The Relationship between Market Orientation and Performance under Different Environmental Conditions: The Moderating Effect of the Top Management Team's Risk Taking Behavior

Beginning of article

INTRODUCTION

The construct of market orientation captures the interface between the organization and its external environment. Ever since the construct was operationalized in the 1990s (Narver and Slater, 1990; Kohli and Jaworski, 1990), a vast and growing body of literature has found support for a positive relationship between market orientation and organizational performance (e.g. Kirca, Jayachandran, and Bearden, 2005; Verhees and Meulenberg, 2004; Baker and Sinkula, 1999; Jaworski and Kohli, 1993; Pulendran, Speed and Widing, 2000, Matsuno, Mentzer and Ozomer, 2002; Pelham and Wilson, 1996; Kumar, Subramanian and Yauger, 1998; Slater and Narver, 1994b; Slater and Narver, 2000; Subramanian and Gopalakrishna , 2001). From a behavioral point-of-view, market orientation focuses on intra organizational activities that relate to the collection, dissemination, and response to external environment stimuli. However, for market orientation to have a palpable payoff, the organization has to develop norms and behaviors (i.e., the culture) that encourage decision makers to make use of the market information to strategically position the organization.

One of the main challenges facing firms pursuing a market-orientation is avoiding the "tyranny of the served market" (Hamel and Prahalad, 1991). Market intelligence may uncover important trends that indicate that the current served market is crowded, there is a trend toward commoditization of the product, and that the heightened intensity of competitive rivalry has resulted in a zero-sum fight for market share. The same market intelligence may provide a siren call to identify "blue oceans" (Kim and Mauborgne, 2004), the virgin market space that is bereft of competition. To take advantage of this opportunity, the firm's managers must be willing to take the risk of entering such uncharted markets. Risk averse managers may not be willing to do this, instead steering the organization to stay the course. Without managers who are willing to take risks, the organization may take a conservative approach and be content to satisfy the expressed needs of current customers in existing markets. Thus it has been argued that in order to successfully pursue a market orientation, it is necessary to have a management team willing to take risk (Jaworski and Kohli, 1993; Pulendran, Speed, and Widing, 2000). In fact, Narver, Slater, and MacLachlan (2004) refer to this concept as "proactive" market orientation, as opposed to one that is merely responsive.

PURPOSE OF THIS STUDY

Research that has explored the relationship between the top management team's (TMT) level of risk aversion and market orientation has been equivocal (e.g. Jaworski and Kohli, 1993; Pulendran et al 2000). These mixed results may be due to the failure of these studies to include the environmental context. In other words, the importance of being wedded to the "served markets" may be more pronounced in stable markets, while dynamic market conditions may favor exploiting "blue ocean" arenas. The industry as a whole and the various niches in it are typically well-defined in stable markets. It behooves firms in these markets to concentrate on the "served markets" rather than seek uncharted territories. In dynamic contexts, on the other hand, the industry definition and its boundaries are constantly in flux, thus encouraging and necessitating firms to look for new market spaces. To date, the literature on market orientation does not address the impact that a TMT willing to accept risk may have on the market orientation-performance relationship under different environmental conditions. Thus the purpose of this study is to examine the impact that risk-taking behavior has on the market orientation-performance relationship under different environmental conditions.

The importance of the study stems from two fronts. First, it extends the extant research on market orientation by identifying the role of the TMT under different environmental conditions. Since it is the upper echelon that sets the strategic mandate for the firm, it is important to know when risk taking would be rewarded and when it would be penalized. Second, from a practical perspective, the study's findings offer a fine-grained analysis of when it would pay off to use market information to shift the organization's strategy.

RESEARCH HYPOTHESES

In their meta analysis of the relationship between market orientation and performance, Kirca, Jayachandran, and Bearden (2005) found empirical support for the moderating influence of three aspects of the competitive environment--market turbulence, competitive intensity, and technological turbulence. Market turbulence refers to the number of customers and the stability of their preferences (Subramanian and Gopalakrishna, 2001; Slater and Narver, 1994a; Kohli and Jaworski, 1990). Competitive intensity refers to the level of competition faced by an organization (Jaworski and Kohli, 1993), which could be both current as well as potential competition that is typically a result of fading industry boundaries. Technological turbulence refers to the rate of technological change (Kohli and Jaworski, 1990). While these three aspects of the competitive environment may co-exist in some markets, this may not always be the case and hence cannot be taken as a given.. The literature (e.g., Narver and Slater, 1990; Kirca, Jayachandran, and Bearden, 2005) has always treated them separately for this reason.

It may be perfectly appropriate to be risk averse under environmental conditions when market and technological turbulence are low and competitive intensity is low. In such conditions an organization could concentrate on the "served market" where competitive advantage can be maintained by focusing on customer satisfaction (Slater and Narver, 1998). In fact deviating far from current successful practices based on the chance that new products and/or services may be successful may hurt profitability because these deviations come at a cost that may not be recouped.

Thus, while having a risk tolerant TMT is not necessary in stable environments in order to successfully implement a market orientation, it is necessary as market turbulence, competitive intensity and technological turbulence increase. In order to …