How market orientation determines high brand orientation in SMEs?

How market orientation determines high brand orientation in SMEs? Tommi Laukkanen, Saku Hirvonen, Helen Reijonen, Sasu Tuominen University of Eastern Finland Abstract The objective of this paper is to explore the effect of market orientation as an antecedent of brand orientation. More specifically the aim is to measure if and how different market orientation measures determine high brand orientation especially in small and medium-sized enterprises (SMEs). An online questionnaire was sent out to 4502 SMEs in Finland and 498 effective responses were received. The results of a logistic regression analysis show that customer and competitor orientations as well as interfunctional cooperation all contain specific measures that separate high brand-oriented and low brand-oriented SMEs from one another. The study argues that high brand-oriented SMEs put significantly more effort especially on creating customer value and customer satisfaction, and monitoring their competitors marketing efforts, than do their non-oriented counterparts. Keywords: market orientation, brand orientation, SMEs Track: Product and Brand Management

1. Introduction Regardless of the widely recognized benefits of strong brands, the current stream of research appears scattered as the lack of common branding terminology (Wood, 2000) and understanding of the conceptual structure of the brand (de Chernatony and Dall`Olmo Riley, 1998) characterize the field of branding research. Whether representing a cause or result, these shortcomings relate to a tendency of researchers to base their commentaries and models primarily on paradigmatic case examples of strong brands (Kay, 2006). In order to explain why some companies succeed and others fail, marketing and branding researchers have since the 1990s focused on several strategic orientations claimed to provide a plausible and comprehensive framework capable to answer this question. Especially the market orientation concept has gained vast attention during the past two decades (e.g. Kohli and Jaworski, 1990; Narver and Slater, 1990; Slater and Narver, 1994). Following the market orientation boom in the literature, a diverging stream of orientation research has lately emerged in the form of brand orientation (e.g. Baumgarth, 2010; Ewing and Napoli, 2005; Urde, 1994, 1999; Wong and Merrilees, 2005, 2007a,b, 2008). Whereas in market orientation the starting point is to understand customers (Cravens and Guilding, 2000), brand orientation goes a step further by combining customer perspective with internal objectives of the organization (Urde, 1999). However, to date academics have paid only minor attention to the interdependences of these orientations. That is, studies have mainly adopted rather limited perspective on each orientation, as only few conceptual papers (Reid, Luxton, and Mavondo, 2005; Urde, 1999) and empirical studies (Laukkanen, Tuominen, and Reijonen, 2010; Tuominen, Laukkanen and Reijonen, 2009) have examined the relationship between market orientation and brand orientation, concluding that there is a positive link between the two. However, prior studies have examined this relationship mainly at the construct level. Diverging from prior studies, this paper contributes to the theoretical understanding of these orientations by examining what are the specific measures in market orientation that determine brand orientation. Hence, this paper endeavors to deepen the perspective adopted in prior studies and examine the issue further by focusing on the effects of separate measures of market orientation. 2. The relationship between market orientation and brand orientation Interest in the market orientation concept reincarnated at the beginning of the 1990s alongside with the papers of Kohli and Jaworski (1990) and Narver and Slater (1990), initiating a larger groundswell of academic research on different strategic orientations. Narver and Slater (1990) conceptualize market orientation as a cultural construct consisting of three interrelated, behavioral components, namely customer orientation, competitor orientation, and interfunctional coordination. Customer and competitor orientations include gathering market intelligence on customer needs and competitor activities and disseminating it within the organization, whereas interfunctional coordination represents the organization-wide creation of value to customers, building on the acquired information. Market orientation represents a focus on the external environment of the company, as the fundamental objective is to understand the market in which the company operates (Cravens and Guilding, 2000; Urde, 1999). Competitive advantage does not relate anymore to such goals of the productionfocused era as economies of scale, but instead customer value (Slater and Narver, 1994). Hence, market orientation shifts the focus of the company to the markets, namely customers and competitors.

Despite the reported positive effects of market orientation for example on employees organizational commitment (Jaworski and Kohli, 1993) and overall profitability of the business (Cravens and Guilding, 2000; Narver and Slater, 1990), the concept has been criticized. Urde (1999) criticizes market orientation for being excessively focused on customer preferences and thus neglecting the long-term brand development as the brand identity is modified to follow every new customer trend. Given the widely recognized benefits of strong brands and the apparent need to understand also the internal environment of the company, academics have lately directed their attention to the brand orientation concept. Although the concept was introduced in Urde`s (1994) seminal article published over fifteen years ago (Reid et al., 2005), only lately an developing stream of brand orientation studies has emerged (e.g. Baumgarth, 2010; Brïdson and Evans, 2004; Ewing and Napoli, 2005; Wong and Merrilees, 2005, 2007a, 2008). Brand orientation is defined as an organizational mindset (Urde, 1999); the extent to which branding is valued within the organization (Brïdson and Evans, 2004); and branding-related managerial cognition (Wong and Merrilees, 2007b), entailing marketing strategies developed around the branding ideology (Wong and Merrilees, 2008). Reid et al. (2005) argue that brand orientation takes a step further than market orientation by placing brands as a basis for competitive advantage. However, brand-oriented mindset does not preclude market orientation; instead, market orientation creates the conditions for brand orientation (Reid et al., 2005), which, according to Urde (1999), represents market orientation plus. Hence, branding appears as both an internal and external process. This twofold perspective on branding necessitates that the needs and preferences of company s stakeholders are integrated with its internal strategy and vision, enabling thus brand based value creation. As an outcome, the elements of market orientation are well presented in the brand management process. The interrelationship between market orientation and brand orientation derives from the fact that no brand can be developed without an adequate understanding of customer preferences. Urde (2003) suggests that brand identity s compatibility with customer s identity is a prerequisite for a strong brand. This implies that the development of a brand identity should be managed in accordance with in-depth understanding of the customers. Branding should not be an intrinsic value either; instead, branding should aim to differentiate the firm from its competitors (Wong and Merrilees, 2008). Thus, marketing intelligence on competitors is as important as customer information in order for the company to able to distinguish itself from other firms. Brand s success depends on the brand associations distinctive to the competitors and valued by the customers (Keller, 1993), entailing that both customer and competitor information will be needed in order for a brand to succeed. Whereas market intelligence serves as the means to develop a brand capable to distinguish the firm from the competitors and attract customers, interfunctional coordination ensures that all the departments are informed of brand promises made, being thus able to deliver those promises. Moreover, interfunctional coordination ensures that both market intelligence and brand-oriented mindset will diffuse through the departmental boundaries. Interfunctional coordination relates also to the integration of communications (Reid et al., 2005), which, in turn, represents one of the fundamental objectives of brand orientation (Urde, 1994). This paper endeavors to dig deeper into these different components of market orientation and identify the specific measures in them that determine high brand orientation.

3. Data and methods 3.1 Sample and steps of research An online questionnaire was sent out to 4502 SMEs in the area of North Karelia, Finland and 595 responses were received, the response rate being 13.2 percent. Out of the 595 responses 498 responses were effective for this study. In order to examine what variables of market orientation determine high brand orientation, a logistic regression analysis with forward stepwise selection procedure was used, with the cut-off statistical significance at the 0.05 level. First, the dependent variable for the logistic regression was created by dividing the sample into low and high brand-orientated companies using K-means clustering method. Second, in order to verify the factor structure and construct validity of the market orientation scale an exploratory factor analysis with Maximum likelihood method and varimax rotation was used. Finally, the measures that remained in the factor model were input as independent variables in the logistic regression analysis. 3.2 Dependent variable The dependent variable is a binary/dichotomous variable in which 0 represents firms with low brand orientation and 1 corresponds to companies with high brand orientation. Based on the four brand orientation (BO) variables derived from Wong and Merrilees (2008) K-means clustering method was used to partition the sample in the two groups. The results show that 165 firms fall into the low brand orientation category and 333 represent firms with high brand orientation (Table 1). Table 1: K-means cluster analysis Brand orientation variables Low BO High BO F-value p-value N=165 (33.1%) N=333 (66.9%) Branding is essential to our strategy 2.01 4.00 766.92 p<0.001 Branding flows through all our marketing activities 1.82 3.87 778.00 p<0.001 Branding is essential in running this company 1.85 3.91 808.88 p<0.001 The brand is important asset for us 2.02 4.07 751.26 p<0.001 3.2 Independent variables In prior research different measures of market orientation have been applied. Kohli, Jaworski and Kumar (1993) developed one of the best known measures called MARKOR that focuses on the measurement of the activities relating to generation of market intelligence, dissemination of it within the organisation and responsiveness to it. Deng and Dart (1994) adopted the cultural view on market orientation presented by Narver and Slater (1990) and established a measure that comprises four components: customer orientation, competitor orientation, interfunctional coordination and profit emphasis. Later on, Gray et al. (1998) developed what they called a better measure of market orientation in which they integrated the ideas of Narver and Slater (1990), Jaworski and Kohli (1993) and Deng and Dart (1994). The results of Gray et al. s (1998) study showed that some of the variables measuring intelligence dissemination (Jaworski and Kohli 1993) could be combined with the measures of interfunctional coordination (Narver and Slater 1990). In this study we examined market orientation through the original three elements by Narver and Slater (1990) but also taking into consideration the more recent works by Deng and Dart (1994) and Gray et al. (1998). Thus, the independent variables include the measure items of customer orientation, competitor orientation and interfunctional cooperation.

In order to ensure that the market orientation measures in our data fall into the three constructs suggested by the literature, exploratory factor analysis with Maximum Likelihood extraction method and Varimax rotation was adopted for 17 measure items. The initial factoring process generated three factors as expected. However, one item received a factor loading less than the 0.50 threshold level and another item had significant loadings on two separate factors. After removing these variables (Hair et al., 1998), the revised factor solution generated a three-factor solution representing 65.4 percent of the variance of the variables. The Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy (KMO=0.939) and the Bartlett s test of sphericity (p<0.001) confirmed that the factor analysis was appropriate. The internal consistency of the factors, measured with Cronbach s alphas, showed good reliability (Table 2). Table 2: Factor analysis Measure items (Alpha) Factor loading Literature source Customer orientation (0.889) We have a strong commitment to our customers 0.711 [1,3,5] We are always looking for new ways to create customer value in our products and services 0.708 [1,3,5] We encourage customer feedback because it helps us do a better job 0.769 [1,3,5] Our business objectives are driven by customer satisfaction 0.819 [2,5] We measure customer satisfaction on a regular basis 0.523 [1,3,5] After-sales service is an important part of our business strategy 0.658 [1,3,5] Competitor orientation (0.917) We regularly monitor our competitors marketing efforts 0.853 [1,3] We frequently collect data about our competitors to help support our marketing 0.814 [1,3] Our people are instructed to monitor and report on competitor activity 0.713 [1,3] We respond rapidly to competitors' actions 0.721 [1,3,5] Our top managers often discuss competitors' actions 0.630 [1,3,5] Inter-functional coordination (0.881) Market information is shared inside our organization 0.657 [1,3] Persons in charge of different business operations are involved in preparing business 0.730 [1,3] plans/ strategies We do a good job integrating the activities inside our organization 0.654 [1,3] We regularly have inter-organizational meetings to discuss market trends and developments 0.712 [3,4] *[1]=Deng & Dart 1994; [2]=Farrel et al. 2008; [3]=Gray et al. 1998; [4]=Jaworski & Kohli 1993; [5]=Narver & Slater 1990 4. Results The results show that five out of the 15 market orientation variables have a significant positive influence on high brand orientation of an SME. First, it seems that customer value and satisfaction as customer orientation measures significantly determine high brand orientation. This means that those companies who are looking for new ways to create value to their customers and those whose business objectives are driven by customer satisfaction are likely to be high brand oriented. Moreover, those companies who put effort on monitoring their competitors marketing actions, as a function of competitor orientation, are likely to be high brand oriented. Finally, those organizations who are active in sharing market information inside their organizations and those whose business plan and strategy preparation involve persons from different business operations in the company are more likely to be brand oriented than non-oriented. The Wald statistic is commonly used to test the significance of the individual coefficient for each independent variable in a logistic regression model (Hair et al., 1998). In this case the

Wald statistic shows how well the variable explains the difference between the groups of organizations. The Wald statistic shows that the creation of customer value as a cultural orientation of a company has the strongest effect in the model followed by the interest in competitors marketing efforts and customer satisfaction. Table 3: Logistic regression analysis S.E. Wald Sig. Exp( ) Customer orientation We are always looking for new ways to create customer 0.566 0.154 13.502 p<0.001 1.762 value in our products and services Our business objectives are driven by customer satisfaction 0.543 0.168 10.463 p=0.001 1.722 Competitor orientation We regularly monitor our competitors marketing efforts 0.446 0.129 11.980 p=0.001 1.562 Interfunctional cooperation Market information is shared inside our organization 0.378 0.134 7.993 p=0.005 1.460 Persons in charge of different business operations are involved in preparing business plans/ strategies 0.256 0.122 4.368 p=0.037 1.291 Note: -2 Log likelihood=428.530; Cox & Snell R²=0.336; Nagelkerke R²=0.467; Classification Improvement (%) = 66.9 80.9 5. Discussion The aim of this paper was to offer deeper insight into the components of market orientation and their relationship with brand orientation. The results indicate that customer and competitor orientations as well as interfunctional cooperation all contain specific measures that separate high brand-oriented and low brand-oriented SMEs from one another. These findings throw light on the little researched determinants that bind market orientation and brand orientation together. Both market-oriented and brand-oriented SMEs emphasize customer satisfaction that comes from providing superior customer value. That, in turn, is enabled by sharing market information and involving several people within the organization to cooperate in strategic planning. Finally, the need to differentiate firms from their competitors becomes easier by monitoring competitors marketing efforts. The results confirm the idea that market orientation forms the basis for brand orientation (Reid et al., 2005). Those SMEs that wish to reap the benefits of strong brands should pay close attention to generating, sharing and responding to market information about their customers and competitors. Despite the marketing limitations with regards to finance and know-how (O Dwyer, Gilmore & Carson 2009) SMEs should focus on both internal (e.g. resources) and external (e.g. customers and competitors) environments. As an outcome SMEs can build brands that create value both for them and for their customers. References Baumgarth, C. (2010). Living the brand : brand orientation in the business-to-business sector. European Journal of Marketing, 44(5), 653-671. Brïdson, K. & Evans, J. (2004). The secret to a fashion advantage is brand orientation. International Journal of Retail & Distribution Management, 32(8), 403-411. Cravens, K.S. & Guilding, C. (2000). Measuring customer focus: an examination of the relationship between market orientation and brand valuation. Journal of Strategic Marketing, 8(1), 27-45.

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