2

The Capabilities and Performance

Advantages of Market-Driven Firms:
An Empirical Investigation

by
Douglas W. Vorhies t
Michael Harker §

Abstract:
Although progress has been made in understanding the development of businesses
competencies from a theoretical perspective, relatively few empirical studies have
addressed the capabilities needed to become market-driven and the performance
advantages accruing to firms possessing these capabilities. One of the barriers
faced has been in defining what is meant by the term 'market-driven'. This study
develops a multi-dimensional measure useful for assessing the degree to which a
firm is market-driven. Evidence is presented in this study that strategically focused
market-driven business units developed higher levels of capabilities than their less
market-driven rivals and significantly outperformed these rival business units on
four measures of organisational performance.

Keywords:
MARKET-DRIVEN; MARKET ORIENTATION; CAPABILITIES.

t Department of Marketing, Illinois State University, College of Business Administration,

Campus Box 5590, Normal, IL 61790.
§ Department of Marketing, University of the Sunshine Coast, Maroochydore, QLD 4558.
Email: mharker@usc.edu.au
Australian Journal of Management, Vol. 25, No. 2, September 2000, © The Australian Graduate School of Management

-145-

Copyright © 2000. All rights reserved.

A USTRAL1AN JOURNAL OF MANAGEMENT September 2000

1. Introduction

T here has been considerable interest in the management literature concerning the
development of core competences in order to enhance corporate
competitiveness and performance (Wernerfelt 1984; Hamel & Prahalad 1989). The
'resource-based view of the firm' (Wernerfelt 1984 p. 171) has seen an increased
emphasis on competing on 'capabilities', both tangible and intangible (Hall 1993).
'Capabilities' have been defined as:
complex bundles of skills and collective learning, exercised through organisational
processes that ensure superior coordination of functional activities (Day 1994,
p. 38).
Thus, a key task for the firm is to identify those capabilities that will provide a
strong competitive advantage. The capability identification process is not a simple
operation since the capabilities need to meet a number of challenging criteria; they
must be rare, complex and tacit (Johnson & Scholes 1999).
Capabilities should be rare because competitors must find them difficult to
emulate; they are complex because they are explained by a number of linked factors
as in the creation of superior customer value, and they are tacit because they are
inextricably embedded in organisational experience and practice. (Johnson &
Scholes 1999). Australian firms purport to pursue customer and competitor
orientation and market orientation has been found to be positively related to sales
growth, customer service, new product success, profitability and overall business
performance (Oczkowski & Farrell 1998). Market orientation and the creation of
superior customer value constitute a set of capabilities that make a firm market-
driven, and such firms often outperform less market-oriented rivals (Jaworski &
Kohli 1993). Despite the recent progress in understanding the characteristics of the
market-driven firm (Deshpande, Farley & Webster 1993), little is known about the
processes that make an organisation market-driven.
In order to provide better insights into the processes that enable a company to
become market-driven, two research questions were formulated to guide this study:
1. What are the set of marketing capabilities that provide a foundation for a
market-driven approach?
2. What are the performance implications for firms that develop a market-driven
approach?

Unfortunately, there is little direct evidence in the literature to assist us to answer

these questions.

2. Research Objectives
The primary objectives of this paper are to:
1. establish the extent to which firms are market-driven;
2. establish the set of capabilities that support a market-driven approach; and
3. test the performance implications discussed in the literature: that market-
driven firms will outperform less market-driven firms.

-146-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

This approach is accomplished in two stages. First, business units are clustered
based on their degree of market orientation. Second, the clusters are validated, as
suggested by Ketchen and Shook (1996), and the clusters are examined for
evidence of supporting market capabilities. Third, the performance implications for
the market-driven firms are tested by examining four measures of organisational
effectiveness.

3. Research Background
3.1 Business Strategy and Market Orientation—Defining the Market-Driven Firm
Business strategy is concerned with setting direction and by matching internal
resources and skills with a changing external environment in a way that enhances
the performance of the organisation over time (Viljoen 1994). This 'fit' view of
strategy was espoused by Michael Porter and industrial organisation economists in
the 1980's (Porter 1980), but strategy can also be viewed as a 'stretching' process
by which organisational resources and competences are leveraged to yield new
opportunities, and provide competitive advantage (Hamel & Prahalad 1994). The
firm, thus, achieves competitive advantage by leveraging resources and meeting
customer needs more accurately and effectively than the competition and in a
manner which competitors find difficult to emulate. In general, this type of market-
based competitive advantage is achieved in one of two basic ways, namely through
the development of differentiated goods and services or through the achievement of
a cost-based advantage (Day & Wensley 1988).
In the case of a differentiation-based approach, competitive advantage is won
when the differentiated product is positioned to select customer groups who are
willing to pay a premium for the use of the good or the delivery of the service (Day
1990). In most markets, however, the competition is able to copy the product
offering, thus diminishing its value. T o maintain a differentiated advantage over the
long term, a company must develop skills, resources and processes that keep
increasing the value to the customer (Day 1994). Competitive advantage can also be
achieved by focusing on development of the lowest cost position in the industry
(Porter 1980). For this cost-based advantage to be achieved, efficiency in all aspects
of the firms operations, from production to distribution to marketing is essential. A
cost leader does not necessarily charge price significantly lower than competitors,
however; to maintain its cost advantage, the cost leader must invest surpluses from
higher profit margins in improved production processes and focus its research and
development on achieving more efficient production processes (Johnson & Scholes
1999). Similar efficiencies must be developed and maintained in the supply chain,
in marketing, and throughout the firm.
A market orientation represents an additional strategic dimension (Slater &
Narver 1998) and is a fundamental approach to understanding markets. As such, it
represents the implementation of the marketing concept (Kohli & Jaworski 1990),
and is a cultural orientation (Slater & Narver 1994; Deshpande & Webster 1989)
that focuses the firm's efforts on the needs of the market. A market-oriented
organisation possesses the ability to generate, disseminate, and respond to
information about market forces and market conditions better than less market-
oriented rivals (Kohli & Jaworski 1990; Jaworski & Kohli 1993). The market-
oriented firm thus has an important basis for building a sustainable competitive

-147-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

advantage. The firm does this by learning what buyers want, building and
leveraging the resources and processes necessary to deliver the value they desire
(Narver & Slater 1990; Slater & Narver 1994), and adapting those value-generating
processes as market conditions change (Slater & Narver 1995). Furthermore, the
market-oriented organisation looks beyond current customer needs to develop
future products that will tap latent needs, thus serving to strengthen the firm's
market position over time (Slater & Narver 1998). To use these processes as the
basis for competitive advantage, an organisation needs to develop the capabilities to
generate, disseminate, and respond to market intelligence (Day 1994) and the
processes to act on this information (Hunt & Morgan 1995).
As one of the major pro-competitive functions in the organisation, marketing
has a major impact on how these strategies are formulated and how resources are
allocated to implement these strategies (Hunt & Morgan 1995; Varadarajan &
Clark 1994). For the market-driven firm, creating superior customer value is the
primary objective driving strategy formulation and implementation (Day 1993;
1994). To do this, customer value-based differentiation strategies will drive the
firm's market research efforts, its selection of target-markets, its product
development processes, its market communications programs, and its delivery
processes (Day 1994; Woodruff 1997).
Obviously, some firms will choose not to develop a market-orientation (Aaker
1994; Day 1990; Hunt & Morgan 1995). These non-market-oriented firms will
choose to focus their attention on developing internal capabilities, such as process
technology. These firms devote less time to understanding what customers value,
choosing instead to build competitive advantage around these internal capabilities.
In many instances the firm focuses on increasing production efficiencies,
concentrating on taking advantage of the learning curve and economies of scale and
focusing its research and development effort around these interests. While not
ignored, customer needs analysis plays a relatively small role in product
development in these firms. Instead, product development may be driven by process
technology capabilities that often are the result of incremental process and product
improvements. Unlike market-driven firms, where a focus on delivering superior
customer value drives marketing decision making, marketing decisions in internally
oriented firms often revolve around pricing issues, such as volume discounts, as the
key to increasing the firm's unit sales (Day 1990). Thus to be successful, these
firms must develop the process technology to out innovate rivals (Day 1990).

3.2 Marketing Capabilities

An important aspect of this research is understanding what role marketing
capabilities play in attaining and maintaining competitive advantage. To do this, it
is necessary to understand how these capabilities develop within the firm.
Marketing capabilities are developed via learning processes when the firm's
employees repeatedly apply their knowledge to solving the firm's marketing
problems. In this respect, both adaptive and generative learning processes may be
used at various times (Day 1994; Slater & Narver 1995). An important aspect of
developing marketing capabilities is the ways in which knowledge is integrated.
Thus, marketing capabilities can be thought of as integrative processes by which
knowledge-based resources and tangible resources come together to create valuable
outputs. As marketing personnel repeatedly undertake marketing tasks, complex

-148-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

patterns of coordination between people, and between people and other resources
occurs (Grant 1991; 1996). These coordinated patterns of behaviour are often quite
consistent, yet remain dynamic and can change as the firm's needs change (Grant
1991). One of the hallmarks of capabilities development is learning through
repetition (Prahalad & Hamel 1990; Sinkula 1994). By bringing people and
resources together in repeated efforts, firms develop the processes upon which
capabilities are based. When value-adding, functional-level capabilities are
integrated across functional lines and are deployed across multiple product-markets
to deliver competitive advantage, then a core capability has developed (Grant
1996).
Marketing capabilities can therefore be defined as integrative processes
designed to apply the collective knowledge, skills, and resources of the firm to the
market-related needs of the business, enabling the business to add value to its goods
and services and meet competitive demands (Day 1994). Since marketing processes
are often firm specific (Day 1994), unique marketing capabilities will develop as
individuals combine their particular knowledge and skills with other intangible and
tangible resources available to them. Although competing firms may focus on
similar market needs, the idiosyncratic way in which each group of individuals
within each firm integrates knowledge creates many unique ways of solving similar
customer needs. Therefore, firms can be expected to evolve similar, but not
identical marketing capabilities. This helps prevent these value-adding capabilities
from being easily imitated by competitors and also prevents easy substitution of one
capability for another. This also prevents these capabilities from being easily
transferred between competitors. As a result, these capabilities are able to form the
basis for sustainable competitive advantage (Grant 1991; 1996).
What specific marketing capabilities would a market-driven business develop?
To investigate this issue.we draw on the insights from past research and managerial
insights. To do this, this study investigates six marketing areas for evidence of
capabilities. The first area is marketing research and is defined as the set of
processes needed to discover broad-based market information and to develop
information about specific customer needs, and to design marketing programs to
meet these needs and market conditions. The second area is concerned with pricing
and is defined as the processes needed to competitively price the firm's products
and services and monitor prices in the market. The third area is product
development. If a firm is to have a capability in product development it is important
to design products that can meet customer needs, can meet internal company goals
and hurdles, and which are able to outperform competitors' products. The fourth
capability is the management of the firm's channels of distribution. To have a
capability in channel management, relationships with distributors must be formed
and effectively managed. Promotion is another important capability for many firms.
Promotion for this study was defined as advertising, sales promotions, and personal
selling activities the firm uses to communicate with the market and sell the product.
The last area in which firms would be expected to have marketing capabilities is in
the marketing management area. Marketing management capabilities are focused
on customer acquisition management, the management of marketing programs, and
the ability to coordinate action among the diverse elements in the firm needed to
implement a marketing program. This conceptualisation of the six marketing
capabilities taps both an importance dimension and an effectiveness dimension,

-149-

Copyright © 2000. All rights reserved.

A USTRALIAN JOURNAL OF MANAGEMENT September 2000

since a capability that is not important cannot serve as a basis for competitive
advantage and a capability (by definition) must be performed effectively (Day
1994). It is also important to note that each marketing capability area is
conceptualised as existing relative to competitors (Grant 1991).

3.3 Performance Effects

The conceptualisation of a market-driven firm as one that has a customer-value
centred strategy, supported by a market orientation, has been discussed by Day
(1993; 1994) but has not been empirically tested in any research published to date.
An important question therefore becomes: do these market-driven firms outperform
their less market-focused rivals? Recent theoretical research in marketing has
supported this idea as market-driven firms have consistently been predicted to
outperform their internally focused competition (Bharadwaj, Varadarajan & Fahy
1993; Day 1990; 1994; Hunt & Morgan 1995). It is interesting to note that these
predictions are largely based on the idea that market-driven organisations will
develop knowledge, skills, resources, and ultimately capabilities, that are rare,
heterogeneous, and difficult to imitate (Barney 1991; Hunt & Morgan 1995).
Further these capabilities will enable market-driven organisations to achieve
positions of sustainable competitive advantage, ultimately resulting in superior
financial performance (Day 1994; Day & Wensley 1988; Hunt & Morgan 1995).
Furthermore, empirical evidence from the more narrow market orientation research
supports a positive impact on performance (Jaworski & Kohli 1993; Narver &
Slater 1990; Oczkowski & Farrell 1998).
To better understand the impact of a market-orientation on firm performance,
it is necessary to first define the relevant dimensions of the organisational
performance construct. Organisational performance is a multidimensional
construct, tapping financial, operational, and customer-related performance
domains (Kaplan & Norton 1992; 1993; 1996; Venkatraman & Ramanujam 1986).
Growth reflects increases in sales and is often reflected in market share gains
(Kaplan & Norton 1992; 1993; 1996; Venkatraman 1989). Growth in sales and
market share are important to a business to ensure long-term viability and resource
availability (Kaplan & Norton 1992; 1993; 1996; Varadarajan 1983). Profitability
primarily reflects current performance (Venkatraman 1989). Profitability is viewed
by some (e.g. Hunt & Morgan 1995) as the ultimate organisational outcome and is
commonly used in strategic management studies. Customer satisfaction (Day 1990;
Day & Wensley 1988; Kaplan & Norton 1992; 1993; 1996) represents the
effectiveness of the organisation in delivering value to its customers and is often
viewed as an antecedent to profitability. Adaptability represents the ability of the
firm to respond to changes in its environment (Ruekert, Walker & Roering 1985) is
ultimately reflected in the market success of an organisation's new products and/or
services (Kaplan & Norton 1992; 1993; 1996; Ruekert, Walker & Roering 1985).
Market-driven firms are well equipped to attain high levels of performance in
each of the previously outlined areas (Day 1994). Market-driven firms excel at
finding attractive markets, determining customer needs, and developing goods and
services to meet those needs (Day 1990). By developing market information and
focusing it around strategic actions, these market-driven firms are predicted to be
better at introducing new products to the market and will have larger numbers of
successful new products than their competition (Slater & Narver 1994). This means

-150-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

that while market-driven firms may not be the most innovative firm in their industry
(as measured by patents, etc.), they will excel at adapting technologies to meet
current and future customer needs. Thus, they often exhibit the adaptive
characteristics of the 'Analyser' organisation (Miles & Snow 1978). Having built a
market-focused, customer-needs centred product development capability, these
firms are expected to stay in touch with current and potential customer needs and
competitor moves better than more internally focused firms and, as a result, they are
expected to be more adaptable and perform better than less market-driven rivals
(Day 1990).

3.4 Insights from Managerial Interviews

Once the conceptual domain of the marketing capabilities constructs had been
defined, interviews with marketing managers were conducted to ascertain whether
the domain specification, discussed above, held meaning for practitioners. Two sets
of interviews were conducted. The first set of interviews was conducted with brand
and product managers from four consumer and five business-to-business firms.
Managers were asked to discuss how they felt marketing capabilities developed in
their firms and define how the capabilities were structured. From these interviews a
perspective emerged that suggested that marketing capabilities were viewed as
primarily consisting of a marketing mix-based typology consisting of product
development, channels management, promotional management, and pricing
management capabilities. These were supported by marketing research capabilities
(although some firms did not formally have marketing research departments) and
by a strategic marketing planning and management capability. When asked about
the impact of the firm's marketing capabilities on performance, marketing
managers were very supportive of the idea that it is only when the firm's marketing
capabilities were supportive of the firm's strategy did the firm outperform
competitors. For example, one consumer goods manager pointed out: 'without our
ability to study consumers needs and develop interesting new products, we
wouldn't be able to differentiate successfully. If we can't differentiate our products
from 's (name deleted) we just won't hit our share and ROI targets'. This
was supported in the business-to-business sectors as well. For example, a marketing
manager with a packaging company stated, 'knowing the customer is key if you
want to be successful. If we aren't building a relationship with the customer,
someone else will get in there, get to know their needs better than we do and we're
done. We won't be able to design custom solutions, we won't sell as much product,
and we won't hit our numbers'.
The second set of managerial interviews were conducted with director and
senior level managers, which were typical of the proposed respondent pool. Once
again, these managers were asked to discuss how they felt marketing capabilities
developed in their firms and define how the capabilities were structured. As with
the lower level managers, a consensus evolved that indicated that marketing
capabilities were vital to understanding customer needs, developing the right
product and getting it into the right channels. This comment from a consumer goods
company marketing director was typical. 'Without the right marketing capabilities,
our company just couldn't compete. We have to be good at understanding
consumers needs. It's the basis for our success! We also have to make sure we get
the product into the channel in a way that supports the positioning. We've had some

-151 -

Copyright © 2000. All rights reserved.

A USTRALIAN JOURNAL OF MANAGEMENT September 2000

trouble there, but we're getting better at it'. In addition, promotion, whether via an
advertising or via a personal selling approach was frequently mentioned as
extremely important. One marketing director with a medium sized consumer goods
firm summed it up well. 'We have to be good at promoting our product both to
consumers and to the trade (channel of distribution). It's a sort of push and pull
strategy—you know, create demand in the market and push to the trade. If we fall
down on either, we can get hurt'. Regarding the role of marketing management and
planning, the directors and senior managers tended to be supportive of the notion
that someone must plan and execute marketing strategy. However, who handled
planning and who handled implementation differed widely. In some firms
marketing planning was very centralised with implementation handled by the brand
and product management groups. In other firms market planning was highly
decentralised. Frequently planning was aligned to the market and implementation
was carried out by various combinations of marketing employees from different
functional areas (advertising, sales, channel management, etc.). A marketing
director with a business-to-business firm summed this situation up nicely: 'we
concentrate our planning efforts around the market. I get involved and so do our
product managers. But implementation and controlling programs are everyone's
job. You need everyone helping you understand what's happening and trying to be
as efficient as possible. Over time you just get better and better at doing your job
and eventually, you gain the kind of experience that makes you invaluable. It
happens at all levels. I learn more every time I plan a program and my people get
better at implementing it each time they do it'.
Having thus validated the basic constructs under study, attention could be
turned to planning and implementing a study to test how these important constructs
worked. This is described in the next section.

4. The Study
In order to increase the generalisability of the study discussed herein, a cross
sectional, multi-industry sample of Australian manufacturing and service firms was
used. A questionnaire was developed, based on the literature and the managerial
interviews, and was sent to the top marketing executive of 400 businesses.
Procedures used to develop the survey questions included a review of previously
used items (in the case of business strategy, market orientation, and performance);
and a procedure for developing the marketing capabilities questions that started
with a literature review to define the marketing capabilities constructs. Interviews
and discussions (described above) with marketing managers to verify the construct
definitions and to help identify critical issues impacting the relationships between
marketing capabilities development and the other variables of interest followed this
process.

4.1 Pre- Testing and Survey Design

Following the first round of managerial interviews, item development was
undertaken. Two rounds of item development, pre-testing, and item analysis were
used to develop the questions used to represent the marketing capabilities
constructs. Finally, prior to the survey administration, the entire questionnaire was

-152-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

pre-tested on a group of marketing managers to check item wording and to verify

the ability of the items to tap the business strategy, market orientation, performance,
and marketing capability dimensions of interest. Administration during this pre-test
was followed by a debriefing to help define problem areas and to collect
information about ways to clarify the items. Following minor changes to the survey
instrument, the main data collection effort was undertaken. In all, 87 useable
responses were obtained from the firms selected, for a 22 % response rate.

4.2 Operationalisation and Measurement of Variables

Measurement of the constructs representing business unit strategy, market
orientation, marketing capabilities, and performance was performed by asking the
top marketing executive to focus on the primary business unit within the selected
firm. Top marketing manager names were obtained from public information and
from telephone contact with the firm. Companies were contacted only after
selection for the project to help prevent a self-selection bias.

4.2.1 Business Strategy Business unit strategy was measured using a 22-item
scale developed by Dess and Davis (1984) and modified by Doty, Glick, and Huber
(1993). Respondents rated their major business unit on items designed to measure
the extent to which they were developing cost-based and differentiation-based
strategies (Porter 1980). Product-market scope (Day 1990) also was assessed to
insure that the breadth of the business unit's market development approach was
measured (Doty, Glick, & Huber 1993). Seven-point Likert-type anchors were used
(1 = not at all; 7 = to a great extent). Items used to represent these strategies are
shown in appendix A.

4.2.2 Market Orientation Market orientation was measured using the scale
developed by Jaworski and Kohli (1993). This scale is designed to measure three
sub-dimensions of the market orientation construct: generation of market
intelligence, dissemination of market intelligence across departments and work
groups, and responsiveness to market intelligence. For this research, the original
32-item scale was used. Seven-point Likert-type scale anchors were used
(1 = strongly disagree; 7 = strongly agree). Items used to represent market
orientation are shown in appendix A.
4.2.3 Marketing Capabilities Marketing capabilities were measured using a new
scale developed for this research. To develop the scale, Churchill's
recommendations for scale development in marketing were followed (Churchill
1979). Since marketing capabilities are outcomes of marketing processes,
respondents were asked to express their beliefs regarding their business unit's
marketing processes in six distinct areas: pricing, promotions, product
development, distribution channels, marketing management and planning, and
marketing research development. In each case, capabilities were measured with
multiple items for each marketing area. To assess the business unit's marketing
capabilities, a seven-point Likert-type scale was used (1 = strongly disagree;
7 = strongly agree). Items used to measure marketing capabilities are shown in
appendix A.

-153-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

4.2.4 Organisational Performance Various conceptualisation of organisational

performance have been presented in past research. Each of the four performance
dimensions, profitability, growth, adaptability, and customer satisfaction, were
operationalised with multiple items (Venkatraman 1989). Relative performance on
each dimension was measured by asking respondents to assess their business unit's
performance relative to that of major competitors. Seven-point Likert-type scales
were used (1 = much better than our competition; 7 = much worse than our
competition). Items are shown in appendix A.

5. Results
Before submitting the data to the main analysis, a series of psychometric analyses
were performed to provide evidence of the validity and reliability of the variables
used in the study.
5.0.1 Business Strategy To test the psychometric properties of the business
strategy scales, a confirmatory factor analysis (CFA) was performed. This was
followed by reliability analyses. Table 1 provides results of the CFA for business
strategy. As can be seen, the CFA, demonstrating a CFI of 0.98 demonstrates a
good fit to the data. Convergent validity was confirmed as no cross loadings
emerged and all /-values were larger than 1.96 (Anderson & Gerbing 1988).
Evidence of discriminant validity was confirmed by a series of analyses which set
all possible pairs of inter-factor covariances equal to one and tested for equality to
the original CFA (Anderson & Gerbing 1988). Reliabilities for each construct were
also calculated. As can be seen in table 1, with the exception of a reliability of 0.61
for cost-based advantage, the business strategy and performance variables all
demonstrated adequate reliability with values in excess of 0.7 (Nunnally 1978).

5.0.2 Business Performance The psychometric properties of the performance

scales were also established via confirmatory factor analysis, followed by reliability
analyses. Table 2 provides results for the business performance CFA. As can be
seen, the CFA demonstrates adequate fit to the data. Each CFA demonstrates
acceptable convergent validity with no cross loadings and /-values larger than 1.96
(Anderson & Gerbing 1988). Acceptable discriminant validity was demonstrated
for each CFA using the procedure outlined above. Reliability analyses were also
performed with all performance constructs demonstrating adequate reliability.

5.0.3 Market Orientation Market Orientation was assessed with Jaworski and
Kohli's (1993) scales. The full 32-item scale was used in the study to allow for the
broadest operationalisation of the market orientation construct possible. This is
important as the original market orientation measure was developed in the United
States and precisely how it behaves outside the US is less well known. For this
reason, psychometric testing was performed via a confirmatory factor analysis on
the original 32-item scale. As can be seen in table 3, the Australian context
appeared to support a broader set of items than the US context where the scale was
originally developed. As can be seen in the final market orientation CFA, a
relatively good fit was achieved. (%2 = 270.54, 227 d.f., CFI = 0.92, with 90%

-154-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

Table 1
Business Strategy Confirmatory Factor Analysis
Constructs and Items Parameter Standardised f-Value
Coefficient

Business Strategy CFA

Differentiation <x = 0.81
Provide unique products or services? X,xu 0.71 7.08
Offer higher quality prods/svcs than your competitors? Xx12 0.39 3.51
Offer innovative products and services? to, 3 0.73 7.39
Offer highly differentiated products and services? A,X]4 0.88 9.48
Offer products and/or services with distinctly different features *•*, 5 0.75 7.62
from those of competing products?
Cost Advantage a = 0.61
Be the lowest cost provider in your industry? 0.99 13.11
Provide your customers with the lowest prices among your major X.X2 2 0.57 5.68
competitors?
Emphasize efficiency? A,X23 0.22 2.07
Strive for high volume to spread costs? Xx2t 0.32 3.03

Product-Market Scope a = 0.76

Offering more products and/or services than your competitors? X,x 3 , 0.80 8.08
Offering a broader range of products/services than competitors? *.X32 0.89 9.31
Offering a more limited line of products/services than competitors to33 0.38 3.35
(RS)?
Serving more market segments than your competitors? X,Xj4 0.67 6.50

Note: x2 = 69.83,63 rf./.

CFI =0.98
Interfactor Correlations and /-Values:
Cost—Diff. (-0.20,-1.79);
Scope—Diff. (0.39, 3.57); and
Scope—Cost (0.08, 0.69)

confidence limit for the Root Mean Square Error of the Approximation (RMSEA)
ranging from 0.02 to 0.07). To assess fit with the relatively small sample collected,
the normal theory reweighted least squares %2 and the comparative fit index (CFI)
are recommended (Bentler 1990). The reweighted LS %2 demonstrated a value of
261.61 with 227 d.f., p = 0.06, and CFI = 0.92. Reliabilities for the three market
orientation constructs were 0.70 for intelligence generation, 0.79 for intelligence
dissemination, and 0.82 for responsiveness, which meet the values suggested by
Nunally(1978).

-155-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

Table 2
Business Strategy and Performance Confirmatory Factor Analyses
Constructs and Items Parameter Standardised f-Value
Coefficient

Performance CFA

Growth a = 0.91
Changes in market share Xxn 0.94 9.50
Market share growth relative to our X.X12 0.89 8.73
competition
Growth in sales of our product and/or Ul] 0.77 7.01
services
Profitability a = 0.95
Business unit profitability X.X21 0.94 9.54
Return on Investment (ROI) Xx22 0.93 9.51
Return on Sales (ROS) X.X 23 0.91 9.10

Customer Satisfaction a = 0.78

Customer satisfaction A,x3, 0.82 7.23
Delivering value to your customers X,x32 0.89 8.06

Adaptability a = 0.80
Number of successful new products Xxn 0.74 6.08
Introduction of new products/services A,X42 0.77 6.43
Time to market for new products A.X43 0.64 5.12

Note: x 2 = 55.17, 38 d.f.

CFI =0.96
Interfactor Correlations and /-Values:
Profit—Growth (0.76, 11.92)
Cust. Sat—Growth (0.63, 6.57)
Cust Sat—Profit. (0.53, 4.89)
Adapt—Growth (0.58, 5.24)
Adapt—Profit. (0.61, 5.88)
Adapt—Cust. Sat. (0.79, 9.30)

5.0.4 Marketing Capabilities Construct validity for the marketing capability

measures were also assessed via confirmatory factor analysis. In this case, all six
constructs were analysed simultaneously by loading each item on the construct it
was hypothesised to represent and performing the CFA. Final results for this
analysis are shown in table 4. As can be seen, the small sample size appears to have
impacted the %2 value causing a significant %2. The reweighted LS % demonstrated
a value of 245.77 with 217 d.f., p = 0.08, with CFI = 0.94. With a reasonable fit
attained for the marketing capability scales, assessment of convergent and
discriminant validity was performed. Adequate convergent validity was
demonstrated by the model shown in table 4, which had no cross loadings and

156-

Copyright © 2000. All rights reserved.

 Table 3
Market Orientation: Confirmatory Factor Analysis
Constructs and Items Parameter Standardised f-Value Constructs and Items Parameter Standardised r-Value
Coefficient Coefficient
Intelligence Generation a = 0.70 Responsiveness a = 0.82
In this bus. unit we meet with custs. at least once a yr to Xxi t 0.53 4.87 Principles of market segmentation drive new product XX31 0.43 3.98
find out what prods/svcs they will need in future. development efforts in this bus. unit.
Individuals from our prod. dept. or group interacts directly Xxi 2 0.25 1.96 For various reasons, we tend to ignore changes in our X*3 2 0.71 7.27
with custs. To learn h o w to serve them better. cust's prodVsvc. needs (RS).
We are slow to detect changes in customer preferences Xxi 3 0.65 6.24 W e periodically review prod/svc devel. efforts to ensure Xx 3 3 0.61 5.90
(RS). they are in line with cust's want.
We poll end users at least once a year to assess the quality Xxi 4 0.56 5.29 Our bus. plans are driven more by tech. advances than by Xx 3 4 0.31 2.81
of our products/services. market research (RS).
W e often talk with or survey those who can influence our X.X15 0.43 3.84 Several departments or groups meet periodically to plan AJC 35 0.58 5157
end users' purchases (e.g. retailers or distributors). responses to changes taking place in our business
environment.
We collect industry information through informal means. Xx! 6 0.52 4.76 Our prod, lines are more a function of internal concerns X.X3 6 0.62 6.02
I or politics than real mkt. needs (RS).
*jj We periodically review the likely effect of changes in our Xxi 7 0.58 5.51 If a major competitor were to launch an intensive Xx 3 7 0.51 4.79
-1 business environment (e.g. regulations) on customers). campaign targeted at our customers, we would
implement an immediate response.
Intelligence Dissemination a = 0.79 Cust complaints fall on deaf ears in this bus. unit. X-*3« 0.68 6.82
We have interdepartmental meetings at least once a quarter Xx2i 0.54 5.10 Even if we came up with a great marketing plan, w e XX39 0.54 5.15
to discuss market trends and developments. probably would not be able to implement it in a timely
fashion (RS).
Mktg. pers. in our bus. unit spend time discussing XX22 0.76 7.88 W e are quick to respond to significant changes in our Xx 3 5 0.55 5.29
customer's future needs with other functional depts. competitor's pricing structure.
Our business unit periodically circulates documents (e.g. Xx2 3 0.59 5.63 When we find that customers would like us to modify a XX310 0.45 4.14
reports, newsletters) that provide information on our prod, or s v c , the depts. or groups involved make
customers. concerted efforts to do so.
When something important happens to a major cust. or Xx2 4 0.77 7.93
mkt., the bus. unit knows about it in a short time. Fit Indices:
When one dept/group discovers something important Xx2 5 0.56 5.34 x2 270.54 227 d.f. p = 0.03
about comp., it's slow to alert other deptsVgroups (RS). Normal Theory Reweighted LS x2 261.61 227 d.f. p = 0.06
Comparative Fit Index (CFI) 0.92
RMSEA 90 % C. I. (0.02,0.07)
Note: Inter-factor Correlations and t-values: Correl. t-value
Intel. Gen and Intel. Dissem. 0.94 15.66
Intel. Gen and Responsiveness 0.93 16.89
Intel. Dissem. and Responsiveness 0.95 20.86
 Table 4
Marketing Capabilities Confirmatory Factor Analysis
Constructs and Items Parameter Standardized C
oefficient
»-Value Constructs and Items Parameter Standardized
Coefficient
f-Value
s
Marketing Research (MR) a = 0.85 Channels/Distribution (CD) a = 0.88
Our mkting. res. abilities help us find more new Xx, [ 0.77 8.11 We have better relationships with distributors than do XX41 0.86 9.23
custs. than do our competitors. our competitors.
Market research skills help us develop effective Xx 12 0.55 5.48 Our distribution system is more efficient than our XX42 0.71 7.32
marketing programs. competitors.
We use our mkting. res. info, more effectively than Xx 13 0.86 9.62 We work more closely with distributors and retailers XX43 0.86 9.64
our comp. uses their own marketing research than do our competitors.
information.
Our marketing research expertise helps us develop Xx 1 4 0.93 10.82 Our distribution programs are vital for marketing XX44 0.71 6.97
better marketing programs than our competition. program success.
Pricing (P) a = 0.74 Promotional Management (PM) a = 0.82
Pricing has a major impact on marketing program XX2 0.44 4.27 Advertising is a vital component of our promotional Xx 5 , 0.49 5.17
success.
Our pricing approach is more effective than our
competition's.
Xx 22 0.99 13.11
program.
Our sales promo's (coupons, free samples, etc.) are
more effective than of our compet.
0.65 6.70
I
We know competitors' pricing tactics better than they Xx 23 0.40 3.83 Our advertising programs are more effective than Xx 53 0.99 13.11
know ours. those of our competitors.
Our prices are more competitive than our X.X24 0.59 5.97
competition's prices. Marketing Management (MM) a = 0.92
Our abilities to segment and target-market help us 0.68 6.86
Product Development (PD) a = 0.79 compete. XXfj!
We do a better job of developing new Xx 3 1 0.81 8.19 We manage our marketing programs better than our 0.91 10.68
products/services than our competition. competitors. XXj2
Our product/service development often falls short of Xx 3 2 0.54 4.98 Our marketing management skills give us a 0.90 10.34
its goals (RS). competitive edge. ^63
Our product/service development gives us an edge in XX33 0.80 8.07 Our ability to coordinate various departments and 0.80 8.74
the market. groups in this business unit helps us to respond to Xx«4
market conditions faster than our competitors.
Our product/service development efforts are more Xx34 0.68 6.52 Fit Indices: 277.19 217 d.f. p = 0.004
responsive to customer needs than those of our X2 245.77 217 d.f. p = 0.08
competition. Normal Theory Reweighted LS x 2 0.94
Comparative Fit Index (CFI) (0.04, .08)
RMSEA90%C.I.

Note: Inter-factor Correlations and (-values: P—MR (0.40,4.22) CD—P (0.29,2.83) PM—PD (0.29,2.59) MM—PD (0.41,3.86)
PD—MR (0.53, 5.65) CD—PD (0.27,2.35) PM—CD (0.47,5.29) MM—CD (0.50,5.49)
PD—P (0.46,4.84) PM—MR (0.44,4.75) MM—MR (0.71,11.03) MM—PM (0.47,5.34)
CD—MR (0.33,3.12) PM—P (0.27, 2.64) MM—P (0.40,4.23)
Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

demonstrated f-values in excess of 1.96 (Anderson & Gerbing 1988). Discriminant

validity was determined by letting all pairs of inter-factor covariances equal to one,
in a pair wise manner, and testing for discriminant validity with a series of chi-
square difference tests (Anderson & Gerbing 1988). In all, six models were tested
(one for each inter-factor covariance). All inter-factor parameters tested
significantly less than one, therefore supporting the discriminant validity of the
model. Reliabilities were calculated with each of the six marketing capability
constructs demonstrating reliabilities in excess of 0.7 (Nunnally 1978).
Finally, to ensure that the market orientation and marketing capabilities
constructs were distinct, we tested the discriminant validity of the market
orientation and marketing capabilities constructs by testing a four factor CFA
which used the three market orientation constructs and one of the six marketing
capabilities constructs. Six sets of model tests were conducted, one for each of the
marketing capabilities constructs. Adequate convergent validity was demonstrated
in each of the six original marketing capability—market orientation models which
showed no evidence of cross loadings and demonstrated f-values in excess of 1.96
for each item loading (Anderson & Gerbing 1988). Discriminant validity was
determined by setting up three models in which the interfactor covariance
parameter representing the: (1) marketing capability to intelligence generation; (2)
marketing capability to intelligence dissemination; and (3) marketing capability to
responsiveness parameter equal to one (once again this was performed in a pair
wise manner) and testing each of the three models against the original model for
discriminant validity with a chi-square difference test (Anderson & Gerbing 1988).
In total, eighteen models were tested, three for each of the marketing capability
constructs. In all cases discriminant validity was supported between the marketing
capability construct and the three market orientation constructs.

5.1 Cluster Procedure

To assess whether market-driven organisations existed among the firms studied, a
data analysis procedure was required that would group the business units studied
based on their similarity along the market orientation dimensions. An efficient and
frequently used approach for forming groups of like organisations is cluster
analysis (Ketchen & Shook 1996). Ward's method of hierarchical cluster analysis
was used for this purpose as it effectively minimizes intra-cluster differences and
maximizes inter-cluster differences among the variables used for clustering (Zahra
& Covin 1993). Variables used in the cluster analysis were the market orientation
factors representing intelligence generation, dissemination, and organisational
responsiveness to market information.

5.2 Business Strategy, Market Orientation and Marketing Capabilities

Differences
Ward's cluster technique provided clear evidence of two groups of organisations
with a lack of any intermediate group(s). The two-cluster solution was selected
based on inspection of an icicle plot, which clearly showed two groups of
organisations (Hair, Anderson, Tatham & Black 1995). The first cluster contained
43 firms, while the second cluster contained 44. Attempts to form three and four
cluster solutions were not successful. Both the three and four cluster solutions

-159-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

exhibited one or two firm clusters, indicating a poor solution. To investigate the
sources of the differences driving the clustering, a two-group multivariate analysis
of variance (MANOVA), which is equivalent to Hotelling's T2 analysis, was
performed on the business strategy and market orientation variables. Table 5
presents the results of this analysis. To investigate the data for multivariate
differences, the hypothesis of no group difference was tested. Wilks' lambda for the
two-group MANOVA was 0.39, (F= 20.92, 6 & 80 d.f., p < 0.0001), indicating
there were significant group differences. Having demonstrated overall significant
group differences, univariate f-tests were conducted on each of the variables to
define the source of the differences in the firms. To ensure that the differences were
not due to size, a /-test on firm size, as measured by number of employees, was
utilised and demonstrated no statistically significant difference in size (/ = 0.22).

Table 5
MANOVA Results, Cluster Means and Comparisons: Strategy and
Market Orientation
Variable Cluster 1 Cluster 2 f-Value Comparison
Market-Driven Non-Market-Driven
(N=43) (N=44)

Differentiation 5.90 5.42 2.41 1>2

Cost Advantage 4.62 4.34 1.11 N.S.
Product-Market Scope 4.70 4.36 1.32 N.S.
Intelligence Generation 5.92 4.86 6.66 1>2
Intelligence Dissemination 6.10 5.01 5.74 1>2
Responsiveness 5.96 4.62 10.66 1>2

MANOVA Test Results Value F,d.f. P-Value

Wilks' Lambda 0.39 20.92, 6, 80 0.0001

5.3 Cluster Results

5.3.1 Cluster 1 The business units in cluster 1 clearly demonstrated much higher
differentiation levels than the business units in the second cluster. In addition, these
business units exhibited much higher levels of gathering, disseminating, and
responding to market information. This group of business units did not appear to
have a particular cost advantage over the business units in cluster 2. Based on their
high differentiation and market orientation scores, these business units were
labelled 'Market-Driven' (Day 1994).

5.3.2 Cluster 2 As a group, the business units in cluster 2 demonstrated

significantly lower levels of each construct as compared with cluster 1, with the
exception of the cost advantage and scope dimensions which were not significantly
different across the two groups. Inspection of the MANOVA results for cluster 2
demonstrates a group of business units that exhibited lower levels of differentiation
and did not focus on gathering, disseminating, and responding to market
information. Interestingly, these business units did not develop cost advantages, nor

-160-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

were they focused on broader,market strategies. Since these firms demonstrated

lower relative market orientation ratings and a lack of clear strategic focus, these
business units were labelled 'Non-Market-Driven'.

5.4 Validating the Cluster Solution

To validate the two-cluster solution (Ketchen & Shook 1996), a second MANOVA
analysis was performed. This analysis used the two-group solution shown in table 4
and tested for group differences on two dimensions related to, but not a part of, the
business strategy or market orientation scales that were used to cluster the firms.
The two dimensions used to validate the cluster solution were: (1) degree of
relationship focus; and (2) degree of customer focus. These constructs were
designed specifically for validating the cluster solution and had not been previously
psychometrically tested. Psychometric testing was performed via maximum
likelihood exploratory factor analysis and reliability analysis. Results from these
analyses are shown in table 6. Clear evidence of the predicted two-factor solution
emerged from the analysis with factor 1 demonstrating the degree of relationship
focus, and factor 2 the degree of customer focus. Reliabilities for both constructs
were good, with relationship focus producing an alpha of 0.87 and customer focus
demonstrating an alpha of 0.86.

Table 6
Cluster Validation Variables—Maximum Likelihood Exploratory
Factor Analysis
Variables Factor 1 Factor 2
Relationship Focus Customer Focus
How well has your org. performed in the following areas:
Developing relationships to meet our customer's needs 0.92 -0.15
Influencing repeat purchases 0.80 0.10
Developing a close relationship with our customers 0.76 0.08
Developing brand loyalty among our customers 0.57 0.06
Meeting the needs of our loyal customers 0.51 0.32
Reacting to changes in the marketplace 0.04 0.88
Reacting to competitor moves -0.11 0.84
Reacting to customer needs 0.07 0.78
Adapting current offerings to customer needs 0.31 0.50
Developing new goods or svcs. to meet cust. needs 0.12 0.49
Cronbach Alpha 0.87 0.86

Having tested the basic measurement properties of the cluster validation variables,
results from the MANOVA were examined. Overall group differences were
supported (Wines' lambda = 0.66, F = 21.28, with 2 and 84 d.f., p < 0.0001), and
differences were found between the two groups for both validation variables used
in the analysis (table 7). As expected, the firms in cluster 1 demonstrated
significantly higher degrees of customer focus and relationship focus than the firms

-161-

Copyright © 2000. All rights reserved.

A USTRALIAN JOURNAL OF MANAGEMENT September 2000

in cluster 2. Based on the results of the cluster analysis and validation, the firms in
cluster 1 were confirmed as market-driven firms, while the firms in cluster 2 were
identified as being significantly less market-driven.

Table 7
Cluster Validation—MANOVA Results
Variable Cluster 1 Cluster 2 f-Value Comparison
Market-Driven Non-Market-Driven
(N=43) (N=44)

Relationship Focus 5.95 4.97 5.53 1>2

Customer Focus 5.52 4.50 5.61 1>2

MANOVA Test Results Value F,d.f. P-Value

Wilks' Lambda 0.66 21.28,2,84 0.0001

5.5 Marketing Capabilities Differences

To investigate potential differences between the business units in the two groups
and to provide validation of the market-driven nature of firms in cluster 1, a
MANOVA was performed using the marketing capabilities measures as the
dependent variables. Results from this analysis are presented in table 8. As can be
seen, there was a significant difference between the overall marketing capabilities
dimensions of the business units in the two clusters (Wilks' A. = 0.59, F ■=■ 9.43, 6, &
80 d.f. p < 0.0001). To investigate sources of the differences, univariate Mests
were performed on the two groups. In this analysis, the market-driven business
units in cluster 1 demonstrated significantly higher levels of all six marketing
capability constructs. It is especially interesting to note that two of the largest
differences were for market research capabilities and marketing
management/planning capabilities, which are crucial to the success of market-
driven businesses (Day 1993; 1994; Hunt & Morgan 1995; Jaworski & Kohli
1993).

5.6 Organisational Performance Differences

The final analysis investigated the hypothesized performance differences between
the two groups. Table 9 presents the results of the fourth, two-group MANOVA.
Once again, an overall difference between the two groups was found
(Wilks' X = 0.81, F=4.67, 4, & 82 d.f., p = 0.0019). To further investigate the
differences, univariate f-tests were calculated for each of the four performance
variables. As can be seen in table 9, the market-driven business units significantly
outperformed the less market-driven business units across the four performance
dimensions. This was especially true in the adaptability, profitability, and customer
satisfaction areas where the mean differences were the largest.

-162-

Copyright © 2000. All rights reserved.

 Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

Table 8
MANOVA Results, Cluster Means and Comparisons: Marketing
Capabilities
Variable Cluster 1 Cluster 2 t-Value Comparison
Market-Driven Non-Market-Driven

Market Research Capabilities 5.23 4.06 5.55 1>2

Pricing Capabilities 4.73 4.06 3.24 1>2
Product Development Capabilities 5.00 4.28 3.37 1>2
Channels/Distribution Capabilities 5.13 4.26 3.51 1>2
Promotion Capabilities 4.81 4.06 3.30 1>2
Marketing Management/Planning Capabilities 5.52 4.18 6.80 1>2

MANOVA Test Results Value F.df. P-Value

Wilks' Lambda 0.59 9.43,6, 80 0.0001

Table 9
MANOVA Results, Performance Differences By Cluster
Variable Cluster 1 Cluster 2 f-Value Comparison
Market-Driven Non-Market-Driven

Growth 5.26 4.79 2.18 I>2

Profitability 5.43 4.70 3.13 1>2
Customer Satisfaction 5.59 5.01 3.08 1>2
Adaptability 4.90 4.14 3.92 1>2

MANOVA Test Results Value F.d.f. P-Value

Wilks' Lambda 0.81 4.67,4, 82 0.0019

6. Implications from the Study

The foregoing study of Australian businesses was designed to accomplish three
main objectives. The first objective was to determine the degree to which firms
could be characterized as market-driven by studying their market orientation. This
objective was accomplished by measuring the 87 firms in this study with regards to
their market intelligence generation, dissemination and responsiveness (Jaworski &
Kohli 1993) and further examining their degree of differentiation, cost-leadership,
and scope for evidence that the market orientation was indeed supportive of the
firm's strategic direction. To analyse the extent to which this strategically focused
market orientation characterized the 87 firms in this study, a clustering technique
that grouped firms based on their market orientation and then analysed for evidence
of supporting business unit strategy differences was used. As predicted, a group of
firms rated highly in market orientation and differentiation emerged from the
analysis, therefore demonstrating the viability of the technique for defining the
market-driven firms in this study. The clusters were then validated by measuring
their relationship to two specifically designed validation variables, customer focus

-163-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

and relationship focus (Ketchen & Shook 1996). As was demonstrated in the
analysis, market-driven firms demonstrated much higher levels of customer focus
and relationship focus, therefore, validating the clustering results.
The second objective of this study was to explore the set of marketing
capabilities that a strategically focused market-driven firm would develop to help
implement this strategic orientation (Day 1993; 1994). Six marketing capabilities
were suggested by the literature and were confirmed via managerial interviews.
These capabilities consisted of six areas: marketing research, product development,
pricing, distribution, promotion, and marketing management. The group of 43
market-driven firms found in this study demonstrated higher levels of all six
marketing capabilities. These findings support Day's (1993; 1994) theoretical work
in marketing capabilities by demonstrating positive associations between the
variables used to define market-driven behaviour, and the six marketing capabilities
demonstrated by these firms. It is important to note that the 44 less market-driven
firms in this study consistently demonstrated lower levels across all six marketing
capability dimensions.
The final objective of this study was to provide empirical support for the idea
that strategically focused market-driven firms would outperform their competitors
(Hunt & Morgan 1995). As the results of this study demonstrated, the 43 market-
driven firms outperformed the 44 less market-driven firms across adaptability,
customer satisfaction, growth, and profitability dimensions. This finding supports
the theoretical work in marketing regarding the capabilities of market-driven firms
(Day 1993; 1994; Day & Wensley 1988) and extends the empirical findings of the
market orientation researchers (e.g. Kohli, Jaworski & Kumar 1993; Narver &
Slater 1990) beyond simple measures of performance. Thus, by meeting the three
main objectives outlined above, this study provides insights regarding the
importance of developing a strategically focused market-driven approach and
provides insights into the internal processes, which contribute to achieving a
business orientation.

7. Limitations and Directions for Future Research

The major limitations in our study result from the trade-offs required in research of
this type. First, the cross-sectional data collected in the study and are unable to
empirically evaluate causality in the relationships examined or to examine the
sustainability dimension of competitive advantage. We need to know what
managers do, but importantly also, how they do it. Future researchers could
complement our findings by utilizing longitudinal research designs and providing
understanding of the processes involved in becoming market-driven. Second, by
focusing specifically on an extensive examination of market orientation and the
marketing capabilities that develop under this orientation, we were unable to
control for differences between firms in the level and quality (e.g. brand image) of
resource inputs, and the level of other types of organisational capabilities (e.g.
R&D) that may impact performance. Clearly, a better understanding of the
interrelationships among these variables is critical for future research.

-164-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

8. Conclusions and Managerial Implications

From a management perspective, an important implication of our research is that
market-driven firms should develop their marketing programs with an eye toward
developing marketing capabilities that support the firm's strategy. Firms that do this
should be able to outperform their less market-oriented rivals, as did the firms
documented in this study. To support their ability to implement such a market-
oriented approach, continued investment in market research, pricing, product
development, promotions, channels and market planning and marketing
management capabilities is indicated as important. Firms should place particular
emphasis on the collection and analysis of market information and the careful
development and management of strategic marketing plans.

(Date of receipt of final transcript: January, 2000.

Accepted by Mark Uncles, Area Editor)

References
Aaker, D.A. 1994, Strategic Market Management, John Wiley and Sons, New York.
Adler, P.S., Mandelbaum, A., Nguyen, V. & Schwerer, E. 1996, 'Getting the most out of your
product development process', Harvard Business Review, March, pp. 134-51.
Anderson, J.C. & Gerbing, D.W. 1988, 'Structural equation modelling in proactive: A review and
recommended two-step approach', Psychological Bulletin, vol. 103, no. 3, pp. 411-23.
Barney, J.B. 1991, 'Firm resources and sustained competitive advantage', Journal of
Management, vol. 17, March, pp. 99-120.
Bentler, P.M. 1990, 'Comparative fit indexes in structural models', Psychological Bulletin,
vol. 107, no. 2, pp. 2 3 8 ^ 6 .
Bharadwaj, S.G., Varadarajan, P.R. & Fahy, J. 1993, 'Sustainable competitive advantage in
service industries: A conceptual model and research propositions', Journal of Marketing,
vol. 57, October, pp. 83-99. i
1
'i
Churchill, G.A. 1979, 'A paradigm for developing better measures of marketing constructs',
Journal of Marketing Research; volJ lp, February, pp. 64-73.
Day, G.S. 1990, Market Driven Strategy, Processes for Creating Value, The Free Press, New
York. |
Day, G.S. 1993, 'The capabilities of maflcet-driven organisations', Marketing Science Institute,
pp. 93-123. I
Day, G.S. 1994, 'The capabilities of market-driven organisations', Journal of Marketing, vol. 58,
October, pp. 37-51. !
Day, G.S. & Wensley. R. 1988, 'Assessing advantage: A framework for diagnosing competitive
superiority', Journal of Marketing, vol. 52, April, pp. 1-20.
Deshpande, R., Farley, J.U. & Webster, F.E. 1993, 'Corporate culture, customer orientation, and
innovativeness in Japanese firms: A quadrad analysis', Journal of Marketing, vol. 57, January,
pp. 23-7.
Deshpande, R. & Webster, F.E. Jr. 1989, 'Organisational culture and marketing: Defining the
research agenda', Journal of Marketing, vol. 53, January, pp. 3-15.

-165-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

Dess, G.G. & Davis, P.S. 1984, 'Porter's (1980) generic strategies as determinants of strategic
group membership and organisational performance', Academy of Management Journal,
vol. 27, August, pp. 467-88.
Doty, D.H., Glick, W.H. & Huber, G.P. 1993, 'Fit, equifinality, and organisational effectiveness:
A test of two configurational theories'. Academy of Management Journal, vol. 30, December,
pp. 1196-250.
Grant, R.M. 1991, 'The resource-based theory of competitive advantage: Implications for strategy
formulation', California Management Review, Spring, pp. 114—35.
Grant, R.M. 1996, 'Prospering in dynamically-competitive environments, organisational
capability as knowledge integration', Organizational Science, vol. 7, pp. 375-87.
Hall, R. 1993, 'A framework linking intangible resources and capabilities to sustainable
competitive advantage', Strategic Management Journal, vol. 14, no. 8, pp. 607-18.
Hamel, G. & Prahalad, C.K. 1989, 'Strategic intent', Harvard Business Review, vol. 67, no. 3,
pp. 63-76.
Hamel, G. & Prahalad, C.K. 1994, Competing for the Future, Harvard Business Press, Cambridge.
Hair, J.F., Anderson, R.E., Tatham, R.L. & Black, W.C. 1995, Multivariate Data Analysis with
Readings, MacMillan Publishing Company, New York.
Hunt, S.D. & Morgan, R.M. 1995, "The comparative advantage theory of competition', Journal of
Marketing, vol. 59, April, pp. 1-15.
Jaworski, B.J. & Kohli, A.K. 1993, 'Market orientation: Antecedents and consequences', Journal
of Marketing, vol. 57, July, pp. 53-70.
Johnson, G. & Scholes, K. 1999, Exploring Corporate Strategy, Prentice Hall Europe, Hemel,
Hempstead.
Kaplan, R.S. & Norton, D.P. 1992, 'The balanced scorecard—Measures that drive performance',
Harvard Business Review, January-February, pp. 71-9.
Kaplan, R.S. & Norton, D.P. 1993, 'Putting the balanced scorecard to work', Harvard Business
Review, vol. 71, no. 5, pp. 134-47.
Kaplan, R.S. & Norton, D.P. 1996, 'Using the balanced scorecard as a strategic management
system', Harvard Business Review, vol. 74, no. 1, pp. 75-85.
Ketchen, D.J. & Shook, C.L. 1996, 'The application of cluster analysis in strategic management
research: An analysis and critique', Strategic Management Journal, vol. 14, June, pp. 441-58.
Kohli, A.K. & Jaworski, B.J. 1990, 'Market orientation: The construct, research propositions and
managerial implications', Journal of Marketings vol. 54, April, pp. 1-18.
Kohli, A.K, Jaworski, BJ. & Kumar, A. 1993 'MARKOR: A measure of market orientation',
Journal of Marketing Research, vol. 30, November, pp. 467-77.
Miles, R.E. & Snow, C.C. 1978, Organisational Strategy, Structure and Process, McGraw Hill,
New York.
Narver, J.C. & Slater, S.F. 1990, "The effect of a market orientation on business profitability',
Journal of Marketing, vol. 54, October, pp. 20-35.
Nunnally, J.C. 1978, Psychometric Theory, McGraw Hill, New York.
Oczkowski, E. & Farrell, M.A. 1998 'An examination of the form of market orientation in
Australian companies', Australian Marketing Journal, vol. 6, no. 2, pp. 3-12.
Porter, M.E. 1980, Competitive Strategy: Techniques for Analysing Industries and Competitors,
The Free Press, New York.
Prahalad C.K. & Hamel, G. 1990, 'The core competence of the corporation', Harvard Business
Review, vol. 68, no. 3, pp. 79-91.

-166-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Barker: MARKET-DRIVEN FIRMS

Reichheld, F.F. & Sasser, W.E. Jr. 1990, 'Zero defections: Quality comes to services', Harvard
Business Review, September, pp. 105-11.
Ruekert, R.W., Walker, O.C. & Roering, K.J. 1985, 'The organisation of marketing activities: A
contingency theory of structure and performance', Journal of Marketing, vol.49, Winter,
pp. 13-25.
Slater, S.F. & Narver, J.C. 1994, 'Does competitive environment moderate the market orientation-
performance relationship?' Journal of Marketing, vol. 58, January, pp. 46-55.
Slater, S.F. & Narver, J.C. 1995, 'Market orientation and the learning organisation', Journal of
Marketing, vol. 59, July, pp. 63-74.
Slater, S.F. & Narver, J.C. 1998, 'Customer led and market oriented: Let's not confuse the two',
Strategic Management Journal, vol. 19, no. 10, pp. 159-74.
Sinkula, J.M. 1994, 'Market information processing and organisational learning', Journal of
Marketing, vol. 58, January, pp. 35-45.
Varadarajan, P. 1983, 'Intensive growth opportunities: An extended classification', California
Management Review, vol. 25, Spring, pp. 118-32.
Varadarajan, P. & Clark, T. 1994, 'Delineating the scope of corporate, business, and marketing
strategy'. Journal of Business Research, vol. 31, pp. 93-105.
Venkatraman, N. 1989, 'Strategic orientation of business enterprises: The construct,
dimensionality and measurement', Management Science, vol. 35, August, pp. 942-62.
Venkatraman, N. & Ramanujam, V. 1986, 'Measurement of business economic performance: A
comparison of approaches', Academy of Management Review, vol. 11, pp. 801-14.
Viljoen, J. 1994, Strategic Management: Planning and Implementing Successful Corporate
Strategies, Longmans, Melbourne.
Wernerfelt, B. 1984, 'A resource-based view of the firm', Strategic Management Journal, vol. 5,
no. 2, pp. 171-80.
Woodruff, R.B. 1997, 'Customer value: The next source for competitive advantage', Journal of
the Academy of Marketing Science, vol. 25, Spring, pp. 139-53.
Zahra, S.A. & Covin, J.G. 1993, 'Business strategy, technological policy and firm performance'.
Strategic Management Journal, vol. 14, pp. 451-78.

-167-

Copyright © 2000. All rights reserved.

AUSTRALIAN JOURNAL OF MANAGEMENT September 2000

Appendix A
Scale Items

Construct Items

Business Strategy:
Differentiation To what extent is the strategy of your business to:
Provide unique products or services?
Offer higher quality products and/or services than your competitors?
Offer innovative products and services?
Offer highly differentiated products and services?
Offer products and/or services with distinctly different features from those of
competing products?
Cost Leadership To what extent is the strategy of your business to:
Be the lowest cost provider in your industry?
Provide your customers with the lowest prices among your major competitors?
Emphasise efficiency?
Strive for high volume to spread costs?
Product-Market Scope Compared to your competitors, to what extent does your business strategy call for:
Offering more products and/or services than your competitors?
Offering a broader range of products/services than competitors?
Offering a more limited line of products/services than competitors (RS)?
Serving more market segments than your competitors?

Market Orientation:
Intelligence Generation Please indicate how much you agree or disagree with the following statements:
In this business unit we meet with customers at least once a year to find out what
products/services they will need in the future.
Individuals from our production department or group interact directly with customers
to learn how to serve them better.
We are slow to detect changes in customer preferences (RS).
We survey end users at least once a year to assess the quality of our products/services.
We often talk with or survey those who can influence our end users' purchases (e.g.
retailers or distributors).
We collect industry information through informal means.
We periodically review the likely effect of changes in our business environment (e.g.
regulations) on customers.
Intelligence Please indicate how much you agree or disagree with the following statements:
Dissemination We have interdepartmental meetings at least once a quarter to discuss market trends
and developments.
Marketing personnel in our business unit spend time discussing customers' future
needs with other functional departments.
Our business unit periodically circulates documents (e.g. reports, newsletters) that
provide information on our customers.
When something important happens to a major customer or market, the whole business
unit knows about it in a short time.
When one department or group discovers something important about competitors, it is
slow to alert other departments or groups (RS).

-168-

Copyright © 2000. All rights reserved.

Vol. 25, No. 2 Vorhies & Harker: MARKET-DRIVEN FIRMS

Construct Items
Responsiveness Please indicate how much you agree or disagree with the following statements:
Principles of market segmentation drive new product development efforts in this
business unit.
For various reasons, we tend to ignore changes in our customer's product/service
needs.
We periodically review our product/service development efforts to ensure that they are
in line with what customers want.
Our business plans are driven more by technological advances than by market research
(RS).
Several departments or groups meet periodically to plan responses to changes taking
place in our business environment.
Our product lines are more a function of internal concerns or internal politics than real
market needs (RS).
If a major competitor were to launch an intensive campaign targeted at our customers,
we would implement an immediate response.
Customer complaints fall on deaf ears in this business unit.
Even if we came up with a great marketing, plan, we probably would not be able to
implement it in a timely fashion (RS).
We are quick to respond to significant changes in our competitor's pricing structure.
When we find that customers would like us to modify a product or service, the
departments or groups involved make concerted efforts to do so.
Marketing Capabilities: Please indicate how much you agree or disagree with the following statements
concerning your business unit's marketing capabilities.
Market Research Our marketing research ability help us find more new customers than do our
competitors.
Market research skills help us develop effective marketing programs.
We use our marketing research information more effectively than our competition uses
their own marketing research information.
Our marketing research expertise helps us develop better marketing programs than our
competition.
Pricing Pricing has a major impact on marketing program success.
Our pricing approach is more effective than our competition's.
We know competitors' pricing tactics better than they know ours.
Our prices are more competitive than our competition's prices.
Product Development We do a better job of developing new products/services than our competition.
Our product/service development often falls short of its goals (RS).
Our product/service development gives us an edge in the market.
Our product/service development efforts are more responsive to customer needs than
those of our competition.
Channels We have better relationships with distributors than do our competitors.
Our distribution system is more efficient than our competitors.
We work more closely with distributors and retailers than do our competitors.
Our distribution programs are vital for marketing program success.
Promotion Advertising is a vital component of our promotional program.
Our sales promotions (coupons, free samples, etc.) are more effective than those of our
competition.
Our advertising programs are more effective than those of our competitors.
Market Management Our abilities to segment and target-market help us compete.
We manage our marketing programs better than our competitors.
Our marketing management skills give us a competitive edge.
Our ability to coordinate various departments and groups in this business unit helps us
to respond to market conditions faster than our competitors.

-169-

Copyright © 2000. All rights reserved.

A USTRALIAN JOURNAL OF MANAGEMENT September 2000

Construct Items

Organisational Please evaluate the performance of your major line of business over the past year
Effectiveness: relative to your major competitors.
Growth Changes in market share.
Market share growth relative to our competition.
Growth in sales of our product and/or services.
Profitability Business unit profitability.
Return on Investment (ROI).
Return on Sales (ROS).
Customer Satisfaction Customer satisfaction.
Delivering value to your customers.
Adaptability Number of successful new products.
Introduction of new products/services.
Time to market for new products.

-170-

Copyright © 2000. All rights reserved.

 Appendix B
Correlations i*

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1 Differentiation 1.00 -0.12 0.34 0.12 0.24 0.22 0.20 0.05 0.22 0.22 0.35 0.27 0.22 0.33 0.25 0.31 0.07
2 Cost Advantage 1.00 0.24 0.27 0.20 0.14 0.05 0.44 0.10 0.02 -0.04 0.03 0.08 0.11 0.02 0.05 -0.10
3 Scope - 1.00 0.25 0.21 0.24 0.25 0.06 0.33 0.31 0.43 0.32 0.15 0.30 0.26 0.34 -0.04
4 Intel. Gen. - 1.00 0.66 0.67 0.48 0.36 0.49 0.40 0.27 0.51 0.35 0.36 0.37 0.41 -0.02
5 Intel. Diss. - 1.00 0.75 0.49 0.32 0.40 0.39 0.35 0.52 0.30 0.39 0.35 0.42 -0.08
6 Responsiveness - 1.00 0.59 0.40 0.46 0.36 0.47 0.69 0.28 0.30 0.38 0.48 -0.03
7 Market Res. - 1.00 0.26 0.50 0.29 0.47 0.67 0.31 0.33 0.31 0.39 0.06

i
8 Pricing - 1.00 0.31 0.28 0.29 0.25 0.18 0.28 0.12 0.33 -0.03
9 Product Devel. - 1.00 0.28 0.49 0.44 0.34 0.41 0.55 0.60 -0.05
10 Distribution - 1.00 0.51 0.44 0.32 0.43 0.29 0.39 0.05
11 Promo. Mgmt. - 1.00 0.50 0.26 0.41 0.28 0.49 -0.04 s=
12 Mktg. Mgmt. - 1.00 0.30 0.44 0.35 0.47 0.08
13 Growth - 1.00 0.62 0.55 0.33 -0.10 ft.
14 Profit - 1.00 0.46 0.43 0.06
15 Customer Sat. - 1.00 0.58 -0.15
16 Adapt - 1.00 -0.06
17 Size - 1.00

1
1