Internal Market Orientation, Market Orientation and Financial Performance; Some Empirical Evidence. Ian Lings, Aston University, UK.

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1 Internal Market Orientation, Market Orientation and Financial Performance; Some Empirical Evidence Ian Lings, Aston University, UK Abstract A sample of 766 UK retail managers was surveyed to identify levels of internal market orientation (IMO), market orientation (MO), and perceptions of financial performance. Regression analysis was used to examine the relationships between these constructs. The study finds a significant relationship between internal market orientation and external market orientation. Evidence of a direct relationship between internal market orientation and financial performance is also identified. The results also confirm previous findings regarding the impact of external market orientation on financial performance. The project contributes to marketing theory by providing the first quantitative evidence to support the long held assumption that internal marketing has an impact on marketing success. For marketing practitioners, the research findings offer additional information on which services marketing strategies may be formulated. 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 motivating and enabling employees to be market oriented. The focus on customer contact personnel and the philosophy of treating employees as customers of the firms jobs is the foundation on which internal marketing is based. Grönroos reflects this in his definition of internal marketing as a concept that holds that an organisation s internal market of employees are influenced most effectively and hence motivated to customer consciousness, market orientation and sales mindedness by a marketing-like internal approach and by applying marketing like activities internally (1982). Despite the attention that internal marketing (IM) has received in the academic and management literature, much of the published work in this area is embryonic, and is descriptive or prescriptive (Varey, 1995). There is little empirical evidence to support assertions that levels of IM influence levels of external marketing, neither is the relationship between internal marketing, external marketing and financial performance clear. This study examines the relationship between these constructs, identifies and quantifies the impact of internal marketing on external marketing and financial performance, and discusses some key managerial and theoretical implications of this new research evidence. Market Orientation Several studies explore the relationship between market orientation and some output measure such as profitability or customer satisfaction. (See for example McCullough, Heng and Khem, 1986; Narver and Slater, 1990; Naidu and Narayana, 1991; Ruekert, 1992; Wong and ANZMAC 2002 Conference Proceedings 461

2 Saunders, 1993; Day and Nedungadi, 1994; Pelham and Wilson, 1996; Chang and Chen, 1998 and Vorhies, Harker and Rao, Perhaps the most significant finding for theorists and practitioners is the consistent evidence that being market oriented does improve organisational performance. This has been found to be true for large firms (Jaworski and Kohli, 1993; Day and Nedungadi 1994), as well as for small firms (Pelham and Wilson, 1996) for product producers, (Narver and Slater, 1990; Vorhies at al., 1999), as well as service suppliers (Naidu and Narayana, 1991; Chang and Chen, 1998 and Vorhies at al., 1999), and for-profit (Slater and Narver, 1994) as well as for not for profit (Wrenn, LaTour and Calder, 1994), low tech (Decker, 1995), and hi tech (Ruekert, 1992) firms. Adopting a market orientation is also suggested to provide significant internal benefits. Chang and Chen, (1998) report that market oriented firms perform significantly better in terms of new product development, Siguaw, Brown and Widing, (1994) report market orientation positively impacts on employees levels of customer orientation, job satisfaction and organisational commitment and negatively impact employees role stress. Jaworski and Kohli (1993) report a strong association between MO and employee commitment and esprit de corps. Ruekert (1992) supports the findings of Jaworski and Kohli (1993), and reports an association between higher levels of market orientation and employee satisfaction, commitment and trust in supervisors. More recently Piercy, Harris and Lane (2002) report that employees in market oriented companies have higher awareness of various aspects of service quality and customer focus. However, as they point out, awareness of these rules of the game does not mean conformance to them. It is generally recognised within the literature that creating market oriented organisations is dependent on the behaviour of individual employees, who must be motivated and able to operate the marketing system and create market orientation. It is also recognised that managerial behaviour impacts on employee behaviour and therefore has a consequent impact on the implementation of market orientation (Kelly, 1992; Miller and Lewis, 1991; Canning, 1988; Masiello, 1988; Shapiro, 1988; Day, 1994; Harris and Piercy, 1999). Indeed, the need to train and motivate employees to be customer conscious and perform market oriented behaviour is a major theme within the marketing literature (Jaworski and Kohli, 1993; Tansuhaj, Wong and McCullough, 1987; Heskett at al., 1994). The organisational behaviours necessary to enhance the motivation of front line staff to perform customer focused and market oriented behaviours are the focus of the internal marketing (Azzolini and Shillaber, 1993; Bak at al., 1994; Bhote, 1991; Davis, 1992; Foreman and Money, 1995; George, 1990; Grönroos, 1985; Gummesson, 1987; Harari, 1991 and 1993; Harrell and Fors, 1992; Piercy and Morgan, 1990 and 1991; Piercy, 1995; Mohr-Jackson, 1991). Despite considerable attention to internal marketing and the role of employees in the development of a market orientation, (Grönroos, 1981; Stauss and Schultz, 1990; George, 1990; Gummesson, 1987; Slater and Narver, 1994; Jaworski and Kohli, 1993; Siguaw at al., 1994; Tuominen and Möller, 1996; Mengüç, 1996), and an increasing recognition that internal marketing has a role to play in external marketing (Grönroos, 1990), there remains a paucity of empirical evidence to demonstrate the relationship between this internal orientation and external market orientation (Conduit and Mavondo, 2001). This scarcity 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 ANZMAC 2002 Conference Proceedings 462

3 concerning the internal marketing external market orientation link. These relationships are illustrated in Figure 1 below Measuring Internal Marketing Analysis of the academic discourse on internal marketing reveals that it consists of two distinct managerial approaches, internal market orientation (Mohr-Jackson, 1991) and internal customer orientation (Marshall, Baker and Finn, 1998; Frost and Kumar, 2000; Conduit and Mavondo, 2001). The first internal customer orientation is refers to Total Quality Management like activities within the firm and the creation of internal service quality across interactions between internal customers and their internal suppliers. (See for example Barrett 1994; Bhote 1991; Lukas and Maignan, 1996; Schneider, Gunnarson and Niles-Jolly, 1994; Reynoso and Moores, 1996; Marshall, Baker and Finn, 1998; Brooks, Lings and Botschen, 1999 and Frost and Kumar, 2000). The second internal market orientation is grounded in the belief that external marketing success is, in part, contingent on the firm having satisfied and motivated boundary spanning employees, and that creating satisfied and motivated employees is the role of internal marketing (see for example Sasser and Arbeit, 1976; Berry and Parasuraman, 1991 and Berry, 1984). Internal market orientation (IMO) is conceptually very similar to external market orientation and involves elements of internal market research (e.g. Stauss and Schultz, 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). Categorising these IMO behaviours in a manner consistent with current conceptualisations of external market orientation (Kohli and Jaworski, 1990), allows IMO to be viewed as the internal equivalent of external marketing activities. IMO involves the generation and dissemination of intelligence pertaining to the wants and needs of the internal market of employees, and the design and implementation of appropriate responses to meet their wants and needs. IMO can therefore be measured using a modification of the instrument developed by Kohli at al. (1993) for measuring external market orientation (Lings and Greenley, 2001). Figure 1 The Relationship Between IMO, External Market Orientation and Financial Performance H 1 Internal Market Orientation H 2 Market Orientation Market Performance H 1 Internal market orientation has a positive impact on the financial performance of the firm H 2 Internal market orientation has positive impact on the adoption of market oriented behaviours in the firm. Methodology IMO was measured using a modification of the scale reported by Lings, Greenley and Broderick, (2000). The modified scale consisted of 14 items measuring four behavioural ANZMAC 2002 Conference Proceedings 463

4 components of IMO. The behavioural components were measured on multi-item scales (4 items measuring informal information generation, 4 items measuring formal information generation, 3 items measuring information dissemination, and 3 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 marketplace success. Managers subjective evaluation of performance were used in preference to objective measures. 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). In this context it was felt that mangers day-to-day behaviours would be driven by their beliefs about the performance of their store in relation to other stores both within the same organisation and competing stores within the same geographic area, rather than objective evaluation of the performance. The U.K. retail sector was chosen as the context of the study as service to customers is a key differentiator in this sector; store managers are allowed considerable autonomy and have a significant impact on the motivation of staff. Due to the conceptual similarities between IMO and MO, and to be consistent with previous research examining MO, where the majority of studies have been conducted using strategic business units (SBU) as the unit of analysis (Uncles, 2000), the IMO survey was administered to 3500 store managers by postal questionnaire. The store manager, as the major decision maker in the store is not only a knowledgeable respondent for questions examining IMO behaviours but is also responsible for implementing those behaviours in store (Segal, 1997). A response rate of 22% was achieved after reminder notices had been posted (828 completed questionnaires, 766 usable responses.) All respondents received a package containing a letter explaining the purpose of the study, the questionnaire and a return envelope. A response rate of 22% was achieved after reminder notices had been posted two weeks after the initial mailing, (828 completed questionnaires, 766 usable). The sample was roughly equally split between male and female respondents (male 57.4%, Female 42.6%). Respondents ages ranged from 20 years to 61 years, with a mean of 36.6 years (standard deviation 8.6), the mean length of service with the company was 13.8 years (standard deviation 7.6) and the mean length of service in the post of 4 years (standard deviation 4.2). A comparison of the mean values for key items of interest for those who responded within the first 3 days and those who responded after the follow up, revealed no significant differences between early and late respondents. In addition 50 randomly selected non-respondents were contacted by telephone and asked why they had not responded. The main reasons given were that they did not receive the questionnaire and that time pressure prevented participation in the survey. None of these reasons suggests that non-response bias was an inhibiting factor in the analysis and interpretation of the data (Lesley, 1972; Armstrong and Overton, 1977). Results A series of regression analyses were conducted to test the hypotheses. To be consistent with other research examining the impact of market orientation, scores for each construct were computed by averaging the scores for all item included in each of the three scales. The psychometric properties of these scales were tested and found to be acceptable i.e. coefficient ANZMAC 2002 Conference Proceedings 464

5 α for each scale 0.80 (Churchill, 1999). The estimated coefficient for the impact of IMO on profitability was positive (β = 0.104) and significant (p = 0.020), the estimated coefficient of the impact of market orientation on profitability was also positive (β = 0.323) and also significant (p = 0.000). The total variance explained by the model (R 2 ) was 15.7%. A second model examining the impact of IMO on market orientation indicated that the relationship was positive (β = 0.658) and significant (p = 0.000). The total variance explained in the model (R 2 ) was 43.3%. Multicollinearity diagnostics were computed and using the criteria suggested by Kleinbaum at al. (1998). Tolerance values and their inverse, variance inflation factors (VIF), were examined, all tolerance values were greater than 0.1 and all VIF were less than 30 suggesting that multicollinearity between any of the independent variables was not found to be an issue for any of the regression equations (Kleinbaum at al., 1998). Furthermore none of the tolerance values or VIFs approached these limits, suggesting that multicollinearity is not a feature of this data (Hair at al., 1998). Discussion The regression results above illustrate that both internal and external market orientation impact significantly on the profitability of the retail store. As expected, the contribution of external market orientation to profitability is considerably more than that of internal market orientation. The results confirm the findings of other researcher who have examined the impact of market orientation on organisational performance (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). The findings relating to internal market orientation support H1 that internal market orientation has a significant and positive impact on organisational performance. Firms that pay attention to the wants and needs of their employees, collect information about the wants and needs of employees and the employment offered by competitors in the employment market, pay attention to dissemination of information to employees and design jobs based on the identified wants and needs of their employees perform better than organisations that do not exhibit these behaviours. The results also indicate that internal market orientation has a significant impact on levels of market orientation in the firm, supporting H2. This addresses the limitations of current research in this area and supports the notion that creating market oriented organisations is dependent on the behaviour of individual employees. Furthermore these employees can be motivated to operate the marketing system, and create market orientation by managerial behaviour in the form of internal market orientation. These findings have important implications for the management of market focused organisations. They suggest that, in addition to understanding the external market, services managers should develop a better understanding of the wants and needs of employees. Marketing knowledge and techniques should then be applied to the problem of balancing employees wants and needs with those of the firm. ANZMAC 2002 Conference Proceedings 465

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