Market orientation, customer value, and superior performance

Business Horizons, March-April, 1994 by Stanley F. Slater, John C. Narver

To achieve superior performance, a business must develop and sustain competitive advantage. But where competitive advantage was once based on structural characteristics such as market power, economies of scale, or a broad product line, the emphasis today has shifted to capabilities that enable a business to consistently deliver superior value to its customers. This, after all, is the meaning of competitive advantage. Our recent research shows that a market-oriented culture provides a solid foundation for these value-creating capabilities.

A business is market-oriented when its culture is systematically and entirely committed to the continuous creation of superior customer value. Specifically, this entails collecting and coordinating information on customers, competitors, and other significant market influencers (such as regulators and suppliers) to use in building that value (see Figure 1).

The three major components of market orientation - customer orientation, competitor focus, and cross-functional coordination - are long-term in vision and profit-driven. Based on extensive interviews with managers and executives, Kohli and Jaworski (1990) conclude that market orientation provides "a unifying focus for the efforts and projects of individuals, thereby leading to superior performance." A developing stream of empirical research has found a strong relationship between market orientation and several measures of business performance, including profitability, customer retention, sales growth, and new product success.

Customer Orientation

The heart of a market orientation is its customer focus. To create superior value for buyers continuously requires that a seller understand a buyer's entire value chain, not only as it is today but also as it evolves over time. Buyer value can be created at any point in the chain by making the buyer either more effective in its markets or more efficient in its operations.

A market-oriented business understands the cost and revenue dynamics not only of its immediate target buyers but also of all markets beyond, for demand in the immediate and "upstream" markets is derived from the demand in the original "downstream" markets. Therefore, a market-driven business develops a comprehensive understanding of its customers' business and how customers in the immediate and downstream markets perceive value.

Employees of market-oriented businesses spend considerable time with their customers. Managers and employees throughout the business call on their customers or bring them into their own facilities in a constant search for new ways to satisfy their needs. For example, Du Pont has developed a program called "Adopt a Customer" that encourages a blue-collar worker to visit a customer once a month, learn the customer's needs, and be the customer representative on the factory floor.

Market-driven businesses continuously monitor their customer commitment by making improved customer satisfaction an ongoing objective. To maintain the relationships that are critical to delivering superior customer value, they pay close attention to service, both before and after sales. Because of the importance of employees in this effort, these businesses take great care to recruit and retain the best people available and provide them with regular training. Some businesses even involve their customers in hiring, training, and developing contact people as well as in making motivation and reward system decisions. Involving customers in these key areas forges strong customer loyalty.

Competitor Focus

Creating superior customer value requires more than just focusing on customers. The key questions are which competitors, and what technologies, and whether target customers perceive them as alternate satisfiers. Superior value requires that the seller identify and understand the principal competitors' short-term strengths and weaknesses and long-term capabilities and strategies. For example, a team of Marriott employees traveled the country for six months, staying in economy hotels and collecting information about their facilities and services. Armed with this information about potential competitors' strengths and weaknesses, Marriott invested $500 million in a new hotel chain. Fairfield Inn, its budget market entry, achieved an occupancy rate 10 points higher than the industry average in one year.

A seller should adopt a chess-game perspective of its current and principal potential competitors. Moreover, it should continuously examine the competitive threats they pose, inferring these threats from intent and value-creation capabilities. This is crucial information to a seller in developing its contingency competitive strategies. In one case, Hewlett-Packard decided to accelerate the announcement of a new computer peripheral after discovering through its travel agency that a rival had booked conference rooms around the country for a specific date. Knowing that this rival had a similar product in development, H-P rushed its announcement and beat the competition to the market.