The nature of the relationship between market orientation and performance

A review of the literature indicates that a universally enhancing relationship between market orientation and performance is not conclusively supported. Recent research suggests that the relationship between marketing investments and profit may be inverted U-shaped such that there is an optimal level of marketing investments which maximises profit (Mantrala et al 2007). In this study, it is proposed that market orientation has different curvilinear relationships with different types of performance. Using a performance categorisation suggested by Kirca et al (2005), it is theorised that market orientation s relationship with revenue-based performance (e.g. sales growth, market share growth) is subject to diminishing returns such that performance is enhanced for all levels of market orientation but the incremental benefits diminish as market orientation increases. For cost-based performance (e.g. profit, return on sales), it is proposed that the incremental costs of implementing market oriented activities may exceed the benefits. Thus, cost-based performance may have an inverted U-shaped relationship with market orientation. Three mechanisms by which diminishing returns affect the market orientation - performance relationship are identified; duplication, contradiction and prioritisation. A review of over 400 papers in the market orientation literature demonstrates that a research gap exists for different curvilinear relationships between market orientation and different types of performance. In particular, an inverted U-shaped relationship has not previously been found between market orientation and profit. A sampling frame was selected to control for both the macro-environment, and different performance levels in different industries (Dess and Robinson 1984). In a sample of 113 UK car dealers operating in the new car market the hypothesised relationships were tested using both objective and subjective performance measures. The findings relating to objective performance measures support the full inverted U-shaped relationship between market orientation and profit across the observed range of values. The relationship for objective revenue-based performance is more curvilinear with significant linear and curvilinear components. In highly competitive environments maximum profit shifts to a higher level of market orientation and overall the relationship is predominantly enhancing. Conversely, in uncompetitive environments profit is maximised at a lower level of market orientation and the relationship becomes detrimental at moderate market orientation levels. In recession, the profit for all new car dealers is reduced and maximum profit occurs at a lower market orientation level. In addition, the relationship between market orientation and sales growth turns negative in a recession. Interestingly, the results for subjective performance are distinctly different to, and sometimes contradict, the objective performance results. In particular, subjective performance predominantly has a positive linear relationship with market orientation.