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International Marketing Review Emerald Article: Strategic orientations and export market success of manufacturing firms: The role of market portfolio diversity Hans Eibe Sørensen, Tage Koed Madsen

Article information: To cite this document: Hans Eibe Sørensen, Tage Koed Madsen, (2012),"Strategic orientations and export market success of manufacturing firms: The role of market portfolio diversity", International Marketing Review, Vol. 29 Iss: 4 pp. 424 - 441 Permanent link to this document: http://dx.doi.org/10.1108/02651331211242647 Downloaded on: 03-07-2012 References: This document contains references to 48 other documents To copy this document: [email protected]

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Strategic orientations and export market success of manufacturing firms

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The role of market portfolio diversity

Received 31 March 2011 Accepted 30 March 2012

Hans Eibe Sørensen and Tage Koed Madsen Department of Marketing and Management, University of Southern Denmark, Odense, Denmark Abstract Purpose – The purpose of this study is to investigate the association of international orientation and market orientation and their joint effects on export market success. Additionally, it aims to examine how firms’ foreign market portfolio diversity moderates this association. Design/methodology/approach – On the basis of a review of the literature on market orientation and international orientation in relation to manufacturers’ performance on export markets, the paper proposes a set of hypotheses. The hypotheses are empirically tested using 249 questionnaire responses from CEOs supplemented with census data. Findings – The results indicate that international orientation is positively related to export market success and that this relationship is independent of market portfolio diversity. The paper provides insights to the limitations of the dominant position that holds market orientation as an undisputed valuable strategic capability since market orientation has different non-linear associations with export market success depending on market portfolio diversity. Finally, the results indicate that the joint effects of international orientation and market orientation on export market success only are present for firms with a focused market portfolio. Research limitations/implications – The authors argue that the performance implications of different strategic orientations on export market success are context-dependent and that firms’ market portfolio diversity assists in providing this nuanced insight. The study’s empirical cross-sectional setting limits inference about causality among the constructs. Practical implications – While all exporting manufacturing firms may benefit from an international orientation, business practitioners are advised to pay particular attention to the diversity of their foreign market portfolio prior to allocating resources to market-oriented activities. Originality/value – In this empirical contribution, the authors show how international orientation explains performance differentials among manufacturing exporters as well as how market orientation positively moderates this relationship. Furthermore, the paper shows the context dependency of the value of firms’ market orientation on the basis of export market portfolio diversity. Keywords International orientation, Market orientation, Export market success, Market portfolio diversity, Manufacturing firms, Foreign markets, Manufacturing industries, Exports Paper type Research paper

International Marketing Review Vol. 29 No. 4, 2012 pp. 424-441 r Emerald Group Publishing Limited 0265-1335 DOI 10.1108/02651331211242647

1. Introduction How can exporting firms successfully manage multiple strategic orientations for superior performance? This question aims to synthesize the recent calls for a new research agenda investigating the role of foreign market characteristics on the effectiveness of exporting manufacturing firms’ activities, behaviors, and orientations (Cadogan et al., 2009; Ellis, 2007; Murray et al., 2007). The present paper is focussed on small and medium-sized exporters and explores two strategic orientations – international orientation and market orientation, as possible necessary capabilities for superior export market performance (Tallman and Li, 1996) and explicitly examines

how firms’ market portfolio diversity may play a moderating role with regard to the effects of these strategic orientations on export performance. Managements’ international orientation has been explored in many studies of export behavior and literature reviews point out that this strategic orientation in general is positively related to export success (see e.g. Leonidou and Katsikeas, 1996; Aspelund et al., 2007; Knight and Kim, 2009). Despite the fact that many meta-studies confirm the positive relationship between market orientation and firm performance (Ellis, 2006, 2007; Grinstein, 2008; Kirca et al., 2005), the stream of research having exporting firms’ strategic orientations as the unit of analysis keeps challenging this “long established positive relationship.” This concerns predominantly the mixed results from the empirical research on the market orientation – performance relationship when introducing environmental moderators (Cadogan et al., 2002, 2003; Rose and Shoham, 2002), and nonlinear relationships (Cadogan and Cui, 2004; Cadogan et al., 2009). Murray et al. (2007) suggests that it is likely that important variables are missing from models of the relationship between market orientation and export success, such as firms’ degree of internationalization and foreign market activities. This literature also suggests that exporting firms with activities in many foreign markets are comparatively more challenged at establishing an effective market orientation, for example, than their counterparts operating within large domestic economies. In particular, Ellis (2007) emphasizes the diversity of the foreign markets in which firms operate as a possible determinant of the strengths of the market orientationperformance relationship. This perspective stands somewhat in contrast to the general internationalization literature (see e.g. Oviatt and McDougall, 1994; Johanson and Vahlne, 2009), that emphasizes the importance of increased market commitments and experiential learning as drivers for better international performance. In other words, additional research is needed to shed light on the issue. In this study, we add new nuances to these general arguments by simultaneously exploring the role and relevance of two strategic orientations – international orientation and market orientation – on export market success. We investigate both strategic orientations because they may prove to be complementary and thus exhibit positive interaction effects. Furthermore, we contribute to the international marketing research agenda by examining how firms’ market portfolio diversity moderates the effects on firms’ export market success. Our conceptual model is presented in Figure 1. We begin this study by providing a theoretical anchor in the resourced-based theory of the firm for our focal strategic orientations – international orientation and market

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Market orientation H5 Market portfolio diversity International orientation

H1

H4

H2, H3

Export market success

Controls Market growth Firm size Supplier power

Figure 1. Conceptual framework

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orientation. With this anchor as our backdrop, we postulate that besides the direct and possible nonlinear relationships between our strategic orientations and export market success, market-oriented activities are argued to be a capability that helps firms to enhance the positive effects of their internationally oriented activities. Moreover, we investigate the overall moderating effect of firms’ market portfolio diversity. After presenting our empirical study and the tests of hypotheses, we conclude by discussing our findings and the implications for researchers and executives. 2. Theory and hypotheses The resource-based view of the firm (Barney, 1991; Wernerfelt, 1984) provides the theoretical foundation for this study. The resource-based view of the firm argues that superior performance rests on resources and capabilities that are valuable and rare, that strategies based on these resources are costly to imitate, and finally that procedures and policies are organized to exploit the resources and capabilities. In this perspective, firms’ strategic orientations represent strategic capabilities that guide (strategic) actions for superior performance (Hult et al., 2005). Market orientation, for example, is argued to be a strategic capability as it is costly for competitors to observe and imitate (Day, 2011; Slater and Narver, 1998). Moreover, empirical research drawing on the resource-based view has suggested that such strategic capabilities may provide a necessary basis for successful “related diversification” into diverse foreign markets (Tallman and Li, 1996). 2.1 Strategic orientations A strategic orientation reflects the set of broad strategic choices implemented in the pursuit of sustainable superior performance, and is a predisposition for creating the proper employee, manager, and overall firm behavior and activities for achieving superior performance (Gatignon and Xuereb, 1997). In this study, we investigate two strategic orientations that have potential to create superior performance for firms with activities in foreign markets. These are international orientation and market orientation. International orientation – international orientation refers to top management’s attitudes and resource allocations with regard to international activities. This strategic orientation is based on a long tradition of empirical research on export markets and internationalization processes (Madsen, 1989; Dichtl et al., 1990; Knight and Cavusgil, 2004; Knight and Kim, 2009). International orientation is a question of mindset (whether managers see the world as their market place as well as their motivation to deal with international customers and partners), but it is also critical that top management has a clear commitment of resources and develops an organizational culture that motivates employees’ behavior in the direction of international activities. In accordance with the findings reported by Knight and Kim (2009), we therefore propose a positive association between international orientation and export performance indicating that the mindset of the managers should reflect the international strategies of the firm, implying that top management encourages employees to actively explore possibilities in foreign markets, and stresses that organizational agility and adaptability is crucial to compete successfully in foreign markets. We hypothesize that: H1. There is a positive linear association between firms’ international orientation and export market success.

Market orientation – market orientation refers to an organizational culture dedicated at delivering superior customer value, which is manifested in the organization-wide behaviors and activities pertaining to the acquisition and dissemination of customer and competitive information and timely action taken upon this information (Kohli and Jaworski, 1990; Narver and Slater, 1990; Homburg and Pflesser, 2000). The positive relationship between market orientation and firm’s operational and financial performance is well documented by several meta-analytic studies (Kirca et al., 2005; Ellis, 2006). Given the organization-wide nature of the market-oriented firm’s behaviors and activities, which includes export market activities, but not only those, we therefore hypothesize that: H2. There is a positive, linear association between firms’ market orientation and export market success. An alternative hypothesis: a nonlinear relationship – despite the general claim that market orientation is positively and linearly related to business performance, such unequivocal associations have not been demonstrated in the export literature (Cadogan et al., 2009). The export literature demonstrates that the strength of the relationship between market orientation and performance is influenced by moderators (Cadogan et al., 2002, 2003; Rose and Shoham, 2002) or takes a nonlinear relationship (Cadogan and Cui, 2004; Cadogan et al., 2009). A nonlinear (invert U-shaped) relationship between market orientation and business performance implies that additional resources allocated to market-oriented activities will not always translate into increased profits. Beyond a certain point the value of market-oriented activities diminish and may even turn detrimental to business performance. The nonlinear relationship follows from Kohli and Jaworski’s (1990) early warning that the value of an orientation is only meaningful when benefits exceed the costs of the resources committed to the orientation. We argue that there are two general beneficial market-oriented approaches for firms operating in foreign markets. The first approach is to have superior market-oriented activities that offset the costs of implementing them, which corresponds to the general advice in the market orientation literature. The second approach suggests that firms may benefit from letting other players in the value system bear the costs of market orientation and merely respond to their immediate orders. However, budget constraints limit the amount of resources that the individual firm can allocate to developing and maintaining market-oriented activities per se (Cadogan et al., 2009) as well as those aimed at leveraging other critical strategic orientations, such as international orientation. For example, beyond a point the extra market research report, customer visit, cross-functional meeting about customers, or after-sale service efforts may have very little value, if any, from a profitability enhancing perspective. These resource allocation issues and their implications are argued to cause an invert U-shaped relation between marketorientation and business success (Atuahene-Gima et al., 2005) and export market performance (Cadogan and Cui, 2004; Cadogan et al., 2009). We therefore hypothesize that: H3. There is an invert U-shaped association between market orientation and export market performance.

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2.2 Market portfolio diversity The strength of the invert U-shaped relationship between market orientation and export market performance may be moderated by the degree of the market portfolio diversity in which the firm operates. Market portfolio diversity refers to the geographical and cultural differences between the foreign markets wherein the focal firm operates. As the differences between these foreign markets increase, so does the complexity of the operations of the organization. From a general stance, Ellis (2007) argues that market diversity may increase the allocation of managerial attention to foreign markets, increase the cost of information acquisition, as well as decrease firms’ abilities to cultivate, for example, an international orientation and market orientation. Tallman and Li (1996) suggests that strong internal capabilities, such as international orientation and market orientation, may provide the basis for successful performance in relation to the scope of international operations, but not for the intensity – or scale, of international operations. Other studies by for example, Zahra et al. (2000) have conflated up to five dimensions to capture the diversity of international expansion activities. We follow the lead from Tallman and Li (1996) and develop a more parsimonious model for our study focussing only on the scope of international operations – the market portfolio diversity. We argue that the expected costs of developing a superior market orientation in all foreign markets is likely to be higher for firms with a very diverse market portfolio relative to those having a focussed market portfolio. In more detail, given the higher complexity of a diverse market portfolio it requires relatively higher levels of marketoriented activities and behaviors to tap into the sources of superior customer value that offset the initial costs of acquiring and disseminating such information. For example, in addition to the process of delivering superior customer value on local markets, the international firm must also acquire information and learn about the particular foreign market’s laws, language, culture, competitors, regulations, and business practices, etc. (e.g. McDougall and Oviatt, 1996). The cost issue is echoed in the stage models of internationalization ( Johanson and Vahlne, 2009) suggesting that accumulation of experiential knowledge about the specific foreign market is of utmost importance for successful exporting. According to this perspective the cost-benefit driver is the accumulation of experiential knowledge. If the firm is focussed on a limited set of markets, it may be beneficial to obtain gradually deeper market knowledge – that is, becoming increasingly market oriented. The firm may increase its export performance by slowly and gradually gaining more experiential knowledge, which can be done without increasing costs too much – and at the same time delivering higher customer value. Firms with focussed export market portfolios are thus expected to benefit from gradually increasing levels of market orientation as their experiential learning from one market may more easily be carried over than in the case of a more diverse export market portfolio. But just as there are limits to the general process of delivering customer value, there are limits to the value of acquiring and learning about the foreign market. As the complexity of the market portfolio increases, the additional marginal value of learning more from one’s markets diminishes and may ultimately become detrimental to performance (Cadogan et al., 2009). As such, our hypothesis is: H4. The invert U-shaped relationship between market orientation and export market performance becomes greater in magnitude as the degree of market portfolio diversity increases.

2.3 Interaction effects between and international orientation and market orientation International orientation and market orientation are strategic orientations that individually contribute to firms’ export market success via different mechanisms in the organization. Additionally, we argue that that the full effect of being highly internationally oriented would require intensive knowledge about international markets as well as capabilities to react and make decisions based on such knowledge. Previous research shows that knowledge-based firms, that is, firms with higher organization-wide ability to generate and disseminate information, have higher international performance (Kuivalainen et al., 2004). Market orientation is a critical antecedent to develop and exploit such market-based knowledge assets and capabilities (Slater et al., 2012). In other words, while international orientation generally drives export market success, higher levels of a firm’s organizational capability to generate and disseminate customer and competitive information and develop marketing strategies will make internationally oriented behaviors and activities even more successful. We therefore hypothesize that: H5. The greater the market orientation, the stronger the positive relationship between international orientation and export market performance. 3. Research design 3.1 Data collection and sample This study focusses on Danish small and medium-sized exporting manufacturing firms. A priori content validity of the questionnaire indicators was established by a panel of marketing academicians and business practitioners from the target sample. Given the non-English research context, translation and, particularly, back-translation of the original measures were performed to assure that the underlying theoretical meaning of each of the questions was not lost during the translation (Douglas and Craig, 1983). Translation from English to Danish was done by the group of researchers involved, whereas back-translation was carried out by an independent native English translator, living in Denmark, knowledgeable of business terminology in both languages. Furthermore, we followed Huber and Power’s (1985) recommendations for obtaining high-quality data from key informants. In accordance with for example Knight and Kim (2009), CEOs were selected as key informants as they should be knowledgeable about their strategic orientations, market activities, and export market performance. A sample of 2,527 Danish manufacturing firms, predominantly SMEs, was contacted, of which 791 firms agreed to participate. The questionnaires were set up as either web-based or postal and were addressed to CEOs. After two follow-up telephone and mailing contacts and removal of outliers from the census data, 249 useful responses from CEOs comprised the sample. The primary reasons for nonparticipation were “lack of time,” “lack of willingness to partake,” or “tired of answering questionnaires.” We have tested for nonresponse bias. Compared with the original sample the respondents are younger than the nonrespondents, but we found no significant differences (at the 0.05 level) with regard to size, industry, or location. The manufacturing firms in the sample belong to the following NACE classification categories: 15-19 food, textiles, etc. (31 firms), 20-26 chemicals, plastics, etc. (47 firms), 27-28 metal products, etc. (41 firms), 29 machines and equipment (57 firms), 30-33 electrical and optical articles (36 firms), 34-37 vehicles and furniture (31 firms), 72-73 high-tech (six firms). The average size of the participating firms is 172 employees.

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For the purpose of assessing Market portfolio diversity, the sample was divided with respect to the degree to which the firm’s sales were spread out to three groups of export markets (Scandinavia/Nordic markets; rest of Europe; beyond Europe). As shown below, this resulted in a group of firms with diverse market portfolios (84 firms) and another group with focussed market portfolios (165 firms). Descriptive statistics (ANOVA and Crosstabs where appropriate) on the two subsamples revealed that the groups consisted of firms with no statistical differences in levels of return on assets, but – not surprisingly, different with respect to their export intensity as well as NACE industry belongingness. The 84 firms with a diverse market portfolio have an average export share of 74 percent, whereas the 164 firms with a focussed market portfolio had an average export share of 37 percent. Finally, we observe relatively more activities in the near markets and more firms from NACE 15-28 among exporters with focussed – or less diverse, markets. 3.2 Measures We developed a questionnaire to assess the components of strategic orientations, export market success, market portfolio diversity, and control variables. The questionnaire data were supported by census data providing firm size measured by the number of employees. The measures and indicators are presented in the Appendix. Strategic orientations – international orientation was operationalized and assessed with a multi-indicator measure inspired primarily by the indicators administered by Knight and Cavusgil’s (2004) and Knight and Kim (2009). The indicators tap top management mindset, attitude and resource allocations of the firm with regard to international activities. We adapted Narver and Slater’s (1990) revised multi-indicator measures assessing market-oriented behavior from Sørensen and Slater (2008). Export market success – export market success was assessed in the questionnaire by a single indicator on a seven-point Likert scale tapping how the CEO evaluates the overall success on their most important export market within the last three years. This measure is replicated from Knight and Cavusgil (2004) and is in accordance with the literature on measures of perceived performance (Diamantopoulos and Kakkos, 2007; Lages et al., 2008). Market portfolio diversity – we assessed market portfolio diversity by the degree of the geographical distance and cultural/psychic differences in the portfolio of foreign markets wherein the focal firm obtains its sales. The CEOs were asked to allocate (in percent) their sales to Scandinavian/Nordic markets, other European markets, and markets beyond Europe. There are different reasons for grouping exports into these three areas. In practice Scandinavian/Nordic markets are mainly Norway and Sweden, countries that adjacent to Denmark and share almost the same language as Danish. We have therefore chosen to isolate exports to this group of countries since language and culture barrier are very small. Europe is mainly exports within the European Union, i.e. within institutional frames that are very homogeneous and without high barriers for Danish firms. We therefore consider the three groups of export areas as having quite distinct characteristics with regard to geographical as well as cultural distance. Lacking measures from previous studies, we propose to operationalize high levels of portfolio diversity as being firms with at least 5 percent sales to all three types of market areas. The responses were then manually coded into the categorical variables; diverse portfolios (firms with at least 5 percent sales in each of the three market areas) and focussed portfolios (firms with o5 percent sales in at least one of the market areas).

This cut-off point is arbitrary, but in lack of guidance from previous literature we chose to administer this procedure as the one that split the sample into manageable subgroups. Control variables – many other factors than the main measures in this study may influence firms’ performance (Porter, 1980; Scherer, 1980). To control for the impact of market and firm conditions on performance, we collected data on market growth, supplier power, and firm size. Market growth and supplier power was assessed in the questionnaire by a single indicator on a seven-point Likert scale. Firm size is measured by the number of employees drawn from the company database CD Direct that contains company information on all VAT registered Danish companies. The logarithm was used to transform the variable for the regression analyses (Hair et al., 1998).

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3.3 Measure assessment The multi-indicator measures were respecified using Cronbach’s a for ascertaining sufficient internal consistency and reliability, but with an explicit care for a posteriori content validity (Sørensen and Slater, 2008). The Cronbach’s a were all 40.90. Podsakoff and Organ’s (1986) recommended Harman’s one-factor test for common method variance be conducted, where all the variable measures were entered into a single factor analysis. The analysis produced five factors with eigenvalues 41 accounting for 69 percent of the variance. Neither a single factor nor a general factor that could account for the majority of the covariance in the measures emerged. This provided evidence that common method variance was not a problem in the sample. Low to moderate correlations among the measures and low variance inflation factors (VIFo1.3 for focussed market portfolios and VIFo3.4 for diverse market portfolios) indicate discriminating measures. See Table I for the measures’ correlations and descriptive statistics. 3.4 Analysis We tested the hypotheses using multivariate regression with product term analysis within subgroups. Subgroup analysis is an appropriate technique to test for moderation when the moderator variable is categorical (Sharma et al., 1981; Olson et al., 2005) as in the case of market portfolio diversity. Since we hypothesized an invert U-shaped relationship between market orientation and export market success, we created a quadratic term by squaring the market orientation variable. We also expected that market orientation positively influence the relationship between international orientation and export market success, and so we created an interaction term by multiplying the international orientation variable with the market orientation variable.

1. 2. 3. 4. 5. 6.

Export market success International orientation Market orientation Market growth Firm size (log employees) Supplier power

Mean

SD

4.70 4.95 5.07 3.70 1.72 4.10

1.59 1.51 0.95 1.26 0.57 1.52

Notes: **po0.01, *po0.05 (two-tailed)

a

0.92 0.91

1

2

3

4

5

1 0.609** 0.287** 0.266** 0.194** 0.030

1 0.337 0.159* 0.145* 0.008

1 0.057 0.125* 0.039

1 0.056 0.084

1 0.068

Table I. Correlation matrix and descriptive statistics

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In order to avoid issues of multicollinearity by using quadratic and interaction terms in multivariate regression, we followed Little et al.’s (2006) recommended procedure for orthogonalizing observed quadratic and interaction terms. 4. Results Table II summarizes our main results of the regression analyses. Please note, that a regression on the full sample revealed insignificant results and did not add to the paper, so these are not included. The first results for positive, linear association between international orientation and export market success is significant and independently of market portfolio diversity (t ¼ 7.886, 3.259), which confirms H1. The significant regression weights of the market orientation (t ¼ 2.936) and squared market orientation (t ¼ 1.759) confirms a negative U-shaped relationship between market orientation and export market success, but only for firms with a focussed market portfolio. We can therefore reject H2 and accept H3 for this subgroup. Interestingly, both H2 and H3 are refuted for the diverse market portfolio sample. In addition, the subgroup analysis for testing H4 stating that greater market portfolio diversity leads to a stronger invert U-shaped relationship between market orientation and export market success is also rejected. However, the empirical evidence (MO, to1.65 and MO2, t41.96) implies that a convex relationship is present for firms with a diverse market portfolio. Note that in the latter sample, the t-value of MO2 is positive and two-tailed significant (at 5 percent), so refuting the hypothesis of a negative effect. This finding is in line with results reported by French and Cadogan Market portfolio diversity Focussed Diverse Independent variables International orientation (IO) Market orientation (MO) MO2 IO  MO Control variables Market growth Size (log employees) Supplier power

Table II. Regression results for export market success

b t-value b t-value b t-value b t-value

0.497 7.886 0.190 2.936 0.110 1.759 0.215 3.299

0.369 3.259 0.112 0.803 0.378 2.452 0.318 1.781

b t-value b t-value

0.141 2.294 0.164 2.708

0.261 2.560 0.033 0.317

b t-value

0.028 0.457

0.189 1.801

0.449 0.424 18.263 165

0.266 0.199 3.941 84

R2 Adjusted R2 F-value N Note: Critical t-value (directional, one-tailed): 1.645

(2011). The plots of the findings of the partially confirmed H3 and the rejected H4 are presented in Figure 2a. The positive significant coefficient (t ¼ 3.299) for firms with a focussed market portfolio confirms H5 that market orientation positively moderate the relationship between international orientation and export market success. However, H5 is rejected for firms with a diverse market portfolio, due to the directional negative t-value as well as the insignificant two-tailed test (t ¼ 1.781o71.96). The plots for H5 are presented in Figure 2b. In conclusion, the results for the “focussed” firms are much more in accordance with our hypotheses. As discussed later, the “diverse” group of firms may entail very different types of firms which may explain the more unclear picture revealed above. Control variables – market growth is positively associated with export market success in all regression models as expected. Firm size has a general positive association with export market success except for firms with diverse market portfolios. Supplier power has a negative impact on export market success except for firms with diverse market portfolios. In all, we argue that the control variables validate our subjective measure of export market performance (Table III).

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5. Discussion and implications Tallman and Li (1996) direct our attention to the development of strategic capabilities, such as international orientation and market orientation, to leverage firms’ international activities whereas Ellis (2007) and Murray et al. (2007) point to the role and relevance of foreign market characteristics in understanding differences in performance on export markets. In particular, Ellis (2007) demonstrates that geographical factors may help explain some of the inconsistent patterns found in the results of past research on the market orientation – performance relationship. (a)

(b)

(A) Focussed strategy

(A) Focussed strategy

Export market success

Export market success High international orientation

High market orientation Low market orientation

Low international orientation Market orientation (B) Diverse strategy

(B) Diverse strategy Export market success

International orientation

High international orientation Low international orientation

Export market success

High market orientation

Low market orientation Market orientation

International orientation

Figure 2. Results from the subgroup analysis

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Table III. Overview of hypotheses and results

Hypothesis

Result

H1. There is a positive, linear association between firms’ international orientation and export market success H2. There is a positive, linear association between firms’ market orientation and export market success H3. There is an invert U-shaped association between market orientation and export market performance H4. The greater the market portfolio diversity, the stronger invert U-shaped relationship between market orientation and export market success H5. Market orientation moderates the relationship between international orientation and export market performance in a positive linear way

Confirmed Refuted. The relationship is nonlinear, not linear Partially confirmed – only in the “focussed” sample Rejected – a convex relationship is found in the “diverse” sample Partially confirmed – only in the “focussed” sample

Our study demonstrates a strong, positive association between international orientation and export market success as hypothesized on the basis of the existing export literature. We also show that market orientation moderates and strengthens the international orientation-export market success relationship for firms with a focussed market portfolio. Moreover, we find an invert U-shaped relationship between market orientation and export market success for firms with a focussed market portfolio, but contrary to our hypothesis this relationship is convex for firms with a diverse market portfolio. For firms with diverse market portfolios, we did not find the strengthening moderating effect of market orientation on international orientation. These insights lead us to the preliminary conclusion that market portfolio diversity plays a critical role in understanding the complex relationship between firms’ strategic orientations and export market success. In accordance with, for example, Cadogan et al. (2009), we find that firms with a focussed market portfolio experience a positive impact of market orientation on export success up to a certain level after which diminishing returns from being too market oriented begin. In other words, beyond a certain point the additional market research and learning about the particular foreign market’s laws, language, culture, competitors, regulations, and business practices, etc. do not add as much value as their associated costs. One explanation is that small and medium-sized firms often do not have the resources to invest in being highly market oriented and at the same time reap the benefits from such a strategic orientation. For example, because of limited financial and human resources firms may have to export through distributors rather than establish their own sales subsidiaries, and thus exploit the market knowledge of the distributor rather than the agents closer to the market and end-user. Firms with very diverse market portfolios may experience quite different situations. Our results indicate (contrary to our hypothesis) that a U-shaped association exists between market orientation and perceived export success for these firms. In other words they seem not to have reached a point at which they can no longer obtain net benefits from being market oriented. Successful firms with diverse market portfolios may have adopted an internationalization strategy that resembles the stage models proposed by, for example, Johanson and Vahlne (2009). Following this perspective, it makes good sense that the firm slowly and gradually gains increasing insights into

their set of foreign markets through experiential learning based on their ongoing business activities in those countries. The costs as well as the benefits of being market oriented develop over time without “lumpy” significant investments, and because they may penetrate many different markets they are perhaps on the steep, initial learning curve in those diverse markets. Our study cannot be conclusive about such issues that should be explored more in detail in future research. The unexpected lack of support for the moderating and strengthening effect of market orientation on the international orientation-export market success relation in the diverse market portfolio sample requires some elaboration. It seems to suggest that the complexity of such strategies render the value added of firms’ general market-oriented activities and behaviors obsolete. One explanation may be that these firms are in the very high end of being internationally oriented already, and that being at a high level on both orientations may not contribute extra value. Market portfolio diversity brings additional challenges to exporting firms, thus making decision making in the diverse environments harder and so more error prone. For example, as market portfolio diversity increases the managerial effectiveness will become much more complex because of more complicated strategy choices, such as choice of new markets, resource allocations, distributor choices, etc. We argue that market portfolio diversity does not reduce the effectiveness of international orientation on performance outcomes directly – but that the implications of diversity operate through the organization’s market orientation. Market portfolio diversity may dilute the effective level of total investments – including the developed export market knowledge, on each foreign market which, in turn, weakens the joint effect of international orientation and market orientation on export market success. General implications – an important takeaway for researchers (and business practitioners alike) is that international orientation and market orientation matter, but that more detailed knowledge about the interaction with market portfolio diversity is needed to extract the underlying drivers of costs and benefits. In other words, resource allocation to the respective strategic orientations must be made in careful consideration of the characteristics of the firms’ export market portfolio and distances to their main export markets. An important implication could be that firms with diverse market portfolios and distant main export markets might need to be cautious in their efforts to be highly market oriented and highly internationally oriented at the same time. It may simply be too costly to retrieve and manage market information and at the same time invest heavily in increasing the international competences in the organization – relative to the benefits from doing so. A complementary explanation for the results mentioned above may be that firms are force-fitting their market orientation from one foreign market context to another without adapting it. Such issues are surely relevant for future research endeavors. Limitations and future research – we adopted a standard research design using questionnaire and census data and with it, its common limitations. First, the study’s empirical cross-sectional setting limits inference about causality among the constructs. Further limitations that restrict our study’s generalizability are the nature of our sample that consists of exporting manufacturing firms (predominantly SMEs) from a small economy – albeit from a diverse range of industries. The results and implications

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are therefore most likely valid for mainly small and medium-sized firms and perhaps to a lesser extend to larger economies and larger firms. Our research design and results provide interesting avenues for future research. First, our sample consists of exporting manufacturing SMEs that invites research on larger firms as well as firms from the service sector. Second, our indicators tapped into firms’ organization-wide market-oriented activities and behaviors, which opens up for research honing in on the subset of market-oriented activities pertaining to the relevant export markets (e.g. Cadogan et al., 2009). This approach may also shed light on the complexities of the interactions between international orientation, market orientation, and diverse market portfolios, as discussed above. Finally, our analyses are based on the overall market-orientation construct, rather than its salient components – customer orientation and competitor orientation. Further research using these components measures (rather than an aggregate measure) could add more nuances to our understanding of the value of different strategic orientations for firms with varying export market portfolios. Managerial implications – as demonstrated, our focus on market portfolio diversity has provided additional nuance to Kohli and Jaworski’s (1990) list of certain conditions where market orientation is less likely to be beneficial for business performance. Business practitioners are therefore advised to pay particular attention to the firm’s context prior to allocating resources to their different strategic orientations. Market orientation may strengthen the positive effects of being internationally oriented, but again with limits. The logic is simple; while undeniably valuable to most firms, beyond a certain point the benefits reaped from an extra market research report, customer visit, cross-functional meeting on customers, aftersale service as well as learning about the particular foreign market’s laws, language, culture, competitors, regulations, and business practices, etc. are outweighed by the costs. Our research, however, does not provide information about the “balance point,” as this is context specific to the particular firm and its particular activities. As legendary James March observes, “balance is a nice word, but a cruel concept” (1999, p. 5). Based on our exposition above, we suggest that managers prior to expansion into foreign markets should always adopt an internationally oriented posture. But in terms of their market orientation they would benefit from defining an explicit strategy depending on their expected market portfolio diversity. A focussed market portfolio apparently implies increasing net benefits from being market oriented up to a certain point, but hereafter the effect of market orientation on performance seems to become negative. The managerial challenge is here to pay explicit attention to the value-added of the marginal increase in (export) market-oriented activities and behaviors. Since the effects of one’s export market-oriented activities occasionally take time, managers should also take care not to prematurely terminate their export market knowledge development activities. In case of a diverse market portfolio, it seems that firms have increasing net benefits from becoming more market oriented, which suggest that managers’ gradual increase in market orientation that reaps the benefits of experiential learning. However, the managerial challenge in this context is not to over-invest if they attempt to be both highly market oriented and highly internationally oriented at the same time. Managers should therefore pay particular attention to how the market orientation helps leverage the internationally oriented activities and behaviors.

6. Conclusions Our study shows that market portfolio diversity plays a critical role in understanding the complex relationship between firms’ strategic orientations and export market success. We demonstrate a strong, positive association between international orientation and export market success as hypothesized on the basis of the existing export literature. We also show that market orientation moderates and strengthen the international orientation-export market success relationship for firms with a focussed market portfolio. Moreover, we find an invert U-shaped relationship between market-orientation and export market success for firms with a focussed market portfolio, but contrary to our hypothesis this relationship is convex for firms with a diverse market portfolio. Our results thus provide insights into the limitations of the dominant position that holds market orientation as an undisputed valuable strategic capability. Despite the limitations of our study, we believe that we have taken a useful step in the investigation of the role of market portfolio diversity in the analysis of the performance implications of firms’ strategic orientations. Furthermore, our anchor in the resource-based view of the firm provides a strong argument for firms with international activities to develop capabilities, such as international orientation and market orientation, as they appear to be a source of competitive advantage if managed at the right level. References Aspelund, A., Madsen, T.K. and Moen, Ø. (2007), “A review of the foundation, international marketing strategies, and performance of international new ventures”, European Journal of Marketing, Vol. 41 Nos 11/12, pp. 1423-48. Atuahene-Gima, K., Slater, S.F. and Olson, E.M. (2005), “The contingent value of responsive and proactive market orientations for new product program performance”, Journal of Product Innovation Management, Vol. 22 No. 6, pp. 464-82. Barney, J. (1991), “Firm resources and sustained competitive advantage”, Journal of Management, Vol. 17 No. 1, pp. 99-120. Cadogan, J.W. and Cui, C.C. (2004), “Chinese export agents’ adoption of export market-oriented behaviours: measurement and performance relationship”, Journal of Asia Pacific Marketing, Vol. 3 No. 2, pp. 21-31. Cadogan, J.W., Cui, C.C. and Li, E.K.Y. (2003), “Export market-oriented behavior and export performance: the moderating roles of competitive intensity and technological turbulence”, International Marketing Review, Vol. 20 No. 5, pp. 493-513. Cadogan, J.W., Diamantopoulos, A. and Siguaw, J.A. (2002), “Export market-oriented activities: their antecedents and performance consequences”, Journal of International Business Studies, Vol. 33 No. 3, pp. 615-27. Cadogan, J.W., Kuivalainen, O. and Sundqvist, S. (2009), “Export market-oriented behavior and export performance: quadratic and moderating effects under differing degrees of market dynamism and internationalization”, Journal of International Marketing, Vol. 17 No. 4, pp. 71-89. Day, G.S. (2011), “Closing the marketing capabilities gap”, Journal of Marketing, Vol. 75 No. 4, pp. 183-95. Diamantopoulos, A. and Kakkos, N. (2007), “Managerial assessments of export performance: conceptual framework and empirical illustration”, Journal of International Marketing, Vol. 15 No. 3, pp. 1-31.

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Table AI. Indicators assessing international orientation

Table AII. Indicators assessing market orientation – the customer orientation component

Table AIII. Indicators assessing market orientation – the competitor orientation component

Appendix. Measures and indicators

The desire for growth is a strong motif for the expansion of international activitiesa The possibility of increased economic profits is a strong motif for international expansion We see the world, not just Denmark, as our firm’s market We find it better to expand our export activities cautious and graduallya Our organizational culture is characterized by active exploration of new business opportunities on export markets We have a strong capability to develop and adapt new and existing products/services for international markets We emphasize to all our employees how important it is to succeed with export activities We emphasize the development of human and other resources that may contribute to successful export activities Notes: aExcluded in the specified measure. Operationalized on a seven-point Likert scale bounded by 1, “strongly disagree” to 7, “strongly agree”

We constantly monitor our level of commitment to serving customers’ needs We measure customer satisfaction systematicallya Our top managers from every function regularly visit current and prospective customersa We give close attention to after-sales service We freely communicate information about our successful and unsuccessful customer experiences across all business functionsa All of our business functions (e.g. marketing/sales, operations, R&D, finance/accounting, etc.) are integrated in serving the needs of our target markets All of our managers understand how everyone in our business can contribute to creating customer value Our business objectives are driven primarily by customer satisfaction Our strategy for competitive advantage is based on our understanding of customer needs Our business strategies are driven by our beliefs about how we can create greater value for our customers Notes: aExcluded in the specified measure. Operationalized on a seven-point Likert scale bounded by 1, “strongly disagree” to 7, “strongly agree”

We diagnose competitor’s goalsa We track the performance of key competitors We identify the areas where the key competitors have succeeded or failed We attempt to identify competitors’ assumptions about themselves and our industry Top management regularly discusses competitor’s strengths and weaknesses Our sales people regularly share information within our business concerning competitors’ activities All of our managers understand how every business functions can contribute to information on competitive activities We target customers where we have an opportunity for competitive advantage We rapidly respond to competitive actions that threaten us We look for market opportunities that do not threaten competitorsa Notes: aExcluded in the specified measure. Operationalized on a seven-point Likert scale bounded by 1, “strongly disagree” to 7, “strongly agree”

Measure

Indicator wording

Export market successa Market growthb Supplier powerc Buyer powerc

Overall, how would you rate your firm’s success on your export markets within the last three years? The accumulated demand in our industry the last three years A large share of our total procurements is placed at few suppliers A large share of our total sales is placed at few buyers

Notes: aThe indicator was operationalized on a seven-point Likert scale bounded by 1, “certainly no success” to 7, “certainly a success”; bthe indicator was operationalized on a seven-point Likert scale bounded by 1, “strong decline” to 7, “strong growth”; cthe indicators were operationalized on a seven-point Likert scale bounded by 1, “strongly disagree” to 7, “strongly agree”

Corresponding author Hans Eibe Sørensen can be contacted at: [email protected]

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Export market success

441 Table AIV. Performance and control variables

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