European Advances in Consumer Research Volume 1, 1993 Pages 317-321
MARKET ORIENTATION AND CUSTOMER SERVICE: THE IMPLICATIONS FOR BUSINESS PERFORMANCE
John C. Narver, University of Washington, U.S.A.
Stanley F. Slater, University of Colorado, U.S.A.
[We gratefully acknowledge the research assistance of Seong Y. Park and the financial support of the Marketing Science Institute, Cambridge, MA.]
This paper examines the relationships among market orientation, customer service, customer satisfaction and business performance. Market orientation, as a business culture with the norm of the continuous creation of superior customer value, is found to be substantially related to customer service, customer satisfaction, customer retention, sales growth, and profitability.
A business's financial performance depends in large part on its ability both to attract and retain customers. The implications of sales growth for business profitability are well known. However, the financial implications of customer retention are less well known. The financial importance of customer retention is truly substantial and can be summarized by two empirical findings. First, on average, it costs a business upwards of six times as much to attract a customer as to retain one (e.g., Sellers 1989). Second, there is evidence that by increasing its customer retention by as little as five percent, a business can increase its profits 25% to 85% (Reicheld and Sasser 1990).
Clearly, a central strategic challenge to every organization is the dual requirement of customer attraction and customer retention. For customers to be attracted to a seller and to continue to buy from it, they must perceive, and continue to perceive, a greater value from the seller than from any alternative source of satisfaction.
The key question, therefore, is how a business or any organization can continuously create superior value for buyers (e.g., Porter 1985, and Day 1990). This question leads in turn to the issue of a business or other organization being market oriented. (From this point on we shall use the term "business," though the ensuing argument applies equally to any organization.)
Market orientation is a business culture in which all employees are committed to the continuous creation of superior value for customers (Narver and Slater 1990; Narver and Slater 1991). By definition, the more a business is market oriented, the more it continuously "augments" (Levitt 1980) the value of its offering to its target customers. As the business augments its offering, two major consequences occur: competitors respond with their own customer-value strategies, and customers' expectations rise. As a result, the unrelenting reality for a business is that its augmented product today becomes the expected product tomorrow. There is no escape. If a business doesn't continuously create additional customer value, it has no tomorrow.
Successful continuous augmentation requires the continuous identification of meaningful customer services to add to the offering. The implication is that a market orientation is a business culture that enables a business to identify continuously such appropriate additional services and product adaptations that it continuously creates superior customer value.
Market orientation, as expected, has been shown to be positively related to business profitability (Narver and Slater 1990; Jaworski and Kohli 1992; Slater and Narver 1992). The present analysis adds to the stream of research on market orientation by opening up the market orientationBperformance linkage to investigate four component linkages. The contribution of the present analysis is that, among other things, it examines the role of customer service in the market orientationBperformance relationship. The four linkages examined in the present paper are (1) market orientationBcustomer service; (2) customer serviceBcustomer satisfaction; (3) customer satisfactionBcustomer retention and sales growth; and (4) customer retention and sales growthBprofitability. (Figure 1)
We first discuss the meaning and expected general performance effects of a market orientation. Second, we discuss the emphasis on customer service to be expected in a market-oriented business. We then examine empirical evidence with respect to the relationships among a business's market orientation, customer service, and performance.
MARKET ORIENTATION: MEANING AND GENERAL EFFECTS
Market orientation is a business culture committed to the continuous creation of superior value for customers. The value of a seller to a buyer is the difference between what the buyer perceives as the total benefits (want satisfactions) offered by the seller and what the buyer perceives as the total money, time, and energy expenditures required to acquire and use the perceived benefits. A given seller attracts and retains customers only insofar as buyers perceive more value from the seller than from any alternative source of satisfaction (including doing nothing or vertically integrating).
The market orientation construct consists of three behavioral components C customer orientation, competitor orientation, and interfunctional coordination (Narver and Slater 1990). In brief, customer orientation is a business's understanding of the current and probable future needs of its current and potential target customers in a given market. Competitor orientation is a business's understanding of the capabilities and intentions of the alternative sources of satisfaction perceived as relevant by the subject target customers. Interfunctional coordination is a business's coordinated use of all of its functions and resources in creating superior value for customers.
In principle, the three components are of equal importance in the long run. A business's magnitude of market orientation is the simple average of its scores on the three components. At any given time, a business lies on a spectrum ranging from very low market orientation to very high market orientation. A market-orientation culture comprises a powerful competitive advantage because it is an "invisible asset" that takes a long time to establish and is difficult to imitate (Day 1990).
A Business's Market Orientation and Performance: Empirical Analysis
The theory of market orientation and performance (Narver and Slater 1990; Kohli and Jaworski 1990; Shapiro 1988) implies that the more that a business is market oriented with respect to its target markets, the better should be its competitive and financial performance. In particular, from the theory we posit seven market orientationBperformance hypotheses. We hypothesize that a business's (1) profitability, (2) sales growth, (3) customer retention, (4) new product success, (5) customer satisfaction, and (6) employee satisfaction are all positively related to the business's magnitude of market orientation. Also (7), we hypothesize that the more that a business is market oriented, the less emphasis buyers will place on price.
MARKET ORIENTATION AND PERFORMANCE: FOUR LINKAGES
Two earlier studies have examined three of the above-listed relationships. The first study, using a 1987 sample of 113 strategic business units in a major forest products corporation, found a significant, positive relationship between market orientation and profitability (Narver and Slater 1990). A strategic business unit (SBU) is a business unit with a defined business strategy and a manager with sales and profit responsibility (Aaker 1988).
The second study, using a sample of 81 forest-products SBUs (a subset of the 113 SBUs that is limited to businesses that do not primarily use telemarketing as their selling approach) and 36 SBUs in a major diversified manufacturing corporation, found a significant, positive relationship between market orientation and profitability, sales growth, and new product success (Slater and Narver 1992).
We now report a third study with a different sample that examines the relationship between market orientation and all of the seven effects mentioned above. This third study uses a 1991 sample of 38 strategic business units in a major forest products company. The 38 SBUs are merchant-wholesaler businesses that buy products both from within and outside the corporation. The SBUs sell to building-supply retailers, contractors, manufacturers, and exporters. Questionnaires were sent to 118 managers in the distribution businesses, and 108 were returned, for a 92% rate.
As in the previous two studies, the respondents are the top management team in each SBU. The criterion of "top management team" is that each of the members knows the business's market strategy, its policies, and its market performance. Also as in the previous two studies, the questionnaire relates to the policies, practices, market structure, and performance of the SBU. The term "market orientation" does not appear at any place in the questionnaire. Each question uses a 7- or 8-point Likert-type scale.
An independent-effects model is used (Boal and Bryson 1987). Moreover, because of the small sample size and the number of situational variables a parsimonious, stepwise model (with a criterion of p < .30) is employed.
The items in the questionnaire pertaining to a SBU's policies, strategies, market structure, and performance are set in the context of the SBU's principal served market segment (PSMS). A SBU's profitability, sales growth, customer retention, new product success, and customer satisfaction are measured as the SBU's performance relative to that of its principal competitors in the PSMS.
Nine situational variables are used as controls in the analysis. These variables were selected because theory indicates how each of them could affect one or more of the five dimensions of performance. The nine control variables in addition to market orientation are: (1) the average costs of an SBU relative to its principal competitors; (2) the size of the SBU relative to its principal competitors; (3) the power of the buyers the SBU faces; (4) the power of the sellers from which the SBU buys; (5) the rate of growth of the PSMS; (6) the rate of technological change in the PSMS; (7) the concentration of sellers in the PSMS; (8) the ease of entry of new sellers into the PSMS; and (9) the intensity of competition in the PSMS. (The theory of the relationship between the first eight control variables and SBU performance is discussed in detail in Narver and Slater 1990; the theory of the relationship between the intensity of competition and SBU performance is discussed in Slater and Narver 1992. In the present study this three-item scale has a Cronbach's alpha of .475.)
The findings support the hypotheses of a positive relationship between market orientation and all seven indicators of performance. (Table 1) With respect to ROI, there is a non-linear, U-shaped relationship. This is similar to a finding in Narver and Slater (1990). The variable, "buyer emphasis on price," is negatively scaled. Thus, we observe that, as hypothesized, increases of market orientation are associated with buyers placing less emphasis on a seller's price. With the exception of seller concentration, each of the control variables shows a significant (p < .10) relationship to one or more of the performance variables.
In sum, the findings of the present study reinforce as well as extend the findings of earlier studies regarding the strong, positive relationship between market orientation and performance. We now look within the market orientationBperformance relationship to observe the relationship between a SBU's market orientation and its emphasis on customer service.
MARKET ORIENTATION AND EMPHASIS ON CUSTOMER SERVICE
We should expect to find a strong relationship between market orientation and customer service in two complementary perspectives. The first perspective is that customer service is an implicit concomitant of market orientation. The second perspective is customer service as a conscious, explicit strategy of an SBU.
With respect to the first perspective market orientation, by definition, is an organization's commitment to the continuous creation of superior value for customers. This means that the more a SBU is market oriented, the more it is continuously discovering additional meaningful benefits for its target customers, most of which are necessarily in the form of relevant services (e.g., Levitt 1980; Day 1990). Thus, the amount of "customer service" by a SBU is necessarily positively related to the SBU's magnitude of market orientation. The strong, positive relationship we observe between a SBU's market orientation and its profitability, sales growth, new product success, customer retention, customer satisfaction, and decrease in a buyer's emphasis on price implies the presence of relevant customer service.
The second perspective of customer service is highly related to the first. It is an SBU's expression of the importance that it places on "customer service." We would expect a high correlation between customer service and market orientation, and this is what we observe (Table 2). Because the line between "product" and "service" is typically ambiguous, the measure of this second perspective may understate the actual role of customer service in a SBU.
MARKET ORIENTATION AND PERFORMANCE PARSIMONIOUS MODEL REGRESSION RESULTS
We hypothesize a positive relationship between an SBU's magnitude of market orientation and the importance it places on providing a high level of customer service. The instructions to the respondents with respect to this and other strategy items in the questionnaire were:
Use the seven-point scale below [from "not at all important to our strategy" to "very important to our strategy"] to describe your business strategy in your principal serviced market segment during the past year. Rate each statement according to its agreement with your business strategy.
MARKET ORIENTATION, CUSTOMER SERVICE, CUSTOMER SATISFACTION AND PERFORMANCE
The variables of greatest intrinsic interest in the present analysis are business performance (profitability, customer retention, and sales growth), market orientation (and after-sales service), customer service, and customer satisfaction. The correlations among these seven variables are shown in Table 2.
As expected, there is in general a high correlation among market orientation and the four dimensions of performanceCprofitability, customer retention, sales growth, and customer satisfaction. Also, as we posited above, the correlations suggest that the importance of customer service and after-sales service relate to performance through customer satisfaction rather than directly. The very high correlation between after-sales service and market orientation is expected, for after-sales service is an item in the scale of customer orientation, one of the three components of market orientation.
As indicated in Figure 1 there are four important relationships among market orientation, customer service, and performance. We analyze the four relationships with parsimonious models that are developed from the principal subject independent variable plus thirteen control variables. The variables were selected on the basis of theory and empirical analyses. The thirteen variables are market orientation (in one equation only, after-sales service is substituted for market orientation in the estimation of the customer satisfactionBcustomer service relationship), employee satisfaction, autonomy, quality, relative cost, market growth, ease of entry, relative size, buyer power, supplier power, intensity of competition, and low-price strategy. (Because of space limitations the theoretical relationship between each of the thirteen control variables and the five dependent variables is not detailed here.)
Customer Service and Market Orientation
We hypothesize a positive relationship between market orientation and customer service. In this analysis the parsimonious, stepwise regression model will include any of the 13 variables, including market orientation, that meets the criterion of p < .30. The estimation of the relationship between market orientation and customer service is shown in Table 3.
As hypothesized, market orientation is the principal explanatory variable with respect to the importance of customer service. The negative sign on ease of entry suggests that the threat of potential competitors is inversely related to a business's customer service. The positive relationship between buyer power and customer service suggests that the businesses pay close attention to powerful buyers.
CORRELATIONS AMONG MARKET ORIENTATION, CUSTOMER SERVICE, AND PERFORMANCE
MARKET ORIENTATION, CUSTOMER SERVICE, AND PERFORMANCE PARSIMONIOUS MODEL REGRESSION RESULTS
Customer Satisfaction and Customer Service
We hypothesize that both of the customer-service variables C the importance of customer service and after-sales service C are positively related to customer satisfaction. To investigate the relationship between customer satisfaction and customer service, we use stepwise regression with a criterion of p < .30 and regress customer satisfaction on customer service and the 13 variables (using after-sales service in place of market orientation).
The findings support the hypothesis. (Table 3) The regression coefficients of both of the customer-service measures are significant at p < .05, and together they comprise a substantial explanation of the variation in customer satisfaction. Employee satisfaction is, as expected, also a substantial explanatory variable with respect to customer satisfaction. Our own studies as well as those of others indicate a strong reciprocal relationship between customer satisfaction and employee satisfaction (e.g., Schlesinger and Heskett 1991). The substantial positive relationship between buyer power and customer satisfaction implies that powerful buyers are well attended to and thus, satisfied.
Customer Retention, Sales Growth, and Customer Satisfaction
We hypothesize that customer satisfaction is positively related to customer retention and sales growth. To analyze the effect of customer satisfaction on customer retention and sales growth, we use stepwise regression with a criterion of p < .30 and regress customer retention and sales growth respectively on customer satisfaction, customer service, and the 13 variables (including market orientation).
The findings support the hypothesis in both cases. (Table 3) With respect to customer retention, customer satisfaction has by far the largest explanatory power of the five independent variables in the model. The coefficient on buyer power suggests, consistent with the preceding findings, that powerful buyers are well attended to and are thus retained. The negative sign on competition implies the expected detrimental impact of competition on a business's customer retention. The negative sign on low price suggests that a low price strategy works against customer retention. The implication is that if a business creates customer value largely through price, it encourages price shopping rather than creating loyalty.
Customer satisfaction is also a substantial explanatory variable with respect to sales growth. In addition, the quality of a business's product relative to that of its principal competitors is an important explanatory variable in regard to sales growth. The positive sign on autonomy suggests that, as would be expected, independence of action is important in attracting customers and increasing sales.
Profitability, Customer Retention, and Sales Growth
We hypothesize that a business's customer retention and sales growth are positively related to its profitability. To examine the effects of customer retention and sales growth on profitability, we employ a stepwise regression with a criterion of p < .30. We regress profitability on customer retention, sales growth, customer satisfaction, customer service, and the 13 control variables.
The findings support the hypothesis. (Table 3) We also hypothesize that market orientation is positively related to a business's profitability. The results support the hypothesis though, as in the earlier analysis reported in Table 1, the relationship is U-shaped.
The relationship between profitability and supplier power and buyer power warrants comment. Supplier power is defined as the ability of a supplier to negotiate high prices, and buyer power is defined as the ability of a buyer to negotiate low prices. For the short run we hypothesize a negative relationship between profitability and both supplier power and buyer power. The findings support these expectations. The present data are short-run (single-period) data. For the long run, however, we would expect a positive relationship between profitability and both supplier power and buyer power. The reason is that we would expect in the long run that a market oriented business would establish and maintain win-win relationships with both its suppliers and customers.
Earlier research indicates a strong relationship between market orientation and business performance. The present study increases understanding of the processes by which market orientation affects business performance by investigating four linkages within the market orientationBperformance relationship. The study finds a substantial positive relationship between market orientation and customer service, customer service and customer satisfaction, customer satisfaction and customer retention and sales growth, and the latter two and profitability.
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