The Impact Of Internal And External Market Orientations On Firm Performance. Ian N Lings, University of Technology Gordon E Greenley, Aston University

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1 The Impact Of Internal And External Market Orientations On Firm Performance. Ian N Lings, University of Technology Gordon E Greenley, Aston University Abstract The relationship between internal market orientation (IMO), market orientation (MO), and firm performance is examined using structural equations modelling. UK retail managers were surveyed to provide subjective data on the constructs of interest in this study. These data were analysed using LISREL SEM software. The data indicate significant relationships between internal market orientation IMO and external marketing success (in terms of financial performance and customer satisfaction) moderated by employee behaviours. The study contributes to marketing theory by providing quantitative evidence to support assumptions that internal marketing has an impact on external marketing success. For marketing practitioners, the research findings offer additional information on which services marketing strategies may be formulated. Keywords: Internal marketing, market orientation, marketing strategy, SEM Introduction Becoming market orientated is generally accepted as an appropriate means of improving competitive advantage and organisational performance. However, the behavioural antecedents of market orientation are the subject of some debate, in particular the relationship between internal and external marketing. It is generally recognised that all employees must be motivated and trained to behave in a market oriented manner (Grönroos, 1985), and that internal marketing has a role to play in achieving this (Harris and Piercy, 1999). Despite the attention that internal marketing (IM) has received in the academic and management literatures, there is little empirical evidence to support assertions that levels of IM influence levels of external marketing success. This study examines the role of internal marketing in facilitating the adoption of market orientation. Market Orientation Perhaps the most significant finding of recent years for marketing theorists and practitioners is an increasing body of evidence indicating that being market oriented improves organisational performance (e.g. Jaworski and Kohli, 1993; Day and Nedungadi, 1994; Pelham and Wilson, 1996; Narver and Slater, 1990; Vorhies et al., 1999; Naidu and Narayana, 1991; Chang and Chen, 1998 and Vorhies et al., 1999). Despite this fairly consistent evidence to support the positive role of market orientation in the firm, there is considerable debate about the exact nature of market orientation. We adopt the approach of Kohli and Jaworski (1990), who consider market orientation to be the organisation wide generation, dissemination and responsiveness to market information. This conceptualisation and the associated operationalisation of market orientation has been shown to be robust under several different research contexts (see for example Pitt et al., 1996; Caruana et al., 1996; Martin, Martin and Grbac, 1998; Siguaw, Simpson and Baker, 1998; Vorhies et al., 1999). ANZMAC 2005 Conference: Strategic Marketing and Market Orientation 42

2 Consequences of Market Orientation Market orientation has been suggested to have both financial and non-financial consequences for the firm (see Langerak, 2003 for a comprehensive review of the business consequences of market orientation). Of particular interest here; MO has been shown to have positive consequences for profitability of the firm (e.g. Homburg and Pflesser, 2000; Matear et al., 2002; Langerak, 2001). In line with these previous studies we hypothesise: H 1 : The higher the level of market oriented behaviour of the firm the better their financial performance will be. Relationship with Employees Attitudes and Behaviours There is strong evidence supporting the relationship between market orientation and employee attitudes and behaviours. Several authors report that market orientation has positive consequences for employee behaviours such as customer orientation, job satisfaction and organisational commitment (see for example Ruekert, 1992; Jaworski and Kohli, 1993; Siguaw, Brown and Widing, 1994; Piercy, Harris and Lane, 2002; Jones, Busch and Dacin, 2003). However, others argue that these employee attitudes and behaviours are antecedent to MO. For example, Gummesson (1991), Kelly (1992), Harris (1998), and Martin, Martin and Grbac (1998) assert that effective market oriented activities require the involvement and participation of employees at all levels of the firm, and in all functions, and that in order to gain the involvement of employees in the market oriented strategy, it is essential to ensure that they are satisfied and motivated to perform in a market oriented manner, (see for example Harris, 2002). Given the organisation wide nature of market orientation it is plausible that employees who are satisfied and motivated will be more likely to undertake these positive behaviours and act in the best interest of the firm. Consequently we hypothesise that: H 2 : The more positive the attitude of the staff to the firm, the greater the firm s market orientation Impact of MO on customers The impact of market orientation on customer satisfaction has been identified by several authors (e.g. Webb, Webster and Krepapa, 2000; Qu and Ennew, 2003, Kaynak and Kara, 2004; Singh and Ranchhod, 2004). Others identify consequences for repeat purchase behaviour and loyalty (e.g. Majden-Olivares and Lado, 2003). These observations lead us to our second hypothesis: H 3 : The greater the firm s market orientation, the higher the satisfaction of customers. Antecedents to Market Orientation Tuominen and Möller (1996), emphasise the role of management in developing appropriate systems and structures to create market orientation behaviour. These, they suggest, are organisational systems, including recruitment, training and rewards systems (see also Ruekert, 1992; Jaworski and Kohli, 1993). Harris (2002) asserts that managerial behaviours (such as internal marketing) also represent a key determinant of MO success (see also Harris and Piercy, 1999). It appears, therefore, that the need to train and motivate employees to be customer conscious and perform market oriented behaviour is a major consideration for organisations wishing to adopt market orientation (Jaworski and Kohli, 1993; Tansuhaj, Wong and McCullough, 1987; Heskett et al., 1994). Internal marketing has long been discussed as one means of motivating employees to perform ANZMAC 2005 Conference: Strategic Marketing and Market Orientation 43

3 customer focused and market oriented behaviours (see for example, Azzolini and Shillaber, 1993; Foreman and Money, 1995; George, 1990; Grönroos, 1985; Gummesson, 1987; Piercy and Morgan, 1990 and 1991; Piercy, 1995). However, there is a lack of empirical evidence to support this assertion (Conduit and Mavondo, 2001). This paucity of systematic research into the role of internal marketing and its impact on company performance, both directly and by facilitating market orientation in the firm, suggests the need for information concerning the internal marketing external market orientation link. Internal Marketing Internal marketing is grounded in the belief that external marketing success is, in part, contingent on the firm having satisfied and motivated boundary spanning employees (see for example Sasser and Arbeit, 1976; Berry, 1984; Berry and Parasuraman, 1991; George and Grönroos, 1991; Greene et al. 1994). Recently internal marketing has been operationalised as an internal market orientation (Lings and Greenley, 2005), a set of managerial behaviours associated with the internal marketing philosophy. Internal market orientation (IMO) is conceptually similar to external market orientation and involves elements of internal market research (e.g. Stauss and Schultze, 1990; Wasmer and Brunner, 1991; Piercy, 1995), communications (e.g. Tansuhaj, Randall and McCullough, 1988; Piercy, 1995; Reynoso and Moores, 1996), and the development of job-products, which will satisfy the wants and needs of employees based on information gleaned from internal market research (e.g. Sasser and Arbeit, 1976; Berry and Parasuraman, 1991; Lukas and Maignan, 1996). These IMO behaviours are reported to have several important consequences for the firm. Firstly IMO is thought to influence employee attitudes and behaviours. In particular job satisfaction and motivation to provide good customer service (Tansuhaj et al., 1988; Comm, 1989). IMO is also thought to foster employee identification with the organization, to reduce dysfunctional behaviours (Ramaswami, 1996), and to increase behaviours compliant with organisational strategies (Piercy and Morgan, 1990). Consequently we hypothesise that: H 4 : The higher the level of IMO exhibited by managers, the greater the satisfaction of service staff. H5 : The higher the level of IMO exhibited by managers, the greater the market orientated behaviour of the firm. In addition to its impact on employees, and perhaps as a result of this, IMO is suggested to have important consequences for customer attitudes and behaviours. Employee satisfaction is thought to influence customer satisfaction and loyalty, and although this relationship has been discussed for nearly three decades (e.g. George, 1977) and is widely accepted; it remains a contended issue (Piercy, 1995; Rafiq and Ahmed, 1993). Despite this, most researchers operate under the belief that employee satisfaction and customer satisfaction are significantly and positively correlated. Therefore, we hypothesise: H 6 : The higher the satisfaction of employees, the greater the satisfaction of customers. H 7 : The higher the level of customer satisfaction, the greater the financial performance of the firm. Method Data from 200 retail managers were analysed to examine the constructs of interest in this study. The data chosen was a subset of data collected for a larger retail study. Retail managers were chosen as respondents because of their unique influence on the achievement of organizational objectives (Lusch and Serpkenci,1990). Using store managers to report on ANZMAC 2005 Conference: Strategic Marketing and Market Orientation 44

4 levels of market orientation is consistent with previous studies examining market orientation where data were collected at the SBU level (Uncles, 2000), in this instance, the retail store can be thought of as the SBU equivalent. Measures IMO was measured using the scale reported by Lings and Greenley (2005). This scale consisted of 16 items measuring the five behavioural components of IMO (four items measuring informal information generation, three items measuring formal face-to-face information generation, three items measuring formal written information generation, three items measuring information dissemination, and three items measuring responsiveness). Market orientation was measured using an adaptation of the MARKOR scale (Kohli, Jaworski and Kumar, 1993). Performance was measured using managers subjective evaluations of their achievement of financial objectives and internal and external marketplace success. The distinction between objective and subjective measures lies in whether the measure is based on empirical observation or, alternatively, on beliefs, perceptions, or attitudes (Wang and Gianakis, 1999). Subjective evaluations of performance were used in preference to objective measures in this context as it was felt that mangers day-to-day behaviours would be driven by their beliefs about performance, rather than objective evaluation of the performance. Results To be consistent with other research examining the impact of market orientation, scores for each MO dimension were computed by averaging the scores for all items included in each of the subscales, and MO was modelled as a higher order construct. A similar approach was taken to modelling IMO. Scores for each of the five dimensions of IMO were calculated by averaging the scores for the items associated with each dimension and then IMO was modelled as a higher order construct. The psychometric properties of these new scales were tested and found to be acceptable i.e. coefficient for each scale 0.75 (Churchill, 1999). Following this a structural model was estimated to examine the relationships between the constructs in the study. As 2 is susceptible to large sample sizes relative chi square ( 2 /df) was used to indicate the adequacy of fit of the model to the data. The relative chi-square for the model is 1.46, which is in the acceptable range of 1-2 and suggests adequate fit between the theoretical model and the sample data (Carmines and McIver, 1981, p.80). Other fit statistics are reported below, along with the path coefficients for the model, and exceed the recommended cut offs. Hypothesis Hypothesised Path St-Coeff t-value Hypothesis 1 Market orientation (+) Financial Performance Hypothesis 2 Employee Motivation (+) Market Orientation NS Hypothesis 3 Market Orientation (+) Customer Satisfaction Hypothesis 4 IMO (+) Employee Motivation Hypothesis 5 IMO (+) Market Orientation Hypothesis 6 Employee Motivation (+) Customer Satisfaction Hypothesis 7 Customer satisfaction (+) Financial Performance = 190, df=163, n=200, Goodness of Fit Index (GFI) = 0.913, Adjusted Goodness of Fit Index (AGFI) = 0.888, Standardised RMR = 0.049, Root mean square error of approximation (RMSEA) =0.029 ANZMAC 2005 Conference: Strategic Marketing and Market Orientation 45

5 Table 1: Maximum likelihood estimates of structural parameters and model fit statistics IMO 0.83 Market Orientation NS 0.30 Financial Performance Staff Motivation 0.50 Customer Satisfaction 0.13 Figure 1. Estimate of Structural Model Discussion The results of the model estimation above illustrate the role of both internal and external market orientations in retailing organisations. Specifically, our results confirm the findings of other researchers who have examined the impact of market orientation on financial performance (H1) and customer satisfaction (H3) in other contexts (see for example McCullough, Heng and Khem, 1986; Narver and Slater, 1990; Naidu and Narayana, 1991; Ruekert, 1992; Wong and Saunders, 1993; Day and Nedungadi, 1994; Pelham and Wilson, 1996; Chang and Chen, 1998 and Vorhies, Harker and Rao, 1999). We also find support for the many assertions that internal market orientation has a significant role to play in retail service organisations. Specifically our data supports the assertion that internal market orientation has a significant positive impact on external market orientation (H5) and employee motivation (H4). This suggests that managerial behaviours associated with viewing employees as being important enough to warrant attention to their wants and needs does indeed create a more motivated workforce. Staff motivation in turn has positive consequences for customer satisfaction (H6) and ultimately profitability (H7). Also these employee focused behaviours of managers give rise to higher levels of market oriented behaviours in the work force as evidenced by increased market orientation (H5). Interestingly, employee motivation did not show a significant relationship with eternal market oriented behaviours. Our findings provide partial support for the notion that external marketing success is dependent on internal marketing, but do not support the notion that effective market oriented activities require the involvement and participation of employees at all levels of the firm (e.g. Harris 1998; Martin, Martin and Grbac, 1998), and that this is achieved through creating satisfied and motivated employees (e.g. Harris, 2002). ANZMAC 2005 Conference: Strategic Marketing and Market Orientation 46

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