more constrained set of sources of capital. In addition, management
constraints vary greatly between for-prot and not-for-prot hospitals (Fottler, 1987).
The location of a hospital may have an impact on the nature of the competitive
environment being faced by different hospitals. Competitive rivalry may be more
intense in large urban locations, which may adversely affect the performance of
hospitals in these areas. On the other hand, hospitals in small rural areas may have
IJCOMA
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little or no competition, which in turn could contribute to the superior performance by
these hospitals. The last control variable was the age of the hospital. The health care
strategy literature (Topping and Hernandez, 1991) identies age as a factor that
inuences the type of strategy pursued by the organization.
Results
Although the use of self-report data is common to management research, it has been
noted to create common method variance problems which can easily inate or
suppress (Ganster et al., 1983) the magnitude of relationships being investigated.
A review of the research on common method variance and examination of the data for
this study indicated that method variance was not a signicant issue for this study.
It has been noted that self-report data create most variance problems for topics that
evoke strong sentiments, such as stress, job satisfaction, organizational commitment,
etc. (Boyd and Fulk, 1996). Market orientation, organizational competencies, and
company performance are quite unobtrusive topics, and hence there is little likelihood of
their being distorted by self-reports. Second, it has been found (Podsakoff and
Organ, 1986) that topics invoking socially desirable responses often lead to a
compressed range in response. None of the variables being examined in this study could
have encouraged respondents to report in a socially desirable manner.
Furthermore, to examine the potential effect of same-source bias that occurs because
of data being collected in a subjective manner, the correlation matrix was closely
examined for any evidence of multicolinearity. This was a potential concern since all of
the data for the study were collected from the same source. However, there was no
evidence of multicolinearity, as all the variables that were correlated were
meaningfully related and there was no signicant correlation among unrelated
variables.
Data analysis for this study was conducted in three related phases. The rst step in
the analyses was to apply the technique developed by Simon (1954) to test for existence
of linkages not hypothesized in the study. Application of this technique involves
calculating the zero-order correlation between the pair of variables hypothesized to be
unrelated (e.g. market effectiveness and operating efciency, domain protection and
domain expansion, domain expansion and cost curtailment, etc.). The correlation
between these variables was insignicant and, as such, further analysis was
conducted. The complete correlation matrix, together with the scale reliability, is
presented in Table I.
The second phase of data analysis involved the use of path analysis to empirically
ascertain the direction and magnitude of causal relationship between variables
hypothesized to be related. Regression analysis of standardized antecedents and
dependent variables was used to obtain path coefcients (standardized regression
coefcients) and direction of relationships. Even though the standardized b coefcients
were, in some cases, small (indicating that relatively small percentage of variations in
the relationship was explained), in all cases the b coefcients were twice their standard
error conrming the robustness of observed relationships. The direction and
magnitude of relationships between variables hypothesized to be related were
ascertained using regression analysis of standardized antecedents and dependent
variables at the nodes of the model. Path coefcients (standardized regression
coefcients) and direction of relationships were obtained from regression analyses.
Role of
organizational
competencies
17
The third phase of the data analysis included the use of moderated multiple regression
(MMR) (Arnold, 1982; Sharma et al., 1981). This permitted the testing of the assertion
that the total impact of market orientation is leveraged through the creation of
organizational competencies (market effectiveness, internal efciency, domain
protection, domain expansion, employee education and creativity, and effective
personnel policies). The procedure requires the introduction of a multiplicative
interaction terminto the regression equation. Accordingly, six multiplicative interaction
terms were created by multiplying the values of market orientation by the values of
hypothesized organizational competencies. A total of 24 equations were built and tested
by estimating the following regression equations:
Y b
0
b
1
X
1
b
2
X
2
b
3
X
1
X
2
e
where Y is the performance measure, X
1
is market orientation, X
2
is a organizational
competency treated as a moderator variable, and where X
1
X
2
is the multiplicative
interaction term (the cross product of the independent and moderator variable).
Performance measures were simultaneously regressed on market orientation, the
organizational competency, and the interaction term. If the multiplicative interaction
termis statistically signicant a moderator effect is present. If the coefcients of both the
multiplicative interaction termand the moderator variable are signicant, the moderator
is a quasi-moderator. However, if the coefcient of the multiplicative interaction term
was signicant and the coefcient of the moderator variable effect was not signicant,
the moderator is a pure moderator. A pure moderator effect implies that the moderator
variable (organizational competency) modies the relationship (i.e. the regression
coefcient) between the predictor variable (market orientation) and criterion variable
(performance).
Market orientation and organizational competencies
Results of path analysis shown in Figure 1 show that path coefcients (standardized b
coefcients) between market orientation and all of the six organizational competencies
are signicant.
Variables Mean SD 1 2 3 4 5 6 7 8 9
1. Market orientation 5.63 0.88 0.94
2. Effective personnel policies 5.50 0.87 0.56 0.85
3. Domain protection 3.86 0.60 0.17 0.05 0.89
4. Domain expansion 4.09 1.30 0.32 0.10 0.03 0.90
5. Operating efciency 5.69 1.15 0.37 0.21 0.14 0.07 0.86
6. Market effectiveness 5.59 1.31 0.54 0.19 0.12 0.17 0.08 0.85
7. Employee education and
creativity 5.54 0.95 0.44 0.23 0.14 0.09 0.12 0.12 0.83
8. Cost containment 14.23 3.87 0.24 0.19 0.17 0.13 0.19 0.05 0.15
9. Success of new services 15.74 5.13 0.46 0.11 0.06 0.18 0.13 0.22 0.19 0.04
10. Growth in revenue
11. Success in retaining patients
Notes: Correlation of 0.20 and above are signicant at p , 0.01 level; reliability coefcients are
presented in the diagonal
Table I.
Mean, standard
deviation, scale reliability
and correlations
(n 159)
IJCOMA
19,1
18
Market orientation had the strongest association with the organizational competency
of operating efciency (0.48, p , 0.01), explaining 43 percent of the variance (adjusted
R
2
), followed by effective personnel policies (0.58, p , 0.01, adjusted R
2
0.34),
market effectiveness (0.57, p , 0.001, adjusted R
2
0.32), employee education and
creativity (0.54, p , 0.01, adjusted R
2
0.30), domain expansion activities (0.37,
p , 0.05, R
2
0.11), and domain protection activities (0.25, p , 0.05, R
2
0.09).
These results provide support for the assertion that the effort to become market
oriented does lead to the creation of critical organizational competencies.
Organizational competencies and performance
The relationship between the organizational competencies and performance was
examined in terms of four different performance measures, namely growth in revenue,
success of new services/facilities, cost containment and success in retaining
patients/customers. Results show that growth in revenue is positively associated
with domain protection (0.42, p , 0.001), operating efciency (0.28, p , 0.01), market
effectiveness (0.23, p , 0.01), domain expansion (0.25, p , 0.01), and effective
personnel policies (0.19, p , 0.05). These competencies together explained 27 percent
of the variance (adjusted R
2
). About 26 percent of the variance (adjusted R
2
) in success
of new services was explained by two organizational competencies: domain expansion
(0.45, p , 0.001) and operating efciency (0.17, p , 0.05). Cost containment was
positively associated with three of the six organizational competencies, namely,
effective personnel policies (0.25, p , 0.05), domain protection (0.17, p , 0.05) and
operating efciency (0.26, p , 0.01). These three competencies explained 21 percent of
the variance. Finally, three competencies (domain expansion (0.42, p , 0.001), market
effectiveness (0.20, p , 0.05) and operating efciency (0.29, p , 0.01)) accounted for
24 percent of variance (adjusted R
2
) in terms of the performance measure of success in
retaining patients. These results provide some interesting insight into the
organizational competencies that are critical to the success of hospitals. It needs to
Figure 1.
Market orientation
organizational activities
and performance
Market
Orientation
Domain Protection
Effective Personnel Policies
Operating Efficiency
Market Effectiveness
Employee Education and
Creativity
Domain Expansion
Cost Containment
R
2
= 0.21
a
Success of New
Facilities/Services
R
2
= 0.26
a
0.58
a
0.25
a
0.48
a
0.57
a
0.54
a
Notes: Path Coefficients are standardized beta weights
a
p < 0.01;
b
p < 0.05
Growth in Revenue
R
2
= 0.27
a
Success in
Retaining Patients/
Customers
R
2
= 0.24
a
0.25
b
0.19
b
0.17
b
0.42
a
0.26
a
0.28
a
0.29
a
0.23
a
0.20
b
0.45
a
0.25
a
0.42
a
0.37
b
0.17
b
Role of
organizational
competencies
19
be pointed out that, while a broad performance measure like growth in revenue appears
to be inuenced by a variety of organizational competencies, other narrower measures
of performance seem to be related to a comparatively small number of organizational
competencies.
Tests for moderator effects of organizational competencies on the
market-orientation-performance relationship
Results of the MMR analyses are given in Table II. These results show the impact of
the six organizational competencies (market effectiveness, operating efciency, domain
protection, domain expansion, employee education and creativity, and effective
personnel policies) on the relationship between market orientation and cost
containment, growth in revenue, success of new services, and success in retaining
patients. Once again, the moderating effect of organizational competencies on the
market-orientation-performance relationship is quite selective.
Discussion and limitations
Findings of this study, in general, provide support for the assertion made by scholars
(Kohli and Jaworski, 1990; Narver and Slater, 1990) that market orientation has a
positive impact on performance. The strategic choice perspective (Child, 1972) that has
both theoretical (Hambrick and Mason, 1984) and empirical support (Zajac and
Shortell, 1989; Jennings and Lumpkin, 1992; Lamont et al., 1993) argues that managers
select the strategy (ies) that they think best aligns their organization with the
environment. Market orientation is vital to an organization in that it helps assess the
constraints and opportunities created by the environment. However, market
orientation is more than just collecting and disseminating information about the
external environment. It also encompasses those activities that allow the organization
to act on such information by providing a coordinated response to environmental
opportunities and threats. Market orientation is, thus, more than a boundary-spanning
activity. It goes beyond the information collection and dissemination activities of
boundary-spanners to include acting on the information to provide value to the
customer and, thus, obtain a sustainable competitive advantage. It is, in effect,
a contributor to the creation of such critical complementarity (Miller, 1988) that is
essential to successfully pursue the strategic choice perspective.
Performance variables
Independent
variables
Growth in
revenue
Success of new
services
Success in
retaining
patients
Success in controlling
expenses
Market orientation 0.42
* * *
(0.08) 0.40
* * *
(0.08) 0.38
* * *
(0.08) 0.38
* * *
(0.08)
Effective personnel
policies 0.09 (0.10) 0.08 (0.10) 20.06 (0.10) 0.02 (0.10)
Interaction term 0.13 (0.08) 0.18
*
(0.09) 0.21
* *
(0.09) 0.25
* *
(0.09)
F 10.59
* * *
9.76
* * *
8.07
* * *
8.94
* * *
Adjusted R
2
0.16 0.14 0.12 0.13
Multiple R 0.42 0.40 0.37 0.39
Notes:
*
p , 0.05;
* *
p , 0.01;
* * *
p , 0.001
Table II.
Results of multiple
moderated regression
analyses standardized
regression coefcients
(standard errors)
(n 159)
IJCOMA
19,1
20
The positive impact of market orientation on creation of organizational competencies
and performance can perhaps be best explained using the systems theory (Scott, 1992).
A market-oriented organization considers itself an open system, in that it emphasizes
interaction with the environment as essential for its functioning, and, as such,
continuously examines alternative sources of sustainable competitive advantage to
determine how it can be most effective in creating superior value for its present and
future target customers. The positive linkages between market orientation and
creation of market effectiveness, employee education and creativity, and domain
expansion efforts, noted in the results of this study provide support for this view. At the
same time, market orientation also contributes to an internally driven optimization in
form of improvement of operating efciencies and institution of effective personnel
policies. To the extent that becoming market oriented requires the creation of such
organizational competencies, superior value for customers is created, thus improving
organizational performance.
The results of this study must be interpreted with caution because of three
limitations. First, while restricting the study to organizations in a single industry
conferred the obvious advantage of being able to control for industry effects, it also
limits the generalizability of the studys ndings to other industry contexts. In addition,
the cross-sectional nature of the study meant that conclusions must be restricted to
those of association. A study conducted in a longitudinal framework would throw light
on causal relationships between the variables of interest. Finally, self-report measures,
although widely used in behavioral and strategy research, raise doubts about the
ndings. While the use of self-reported measures for managerial perception about
market orientation, rm characteristic and company performance is justied, one
would have ideally liked to collect data through more than one source, combining both
perceptual and archival sources.
Managerial and academic implications
In the past, when entry regulation and cost reimbursement virtually insulated the
hospital industry fromtraditional market pressures (Cleverley and Harvey, 1992, p. 54)
being market oriented was of little consequence. Given these conditions, it is possible
that some health care managers may have concluded that the extra resources required
for making a hospital market oriented could not be justied in terms of the resultant
benets. However, the competitive landscape of the health care industry has been
dramatically altered in recent years. A number of factors have contributed to this
change, important among which are: active encouragement of competition by the
Federal government; the shifting balance of power from physicians to managers;
increased cost consciousness on the part of the government, employers, and third-party
payers; implementation of a prospective pricing system for reimbursing hospitals
under Medicare; and the growth and dominance of multi-hospital systems. Given this
industry environment, managers of health care organizations are increasingly being
forced to recognize organizational competencies and weaknesses, resolve strategic
issues, and develop coherent strategies.
The ndings of the current study provide important pointers to health care
executives in terms of managing the organization for superior performance, given the
industry dynamics. First of all, this study establishes the importance of market
orientation for hospitals in order to obtain a sustainable competitive advantage by
Role of
organizational
competencies
21
relating the degree of market orientation to the extent of success in achieving critical
performance outcomes. The study also underscores the necessity of building the
organizational competencies that will help them become more market oriented and
achieve superior performance outcomes. In the academic context, the current study adds
to the body of literature on market orientation. By examining the relationship between
the degree of market orientation and organizational competencies, it contributed to a
better understanding of the determinants of the market-orientation-performance
relationship. Also, by conducting the study in a context-specic environment, thereby
controlling for industry effects, its ndings clarify and add to the existing
understanding of the market-orientation-performance relationship.
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Corresponding author
Ram Subramanian can be contacted at: subramanianr@mail.montclair.edu
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