Implementing_competitive

Implementing competitive strategies:the role of responsive and proactive market orientationsRanjit VoolaDiscipline of Marketing,Faculty of Economics &Business,The University of Sydney,Sydney,Australia,and Aron O’CassNewcastle Graduate School of Business,Callaghan,AustraliaAbstractPurpose –This study seeks to draw on the strategy implementation approach and the resource-based view of the firm (RB theory)to investigate the relationships among competitive strategies (i.e.differentiation and cost-leadership),responsive market orientation (RMO),proactive market orientation (PMO)and firm performance.The purpose is to show that competitive strategies have a significant effect on market orientation and market orientation has a significant effect on firm performance.Design/methodology/approach –The paper designed a mail-survey that was sent to senior executives,which resulted in 189usable surveys.Data were analysed using partial least squares (PLS)to test the hypotheses.Findings –The findings show that both competitive strategies influence RMO and PMO,which then influence firm performance.However,the results show that differentiation strategy has a stronger influence on RMO and PMO than cost-leadership strategy,and that PMO has a stronger influence on performance than RMO.Research limitations/implications –The study examined one set of capabilities (RMO and PMO);research opportunities exist for identifying other firm capabilities (anisational learning)and their relationships with competitive strategies.Practical implications –Strategy implementation is a valid route to firm performance.Therefore,marketing managers must simultaneously develop competitive strategies and RMO and PMO to obtain increased firm performance outcomes.Originality/value –The study conceptualises market orientation as RMO and PMO,and suggests that this treatment of market orientation is important in understanding its role in the competitive strategies of firms and consequent firm performance.Keywords Competitive strategy,Product differentiation,Costs,Market orientation,Resources Paper type Research paperIntroductionOrganising marketing activities in ways that successfully enable business strategy implementation is recognised as one of the most difficult challenges facing managers [...]and researchers know little about how marketing activities should be organised to enable business strategy implementation or how this affects performance (Vorhies and Morgan,2003,p.100).A fundamental objective of marketing strategy research is to examine and better understand how firms develop and sustain competitive advantage,and how this leadsThe current issue and full text archive of this journal is available at/0309-0566.htmImplementing competitive strategies 245Received January 2007Revised September 2007,October 2008European Journal of Marketing Vol.44No.1/2,2010pp.245-266q Emerald Group Publishing Limited 0309-0566DOI 10.1108/03090561011008691to better firm performance outcomes (McNaughton et al.,2002).However,as the above extract from Vorhies and Morgan (2003)indicates,implementation is a critical issue requiring much more attention.With regard to competitive advantage and firm performance,market orientation has been identified as a key issue.As such,market orientation as a firm capability has been studied extensively in the context of how firms develop and sustain competitive advantages.However,there still exists aresearch gap in understanding how market orientation fits in the implementation of competitive strategies (e.g.Homburg et al.,2004).In particular,because the relationship between marketing and strategic management is axiomatic (Morgan and Strong,1998)and the contribution of marketing to corporate strategy is under-researched (Olson et al.,2005),understanding the relationships between market orientation and competitive strategies is crucial to understanding how market orientation contributes to firm performance (Vijande et al.,2005).Furthermore,Homburg et al.(2004)argue that although examining the role of market orientation in the relationship between competitive strategies and firm performance is important,understanding the role of market orientation when a firm simultaneously attempts to achieve differentiation and cost-leadership is vital.Although previous studies have examined the relationships among differentiation strategy,cost-leadership strategy,market orientation and new product activity (Frambach et al.,2003)and differentiation,market orientation and firm performance (Homburg et al.,2004),existing research has not simultaneously examined the relationships between differentiation,cost-leadership competitive strategies,responsive market orientation (RMO),proactive market orientation (PMO)and firm performance.The issue of simultaneity is particularly important because in most circumstances,the constructs derive their essence from the conceptual (nomological)network in which they are rooted.Furthermore,in reality,a firm may choose one or adopt both differentiation and cost-leadership competitive strategies (Hall,1980).Although adopting both these strategies may seem contradictory,because it may lead to conflicts in an organisation’s requirements,some research indicates that a mixed strategy is not only feasible (White,1986)but essential for organisational success (Chan and Mauborgne,2005).This argument is analogous to Gibson and Birkinshaw’s (2004)notion of organisational ambidexterity,or simultaneously achieving alignment and adaptability,and Atuahene-Gima’s (2005)assertion that firms must simultaneously implement exploitation and exploration strategies.For the most part,the existing literature examining market orientation and competitive strategies has not conceptualised market orientation within the notion of RMO and PMO.This is important,as Narver et al.(2004)argue that dominant conceptualisations of market orientation (Kohli and Jaworski,1990;Narver and Slater,1990)emphasise responding to the expressed needs of the customers and consequently do not include the proactive nature of market orientation or understanding the latent needs of the customers.This results in market-oriented firms ignoring or paying insufficient attention to new markets and/or potential competitors (Argyris,1994;Slater and Narver,1995).Furthermore,Grinstein (2008)highlights that few studies have made the distinction between RMO and PMO,and that research in the future should study these constructs,their antecedents and consequences.Moreover,adding to Grinstein’s (2008)view,Coltman et al.(2008)indicate a disparity between the focus on RMO versus PMO andEJM 44,1/2246contend that given the growing evidence,industry and customer foresight(PMO)are potentially the most important components of market orientation.Importantly,as suggested earlier,the primary criticism of the conventional treatment of market orientation is that it has been conceptualised as responsive.Critics of RMO argue that it hinders afirm’s innovativeness(Berthon et al.,1999),confuses afirm’s processes (MacDonald,1995),and results in narrow-minded research and development activities (Frosch,1996).We respond to these issues and the call for research by proposing that competitive strategies are antecedents to RMO and PMO andfirm performance is a key consequence of RMO and PMO;we test this contention using an empirical study.As such,we seek to contribute to both the strategy implementation literature and the market orientation literature by focusing on the strategy-capability-performance connections.This study is structured as follows.First,we present a background discussion in relation to the strategy formulation and strategy implementation perspectives.Within this discourse,we adopt the RB theory to shed light on the strategy formulation-strategy implementation perspectives.Second,in line with the strategy implementation approach and the RB theory,specifically focusing on market orientation as a key variable in RB theory,we develop six hypotheses.Third,we discuss the quantitative method and thefist,we highlight implications for research and practice and discuss limitations and opportunities for extending this research.Strategy formulation and strategy implementationThere has been a debate on whether organisational dimensions affect competitive strategies(i.e.strategy formulation)or whether competitive strategies affect organisational dimensions(i.e.strategy implementation)(e.g.Noble and Mokwa, 1999;Prahalad and Bettis,1986).Historically,the emphasis of both marketing strategy scholars and practitioners has been on strategy formulation,with strategy implementation being viewed as a strategic afterthought(Noble and Mokwa,1999). Furthermore,strategy formulation has been at the core of strategic management for several decades(e.g.Mintzberg,1973),and is an attempt to explain how effective strategies are developed within afirm(Slater et al.,2006).The strategy formulation approach views organisational variables as antecedents to strategy on the basis of the argument that managerial action is founded on underlying beliefs,behaviours and cognitive maps such as dominant logics and worldviews(e.g.Foil and Huff,1992; Homburg et al.,2004).The strategy implementation approach involves viewing strategy as affecting organisational dimensions,or organisational dimensions are adapted to strategy, which then results in higherfirm performance(Homburg et al.,2004).Although traditionally organisational dimensions such as structure and systems have been emphasised,with the advent of the RB theory(Barney,1991;Day,1994),firm capabilities are increasingly being viewed as organisational dimensions that must be developed and deployed to implement a particular competitive strategy effectively. Essentially,the RB theory adopts an inside-out approach to strategy,taking the position that internalfirm factors explain more variance infirm performance than do external industry-related factors,a view that emphasises an outside-in approach to strategy(Barney,1991;O’Cass and Ngo,2007b;Wernerfelt,1984).Implementing competitivestrategies247The importance of strategy and the significance of the strategy debate can be seen in the argument over formulation versus implementation,with various scholars such as Bonoma (1984),Chebat (1999),Chimhanzi (2004),McGuinness and Morgan (2005),Olson et al.(2005)and Slater and Mohr (2006)raising the contention that marketing scholars must align themselves with the strategy implementation approach.Furthermore,the role of strategy and its implementation can be seen in the work ofO’Cass and Ngo (2007b),who show empirically that strategy drives market orientation.Moreover,Barney (2001)highlights the importance of implementation and its connection with RB theory.According to the original conception of RB theory,competitive advantage results from a firm’s unique capabilities that are valuable,rare and inimitable (Barney,1991).Therefore,market orientation positioned as a capability is valuable because it enables firms to better serve their target markets.However,a limitation of early RB theory is the lack of attention to implementation issues,and as Barney (2001)notes,for simplicity’s sake even he early on adopted the view that “once a firm understands how to use its resources [...]implementation follows,almost automatically”(Barney,2001,p.53).This view perpetuated the notion that the actions the firm should take to exploit these capabilities will be self-evident and automatic.However,the link between capabilities and actions may not be obvious,and proper strategy implementation remains a major challenge.For example,Barney (2001)and Slater and Olson (2001)argue that there is a need for more research on how marketing can facilitate the implementation of competitive strategies.However,a key question relates to whether strategy formulation or strategy implementation is more realistic to apply,and it refers to the causality between strategy and organisational dimensions.This study adopts a strategy implementation approach based on the work of Homburg et al.(2004),who argue that it is more likely that strategy has a stronger positive effect on structure than structure on strategy (Amburgey and Dacin,1994),whilst acknowledging that strategy and structure affect each other.Furthermore,the notion that competitive strategies influence market orientation is consistent with the work of Pelham and Wilson (1996)and Frambach et al.(2003).For example,Frambach et al.(2003)argue that behaviours inherent in market orientation,such as responsiveness to information,are likely to be influenced by strategic choices at the broader corporate level.The theory development here extends Homburg et al.’s (2004)and Frambach et al.’s (2003)work on the role of market orientation in the competitive strategy-firm performance relationship.Furthermore,by conceptualising and operationalising market orientation as having two theoretical components –specifically RMO as responsive and PMO as proactive –it responds to the call for this distinction by many researchers,including Narver et al.(2004)and Grinstein (2008).The argument put forward here is that differentiation and cost-leadership strategies drive RMO and PMO,which then drive firm performance.The conceptual model outlining the key constructs and hypothesised paths is presented in Figure 1.This model essentially shows:.a direct positive effect for differentiation (H1)and cost-leadership strategies (H2)on RMO;.a direct positive effect for differentiation (H3)and cost-leadership (H4)on PMO;and.a positive effect for RMO (H5),and PMO (H6)on firm performance.EJM 44,1/2248Hypotheses developmentCompetitive strategies,responsive and proactive market orientationResponsive and proactive market orientation .To overcome the limitations of the responsive nature of the market orientation conceptualisations,Narver et al.(2000,p.7)highlight the concept of PMO and define it as “the attempt to understand and satisfy customers’latent needs”.The development of this capability is based on Jaworski and Kohli’s (1996)and Slater and Narver’s (1995)assertion that there are two types of customers’needs:(1)expressed;and(2)latent.They define expressed needs as those needs that the customers are aware of and consequently can express;whereas latent needs are needs that the customers are unaware of and reside in the subconscious of the customers.The treatment of RMO and PMO here as distinct constructs is consistent with empirical research (i.e.Atuahene-Gima et al.,2005;Coltman et al.,2008;Narver et al.,2004;Saini and Johnson,2005;Tsai et al.,2007)and Narver et al.’s (2004)argument that RMO and PMO are statistically related but distinct constructs.The effects of competitive strategies on RMO and PMO .The extent of market orientation in a firm must be congruent with the competitive strategy adopted (e.g.Conant et al.,1990;Walker and Ruekert,1987).In fact,the importance of the match between business strategy and marketing strategy has been empirically illustrated (Olson et al.,2005).The argument that competitive strategies drive market orientation is founded on the assertion that marketing activities are likely to be influenced by strategic choices at the macro competitive strategy level (Slater and Olson,2001).Furthermore,literature suggests that top management leadership is critical in developing market orientation (Day,1994;Narver and Slater,1990).This point is Figure 1.Competitive strategies,RMO,PMO and firmperformanceImplementingcompetitive strategies 249alluded to by Stoelhorst and van Raaij (2004),who in the context of the RB theory,argue that the role of the manager is to acquire,combine and deploy appropriate capabilities.In this sense,such capabilities should logically be deployed to implement the strategy of the firm through its managers.We concur with Makadok’s (2001)definition of a capability as an asset that cannot be observed (therefore,intangible),cannot be valued and is traded only as part of its entire unit.Typically,thesecapabilities are idiosyncratic to the firm,have been built over time with heavy reliance on tacit knowledge and skills,involve complex interrelationships with other resources,and are by their nature important factors in affecting firm performance outcomes (Hooley et al.,2005).Therefore,we contend that if market orientation is a firm capability (Atuahene-Gima et al.,2005),then the strategy the firm develops and seeks to pursue requires implementation.Thus,market orientation provides the mechanism through which strategy is enacted through its possession and appropriate deployment.This,we argue,is fundamental,in that top management is critical for developing strategies (i.e.differentiation and cost-leadership)and therefore they will drive market orientation development and deployment to implement the strategy.The connection between strategy and market orientation is further identified by Slater and Narver (1996),who contend that successful execution of a strategy is facilitated by market orientation.Importantly,Frambach et al.(2003)provide support for the notion that a firm’s differentiation strategy and/or cost-leadership strategy will influence the extent of market orientation.When a differentiation strategy leads to increased customer benefits,it is consistent with market orientation’s external focus on customer needs as implied by RMO (Slater and Narver,1996).Furthermore,differentiation strategy is based on the ability of a firm to balance product benefits and costs to the customer (Slater and Olson,2001).Therefore,a differentiation strategy affects market orientation,as it requires an intimate examination of customer-related information.Essentially,we argue that a firm adopting a differentiation strategy will need to develop unique insights into customers (RMO)for the differentiation strategy to result in higher performance.On this issue,Homburg et al.(2004)argue that product differentiation strategy affects market orientation,which they operationalise as RMO.Furthermore,various empirical studies provide evidence that market orientation is influenced by a firm pursuing a differentiation strategy (Frambach et al.,2003;Homburg et al.,2004;Narver and Slater,1990;Pelham and Wilson,1996;Slater and Narver,1996).Thus we hypothesise the following:H1.Differentiation strategy is positively related to responsive market ing internal efficiencies,market-oriented firms create customer value by reducing customers’acquisition and usage costs (Slater and Narver,1996).Firms adopting a cost-leadership strategy must be market-oriented because they need to understand the perceived customer value to decide whether cost advantages should be transferred to their target market(s)and to determine which aspects of the firm’s marketing activities can be reduced without affecting customers’perceived value (Frambach et al.,2003).Furthermore,firms emphasising activities that seek to understand customer needs and satisfy those needs are more likely to manufacture products that have lower defects,which then should result in lower costs (Pelham and Wilson,1996).Moreover,Frambach et al.(2003)found that cost-leadership strategy was positively related toEJM 44,1/2250customer orientation(i.e.RMO).They contend that understanding the customer is critical in deciding how to decrease the marketing budget in the most cost-effective manner.Therefore,market orientation plays an important role in transmitting the benefits of a cost-leadership strategy tofirm performance.Several empirical studies provide evidence that cost-leadership strategy influences market orientation(e.g. Frambach et al.,2003;Slater and Narver,1996).Thus,we hypothesise the following: H2.Cost-leadership strategy is positively related to responsive market orientation.The existing literature relating to the competitive strategy-firm performance relationship has conceptualised market orientation primarily as a responsive construct.Some authors have alluded to the proactive nature of market orientation in examining its relationship to competitive strategies(Slater and Narver,1996; Vazquez et al.,2001).For example,Slater and Narver(1996,p.163)conceptualise market orientation as including both responsive and proactive elements,but operationalise it primarily as a responsive construct.Here,we argue that PMO is a critical mechanism by which the benefits of differentiation strategy are transmitted to firm performance.The contention raised here is that a differentiation competitive strategy also affects PMO,on the basis of the notion that marketing activities are likely to be influenced by strategic choices(Slater and Olson,2001).Specifically,a differentiation strategy affects PMO,because this strategy drives afirm to develop not only an intimate understanding of customers(i.e.RMO or unique insights)but also an understanding of their customers’latent needs(i.e.PMO or unique foresights). Furthermore,PMO is becoming more important in the context offirm performance as more and morefirms develop the RMO capability.PMO inherently involves exploratory learning that includes searching for a broader range of information and knowledge that allows thefirm to move beyond the limitations of experience and engage in experimentation(Atuahene-Gima et al.,2005).Consequently,firms using PMO engage in scanning the markets more widely(Day,1994)and working integrally with lead customers(Leonard-Barton,1995),both of which provide unique foresight into afirm’s customers.Thus,we hypothesise the following:H3.Differentiation strategy is positively related to proactive market orientation. The essence of PMO is that it leads thefirm beyond its existing experience and encourages experimentation,through new knowledge of markets that may be different from thefirm’s existing market(Tsai et al.,2007).Proactively market-orientedfirms work closely with lead users and engage in experiments,both of which are linked to innovative developments(Lilien et al.,2002).Therefore,a cost-leadership strategy will lead to higher levels of PMO because proactively market-orientedfirms experiment with new technological developments that allow for increased internal efficiencies. Furthermore,focusing on future customer needs may also alert thefirm to new market and technology developments and increase its abilities to integrate new developments into lowering costs.In addition,because it is important thatfirms adopt both competitive strategies concurrently,these new technologies enable thefirm to simultaneously engage in such activities as new product development whilst emphasising cost-leadership.Thus,we hypothesise the following:H4.Cost-leadership strategy is positively related to proactive market orientation.Implementing competitivestrategies251RMO,PMO and firm performance .The key premise of the RB theory is that competitive advantage lies in the heterogeneous firm-specific capabilities held by firms (Montgomery and Wernerfelt,1988).Moreover,RB theory contends that capabilities are the most important source of an organisation’s success (Day,1994).Firm capabilities have gained widespread attention in recent years because they are difficult to duplicate (Dierickx and Cool,1989).Similarly to Atuahene-Gima et al.(2005),weconceptualise RMO and PMO as capabilities.Market orientation has been linked to the organisational response to consumers’needs and wants (e.g.Ruekert,1992),and has been argued to be a source of competitive advantage that influences firm performance (e.g.Jaworski and Kohli,1993;Narver and Slater,1990).Although there is a debate regarding the direct effects of market orientation on firm performance (e.g.Matear et al.,2002),we adhere to the assertion that there has been a broad consensus regarding the positive relationship between market orientation and firm performance (e.g.Kirca et al.,2005).For example,a meta-analysis conducted in 23countries in five continents suggests that the relationship between market orientation and firm performance is positive and consistent (Cano et al.,2004).However,previous conceptualisations have viewed market orientation primarily as a responsive capability (RMO),attempting only to understand customers’expressed needs and satisfying them (e.g.Kohli and Jaworski,1990;Narver and Slater,1990).Nevertheless,there is strong support for a positive relationship between RMO and firm performance.Thus,we hypothesise the following:H5.Responsive market orientation is positively related to firm performance.Market orientation can be a source of competitive advantage when it is rare in a firm’s industry (Barney,1991).With the widespread research on RMO and its relationship to firm performance,firms are increasingly investing in being market-oriented in the traditional notion of RMO.Consequently,as RMO becomes common,in the long run,competitors can imitate it (Narver et al.,2000).Therefore,Narver et al.(2004)argue that to develop and maintain a competitive advantage,firms increasingly must complement RMO with PMO.Furthermore,to understand and discover latent needs and to respond with new solutions,proactively market-oriented firms are more likely to scan the markets more widely than are firms that focus on RMO (Day,1994)and work integrally with lead customers (Leonard-Barton,1995).Owing to the more sophisticated market-sensing and linking processes involved in PMO,as opposed to RMO,we argue that firms adopting PMO are more likely to understand not only the expressed needs but the latent needs of the customers,allowing firms,for example,to uncover new market opportunities and to undertake market experiments to improve marketing strategies (Atuahene-Gima et al.,2005),all of which affect customer value and firm performance.Thus,we hypothesise the following:H6.Proactive market orientation is positively related to firm performance.MethodResearch designThe mail survey was comprised of pre-existing scales found in the literature.RMO wasmeasured using Deshpande´et al.’s (1993)measure;PMO by Narver et al.’s (2004)measure and differentiation and cost-leadership competitive strategies by Frambach et al.’s (2003)measures.Measures were anchored with scale poles from 1¼stronglyEJM 44,1/2252disagree to7¼strongly agree.Firm performance was measured with Hooley et al.’s (2005)measure using sales volume,market share,overall profit,profit margins and return on investment compared with competitors.Anchors were1¼much worse than competitors to7¼much better than competitors.Following Venkatraman and Ramanujam’s(1986)two-step method of pretesting,the survey was pretested withfive marketing academics and doctoral students in marketing and with17senior managers from the sample frame.The sample frame was obtained from databases of Australian firms that are publicly available on the internet.These websites provided public access to the mailing addresses of more than8,000firms across Australia.A systematic sampling process was used because of its representativeness and ease of implementation.For example,every fourthfirm on the databases was chosen as the sample unit for the mail survey to be sent.For thefinal survey,1,400key informants in organisations across various industries listed on a publicly available website were mailed the surveys.Of the1,400surveys mailed,189useable surveys were returned,resulting in a response rate of13.5percent. This response rate is within the10-20per cent range for top management survey response rates(Mennon et al.,1996).The RB theory does not place any significant emphasis onfirm size because that measure is primarily focused on resource-based rather than monopoly-based advantages(Fahy,2002).Therefore,the population of interest included allfirms(SMEs)[1],focusing onfirms having fewer than200 employees.Furthermore,the industries represented included software,construction, automotive,engineering and mining.The majority of thefirms were in the services industry(63.6per cent)and the remainder were in the manufacturing industry(36.4per cent).Moreover,70per cent of thefirms were in the business-to-business sector,whilst 24per cent had both businesses and individual customers.Thefirm-level variables in this study are strategic(i.e.firm capabilities,competitive strategies)and as such senior executives are appropriate informants,because they have the greatest insight into the firm’s strategic practices(Child,1997).A descriptive analysis suggested that47per cent were managing directors,24per cent chief executive officers,13per cent were owners and the remaining16per cent of the respondents included general managers and marketing managers.To verify the respondents’knowledge of the key constructs, each survey instrument contained a self-report item on the informant’s knowledge and confidence of the area being studied(Kumar et al.,1993).Thefinal sample showed a high mean score of5.36on a scale of1-7,where1¼not confident and7¼very confident.Analysis proceduresThe hypotheses were tested using partial least squares(PLS),a multivariate, variance-based technique used for estimating path models involving latent constructs indirectly observed by multiple indicators.Moreover,because PLS focuses on the explanation of variance using ordinary least squares,this technique is better suited for investigating relationships in a predictive rather than confirmatory fashion(Fornell and Bookstein,1982).In this study,our primary concern is with maximizing the prediction of dependent endogenous constructs using exogenous constructs,including strategy to PMO-RMO and PMO-RMO tofirm performance.Because we used PLS,we also avoided the necessity of a large sample size,as research similar to this study has done as well.For example,O’Cass and Ngo(2007b)used a sample size of180,which is Implementing competitivestrategies253。