Application of Generic Strategies and Models

Voola, R., & O'Cass, A. (2010). Implementing competitive strategies: The role of responsive and proactive market orientations. European Journal of Marketing, 44(1/2), 245–266. doi: 10.1108/03090561011008691 (ProQuest Document ID: 237032252) 

Introduction

Organising marketing activities in ways that successfully enable business strategy implementation is recognised as one of the most difficult challenges facing managers [...] and researchers know little about how marketing activities should be organised to enable business strategy implementation or how this affects performance ([85] Vorhies and Morgan, 2003, p. 100).

A fundamental objective of marketing strategy research is to examine and better understand how firms develop and sustain competitive advantage, and how this leads to better firm performance outcomes ([45] McNaughton et al. , 2002). However, as the above extract from [85] Vorhies and Morgan (2003) indicates, implementation is a critical issue requiring much more attention. With regard to competitive advantage and firm performance, market orientation has been identified as a key issue. As such, market orientation as a firm capability has been studied extensively in the context of how firms develop and sustain competitive advantages. However, there still exists a research gap in understanding how market orientation fits in the implementation of competitive strategies (e.g. [34] Homburg et al. , 2004). In particular, because the relationship between marketing and strategic management is axiomatic ([53] Morgan and Strong, 1998) and the contribution of marketing to corporate strategy is under-researched ([65] Olson et al. , 2005), understanding the relationships between market orientation and competitive strategies is crucial to understanding how market orientation contributes to firm performance ([83] Vijande et al. , 2005). Furthermore, [34] Homburg et al. (2004) argue that although examining the role of market orientation in the relationship between competitive strategies and firm performance is important, understanding the role of market orientation when a firm simultaneously attempts to achieve differentiation and cost-leadership is vital.

Although previous studies have examined the relationships among differentiation strategy, cost-leadership strategy, market orientation and new product activity ([27] Frambach et al. , 2003) and differentiation, market orientation and firm performance ([34] Homburg et al. , 2004), existing research has not simultaneously examined the relationships between differentiation, cost-leadership competitive strategies, responsive market orientation (RMO), proactive market orientation (PMO) and firm performance. The issue of simultaneity is particularly important because in most circumstances, the constructs derive their essence from the conceptual (nomological) network in which they are rooted. Furthermore, in reality, a firm may choose one or adopt both differentiation and cost-leadership competitive strategies ([32] Hall, 1980). Although adopting both these strategies may seem contradictory, because it may lead to conflicts in an organisation's requirements, some research indicates that a mixed strategy is not only feasible ([89] White, 1986) but essential for organisational success ([12] Chan and Mauborgne, 2005). This argument is analogous to [30] Gibson and Birkinshaw's (2004) notion of organisational ambidexterity, or simultaneously achieving alignment and adaptability, and [4] Atuahene-Gima's (2005) assertion that firms must simultaneously implement exploitation and exploration strategies.

For the most part, the existing literature examining market orientation and competitive strategies has not conceptualised market orientation within the notion of RMO and PMO. This is important, as [57] Narver et al.(2004) argue that dominant conceptualisations of market orientation ([40] Kohli and Jaworski, 1990; [55] Narver and Slater, 1990) emphasise responding to the expressed needs of the customers and consequently do not include the proactive nature of market orientation or understanding the latent needs of the customers. This results in market-oriented firms ignoring or paying insufficient attention to new markets and/or potential competitors ([3] Argyris, 1994; [73] Slater and Narver, 1995).

Furthermore, [31] Grinstein (2008) highlights that few studies have made the distinction between RMO and PMO, and that research in the future should study these constructs, their antecedents and consequences. Moreover, adding to [31] Grinstein's (2008) view, [16] Coltman et al. (2008) indicate a disparity between the focus on RMO versus PMO and contend that given the growing evidence, industry and customer foresight (PMO) are potentially the most important components of market orientation. Importantly, as suggested earlier, the primary criticism of the conventional treatment of market orientation is that it has been conceptualised as responsive. Critics of RMO argue that it hinders a firm's innovativeness ([9] Berthon et al. , 1999), confuses a firm's processes ([46] MacDonald, 1995), and results in narrow-minded research and development activities ([28] Frosch, 1996). We respond to these issues and the call for research by proposing that competitive strategies are antecedents to RMO and PMO and firm performance is a key consequence of RMO and PMO; we test this contention using an empirical study. As such, we seek to contribute to both the strategy implementation literature and the market orientation literature by focusing on the strategy-capability-performance connections.

This study is structured as follows. First, we present a background discussion in relation to the strategy formulation and strategy implementation perspectives. Within this discourse, we adopt the RB theory to shed light on the strategy formulation-strategy implementation perspectives. Second, in line with the strategy implementation approach and the RB theory, specifically focusing on market orientation as a key variable in RB theory, we develop six hypotheses. Third, we discuss the quantitative method and the findings. Last, we highlight implications for research and practice and discuss limitations and opportunities for extending this research.

Strategy formulation and strategy implementation

There has been a debate on whether organisational dimensions affect competitive strategies (i.e. strategy formulation) or whether competitive strategies affect organisational dimensions (i.e. strategy implementation) (e.g. [59] Noble and Mokwa, 1999; [68] Prahalad and Bettis, 1986). Historically, the emphasis of both marketing strategy scholars and practitioners has been on strategy formulation, with strategy implementation being viewed as a strategic afterthought ([59] Noble and Mokwa, 1999). Furthermore, strategy formulation has been at the core of strategic management for several decades (e.g. [51] Mintzberg, 1973), and is an attempt to explain how effective strategies are developed within a firm ([76] Slater et al. , 2006). The strategy formulation approach views organisational variables as antecedents to strategy on the basis of the argument that managerial action is founded on underlying beliefs, behaviours and cognitive maps such as dominant logics and worldviews (e.g. [23] Foil and Huff, 1992; [34] Homburg et al. , 2004).

The strategy implementation approach involves viewing strategy as affecting organisational dimensions, or organisational dimensions are adapted to strategy, which then results in higher firm performance ([34] Homburg et al. , 2004). Although traditionally organisational dimensions such as structure and systems have been emphasised, with the advent of the RB theory ([6] Barney, 1991; [18] Day, 1994), firm capabilities are increasingly being viewed as organisational dimensions that must be developed and deployed to implement a particular competitive strategy effectively. Essentially, the RB theory adopts an inside-out approach to strategy, taking the position that internal firm factors explain more variance in firm performance than do external industry-related factors, a view that emphasises an outside-in approach to strategy ([6] Barney, 1991; [63] O'Cass and Ngo, 2007b; [87] Wernerfelt, 1984).

The importance of strategy and the significance of the strategy debate can be seen in the argument over formulation versus implementation, with various scholars such as [10] Bonoma (1984), [13] Chebat (1999), [15] Chimhanzi (2004), [44] McGuinness and Morgan (2005), [65] Olson et al. (2005) and [72] Slater and Mohr (2006) raising the contention that marketing scholars must align themselves with the strategy implementation approach. Furthermore, the role of strategy and its implementation can be seen in the work of [63] O'Cass and Ngo (2007b), who show empirically that strategy drives market orientation. Moreover, [7] Barney (2001) highlights the importance of implementation and its connection with RB theory. According to the original conception of RB theory, competitive advantage results from a firm's unique capabilities that are valuable, rare and inimitable ([6] Barney, 1991). Therefore, market orientation positioned as a capability is valuable because it enables firms to better serve their target markets. However, a limitation of early RB theory is the lack of attention to implementation issues, and as [7] Barney (2001) notes, for simplicity's sake even he early on adopted the view that "once a firm understands how to use its resources [...] implementation follows, almost automatically" ([7] Barney, 2001, p. 53). This view perpetuated the notion that the actions the firm should take to exploit these capabilities will be self-evident and automatic.

However, the link between capabilities and actions may not be obvious, and proper strategy implementation remains a major challenge. For example, [7] Barney (2001) and [75] Slater and Olson (2001) argue that there is a need for more research on how marketing can facilitate the implementation of competitive strategies. However, a key question relates to whether strategy formulation or strategy implementation is more realistic to apply, and it refers to the causality between strategy and organisational dimensions. This study adopts a strategy implementation approach based on the work of [34] Homburg et al. (2004), who argue that it is more likely that strategy has a stronger positive effect on structure than structure on strategy ([2] Amburgey and Dacin, 1994), whilst acknowledging that strategy and structure affect each other. Furthermore, the notion that competitive strategies influence market orientation is consistent with the work of [66] Pelham and Wilson (1996) and [27] Frambach et al. (2003). For example, [27] Frambach et al. (2003) argue that behaviours inherent in market orientation, such as responsiveness to information, are likely to be influenced by strategic choices at the broader corporate level.

The theory development here extends [34] Homburg et al. 's (2004) and [27] Frambach et al. 's (2003) work on the role of market orientation in the competitive strategy-firm performance relationship. Furthermore, by conceptualising and operationalising market orientation as having two theoretical components - specifically RMO as responsive and PMO as proactive - it responds to the call for this distinction by many researchers, including [57] Narver et al. (2004) and [31] Grinstein (2008). The argument put forward here is that differentiation and cost-leadership strategies drive RMO and PMO, which then drive firm performance. The conceptual model outlining the key constructs and hypothesised paths is presented in Figure 1 [Figure omitted. See Article Image.]. This model essentially shows:

- a direct positive effect for differentiation (H1 ) and cost-leadership strategies (H2 ) on RMO;

- a direct positive effect for differentiation (H3 ) and cost-leadership (H4 ) on PMO; and

- a positive effect for RMO (H5 ), and PMO (H6 ) on firm performance.

Hypotheses development

Competitive strategies, responsive and proactive market orientation

Responsive and proactive market orientation

To overcome the limitations of the responsive nature of the market orientation conceptualisations, [56] Narveret al. (2000, p. 7) highlight the concept of PMO and define it as "the attempt to understand and satisfy customers' latent needs". The development of this capability is based on [37] Jaworski and Kohli's (1996) and [73] Slater and Narver's (1995) assertion that there are two types of customers' needs:

expressed; and

latent.

They define expressed needs as those needs that the customers are aware of and consequently can express; whereas latent needs are needs that the customers are unaware of and reside in the subconscious of the customers. The treatment of RMO and PMO here as distinct constructs is consistent with empirical research (i.e. [5] Atuahene-Gima et al. , 2005; [16] Coltman et al. , 2008; [57] Narver et al. , 2004; [70] Saini and Johnson, 2005; [80] Tsai et al. , 2007) and [57] Narver et al. 's (2004) argument that RMO and PMO are statistically related but distinct constructs.

The effects of competitive strategies on RMO and PMO

The extent of market orientation in a firm must be congruent with the competitive strategy adopted (e.g. [17] Conant et al. , 1990; [86] Walker and Ruekert, 1987). In fact, the importance of the match between business strategy and marketing strategy has been empirically illustrated ([65] Olson et al. , 2005). The argument that competitive strategies drive market orientation is founded on the assertion that marketing activities are likely to be influenced by strategic choices at the macro competitive strategy level ([75] Slater and Olson, 2001). Furthermore, literature suggests that top management leadership is critical in developing market orientation ([18] Day, 1994; [55] Narver and Slater, 1990). This point is alluded to by [79] Stoelhorst and van Raaij (2004), who in the context of the RB theory, argue that the role of the manager is to acquire, combine and deploy appropriate capabilities. In this sense, such capabilities should logically be deployed to implement the strategy of the firm through its managers. We concur with [47] Makadok's (2001) definition of a capability as an asset that cannot be observed (therefore, intangible), cannot be valued and is traded only as part of its entire unit. Typically, these capabilities are idiosyncratic to the firm, have been built over time with heavy reliance on tacit knowledge and skills, involve complex interrelationships with other resources, and are by their nature important factors in affecting firm performance outcomes ([35] Hooley et al. , 2005). Therefore, we contend that if market orientation is a firm capability ([5] Atuahene-Gima et al. , 2005), then the strategy the firm develops and seeks to pursue requires implementation. Thus, market orientation provides the mechanism through which strategy is enacted through its possession and appropriate deployment. This, we argue, is fundamental, in that top management is critical for developing strategies (i.e. differentiation and cost-leadership) and therefore they will drive market orientation development and deployment to implement the strategy. The connection between strategy and market orientation is further identified by [74] Slater and Narver (1996), who contend that successful execution of a strategy is facilitated by market orientation. Importantly, [27] Frambach et al. (2003) provide support for the notion that a firm's differentiation strategy and/or cost-leadership strategy will influence the extent of market orientation.

When a differentiation strategy leads to increased customer benefits, it is consistent with market orientation's external focus on customer needs as implied by RMO ([74] Slater and Narver, 1996). Furthermore, differentiation strategy is based on the ability of a firm to balance product benefits and costs to the customer ([75] Slater and Olson, 2001). Therefore, a differentiation strategy affects market orientation, as it requires an intimate examination of customer-related information. Essentially, we argue that a firm adopting a differentiation strategy will need to develop unique insights into customers (RMO) for the differentiation strategy to result in higher performance. On this issue, [34] Homburg et al. (2004) argue that product differentiation strategy affects market orientation, which they operationalise as RMO. Furthermore, various empirical studies provide evidence that market orientation is influenced by a firm pursuing a differentiation strategy ([27] Frambach et al. , 2003; [34] Homburg et al. , 2004; [55] Narver and Slater, 1990; [66] Pelham and Wilson, 1996; [74] Slater and Narver, 1996). Thus we hypothesise the following:

H1. Differentiation strategy is positively related to responsive market orientation.

Using internal efficiencies, market-oriented firms create customer value by reducing customers' acquisition and usage costs ([74] Slater and Narver, 1996). Firms adopting a cost-leadership strategy must be market-oriented because they need to understand the perceived customer value to decide whether cost advantages should be transferred to their target market(s) and to determine which aspects of the firm's marketing activities can be reduced without affecting customers' perceived value ([27] Frambach et al. , 2003). Furthermore, firms emphasising activities that seek to understand customer needs and satisfy those needs are more likely to manufacture products that have lower defects, which then should result in lower costs ([66] Pelham and Wilson, 1996). Moreover, [27] Frambach et al. (2003) found that cost-leadership strategy was positively related to customer orientation (i.e. RMO). They contend that understanding the customer is critical in deciding how to decrease the marketing budget in the most cost-effective manner. Therefore, market orientation plays an important role in transmitting the benefits of a cost-leadership strategy to firm performance. Several empirical studies provide evidence that cost-leadership strategy influences market orientation (e.g. [27] Frambach et al. , 2003; [74] Slater and Narver, 1996). Thus, we hypothesise the following:

H2. Cost-leadership strategy is positively related to responsive market orientation.

The existing literature relating to the competitive strategy-firm performance relationship has conceptualised market orientation primarily as a responsive construct. Some authors have alluded to the proactive nature of market orientation in examining its relationship to competitive strategies ([74] Slater and Narver, 1996; [81] Vazquez et al. , 2001). For example, [74] Slater and Narver (1996, p. 163) conceptualise market orientation as including both responsive and proactive elements, but operationalise it primarily as a responsive construct. Here, we argue that PMO is a critical mechanism by which the benefits of differentiation strategy are transmitted to firm performance. The contention raised here is that a differentiation competitive strategy also affects PMO, on the basis of the notion that marketing activities are likely to be influenced by strategic choices ([75] Slater and Olson, 2001). Specifically, a differentiation strategy affects PMO, because this strategy drives a firm to develop not only an intimate understanding of customers (i.e. RMO or unique insights) but also an understanding of their customers' latent needs (i.e. PMO or unique foresights). Furthermore, PMO is becoming more important in the context of firm performance as more and more firms develop the RMO capability. PMO inherently involves exploratory learning that includes searching for a broader range of information and knowledge that allows the firm to move beyond the limitations of experience and engage in experimentation ([5] Atuahene-Gima et al. , 2005). Consequently, firms using PMO engage in scanning the markets more widely ([18] Day, 1994) and working integrally with lead customers ([42] Leonard-Barton, 1995), both of which provide unique foresight into a firm's customers. Thus, we hypothesise the following:

H3. Differentiation strategy is positively related to proactive market orientation.

The essence of PMO is that it leads the firm beyond its existing experience and encourages experimentation, through new knowledge of markets that may be different from the firm's existing market ([80] Tsai et al. , 2007). Proactively market-oriented firms work closely with lead users and engage in experiments, both of which are linked to innovative developments ([43] Lilien et al. , 2002). Therefore, a cost-leadership strategy will lead to higher levels of PMO because proactively market-oriented firms experiment with new technological developments that allow for increased internal efficiencies. Furthermore, focusing on future customer needs may also alert the firm to new market and technology developments and increase its abilities to integrate new developments into lowering costs. In addition, because it is important that firms adopt both competitive strategies concurrently, these new technologies enable the firm to simultaneously engage in such activities as new product development whilst emphasising cost-leadership. Thus, we hypothesise the following:

H4. Cost-leadership strategy is positively related to proactive market orientation.

RMO, PMO and firm performance

The key premise of the RB theory is that competitive advantage lies in the heterogeneous firm-specific capabilities held by firms ([52] Montgomery and Wernerfelt, 1988). Moreover, RB theory contends that capabilities are the most important source of an organisation's success ([18] Day, 1994). Firm capabilities have gained widespread attention in recent years because they are difficult to duplicate ([20] Dierickx and Cool, 1989). Similarly to [5] Atuahene-Gima et al. (2005), we conceptualise RMO and PMO as capabilities. Market orientation has been linked to the organisational response to consumers' needs and wants (e.g. [69] Ruekert, 1992), and has been argued to be a source of competitive advantage that influences firm performance (e.g. [36] Jaworski and Kohli, 1993; [55] Narver and Slater, 1990). Although there is a debate regarding the direct effects of market orientation on firm performance (e.g. [48] Matear et al. , 2002), we adhere to the assertion that there has been a broad consensus regarding the positive relationship between market orientation and firm performance (e.g. [38] Kirca et al. , 2005). For example, a meta-analysis conducted in 23 countries in five continents suggests that the relationship between market orientation and firm performance is positive and consistent ([11] Cano et al. , 2004). However, previous conceptualisations have viewed market orientation primarily as a responsive capability (RMO), attempting only to understand customers' expressed needs and satisfying them (e.g. [40] Kohli and Jaworski, 1990; [55] Narver and Slater, 1990). Nevertheless, there is strong support for a positive relationship between RMO and firm performance. Thus, we hypothesise the following:

H5. Responsive market orientation is positively related to firm performance.

Market orientation can be a source of competitive advantage when it is rare in a firm's industry ([6] Barney, 1991). With the widespread research on RMO and its relationship to firm performance, firms are increasingly investing in being market-oriented in the traditional notion of RMO. Consequently, as RMO becomes common, in the long run, competitors can imitate it ([56] Narver et al. , 2000). Therefore, [57] Narver et al. (2004) argue that to develop and maintain a competitive advantage, firms increasingly must complement RMO with PMO. Furthermore, to understand and discover latent needs and to respond with new solutions, proactively market-oriented firms are more likely to scan the markets more widely than are firms that focus on RMO ([18] Day, 1994) and work integrally with lead customers ([42] Leonard-Barton, 1995). Owing to the more sophisticated market-sensing and linking processes involved in PMO, as opposed to RMO, we argue that firms adopting PMO are more likely to understand not only the expressed needs but the latent needs of the customers, allowing firms, for example, to uncover new market opportunities and to undertake market experiments to improve marketing strategies ([5] Atuahene-Gima et al. , 2005), all of which affect customer value and firm performance. Thus, we hypothesise the following:

H6. Proactive market orientation is positively related to firm performance.

Method

Research design

The mail survey was comprised of pre-existing scales found in the literature. RMO was measured using [19] Deshpandé et al. 's (1993) measure; PMO by [57] Narver et al. 's (2004) measure and differentiation and cost-leadership competitive strategies by [27] Frambach et al. 's (2003) measures. Measures were anchored with scale poles from 1=strongly disagree to 7=strongly agree. Firm performance was measured with [35] Hooley et al. 's (2005) measure using sales volume, market share, overall profit, profit margins and return on investment compared with competitors. Anchors were 1=much worse than competitors to 7=much better than competitors. Following [82] Venkatraman and Ramanujam's (1986) two-step method of pretesting, the survey was pretested with five marketing academics and doctoral students in marketing and with 17 senior managers from the sample frame. The sample frame was obtained from databases of Australian firms that are publicly available on the internet. These websites provided public access to the mailing addresses of more than 8,000 firms across Australia. A systematic sampling process was used because of its representativeness and ease of implementation. For example, every fourth firm on the databases was chosen as the sample unit for the mail survey to be sent.

For the final survey, 1,400 key informants in organisations across various industries listed on a publicly available website were mailed the surveys. Of the 1,400 surveys mailed, 189 useable surveys were returned, resulting in a response rate of 13.5 percent. This response rate is within the 10-20 per cent range for top management survey response rates ([49] Mennon et al. , 1996). The RB theory does not place any significant emphasis on firm size because that measure is primarily focused on resource-based rather than monopoly-based advantages ([21] Fahy, 2002). Therefore, the population of interest included all firms (SMEs)[1] , focusing on firms having fewer than 200 employees. Furthermore, the industries represented included software, construction, automotive, engineering and mining. The majority of the firms were in the services industry (63.6 per cent) and the remainder were in the manufacturing industry (36.4 per cent). Moreover, 70 per cent of the firms were in the business-to-business sector, whilst 24 per cent had both businesses and individual customers. The firm-level variables in this study are strategic (i.e. firm capabilities, competitive strategies) and as such senior executives are appropriate informants, because they have the greatest insight into the firm's strategic practices ([14] Child, 1997). A descriptive analysis suggested that 47 per cent were managing directors, 24 per cent chief executive officers, 13 per cent were owners and the remaining 16 per cent of the respondents included general managers and marketing managers. To verify the respondents' knowledge of the key constructs, each survey instrument contained a self-report item on the informant's knowledge and confidence of the area being studied ([41] Kumar et al. , 1993). The final sample showed a high mean score of 5.36 on a scale of 1-7, where 1=not confident and 7=very confident.

Analysis procedures

The hypotheses were tested using partial least squares (PLS), a multivariate, variance-based technique used for estimating path models involving latent constructs indirectly observed by multiple indicators. Moreover, because PLS focuses on the explanation of variance using ordinary least squares, this technique is better suited for investigating relationships in a predictive rather than confirmatory fashion ([24] Fornell and Bookstein, 1982). In this study, our primary concern is with maximizing the prediction of dependent endogenous constructs using exogenous constructs, including strategy to PMO-RMO and PMO-RMO to firm performance. Because we used PLS, we also avoided the necessity of a large sample size, as research similar to this study has done as well. For example, [63] O'Cass and Ngo (2007b) used a sample size of 180, which is comparable to this study (189 respondents). Furthermore, PLS is not sensitive to the assumptions of normality, thus circumventing the necessity for the multivariate normal data. Moreover, the preliminary analysis indicated that some items had moderate to high levels of skew and kurtosis, indicating that PLS was suitable procedure ([63] O'Cass and Ngo, 2007b). Finally, PLS is increasingly being used in marketing literature (e.g. [39] Klemz et al. , 2006; [62], [63] O'Cass and Ngo, 2007a, b; [77] Slotegraaf and Dickson, 2004)[2] to analyse data to test theory in marketing strategy.

Also, because PLS is not based on distributional assumptions, providing definite statistics tests are contrary to the soft modelling philosophy, the evaluation of the model is as such not based on any single statistical index, but uses several indices ([22] Falk and Miller, 1992). These indices are used and assessed on the basis of their ability to explain the data congruence with hypotheses and their precision. As a result, we used several indices to assess the hypotheses (see [25] Fornell and Cha, 1994): r2 , average variance explained (AVE), average variance accounted (AVA), regression weights and loadings. Furthermore, we also assessed important indices such as the variance explained by the paths and critical ratios for the inner model. Because the hypotheses are one-tailed, to reject a null hypothesis at the 0.05 level the observed t -value should be greater than 1.645 and 0.01 at 1.96 ([58] Ngo and O'Cass, 2008). Moreover, two sets of linear relations specify the model: the outer model relationships between the latent and the manifest variables and the inner model where the hypothesised relationships ( H1 -H6) between the latent variables are specified ([58] Ngo and O'Cass, 2008).

Measurement issues

Convergent and discriminant validity

Given that a single source of information can introduce spurious relationships among the variables, and as this study collected data via single source methods (self-report scales), the need to test for common method variance was evident. This test was conducted by adopting Harmon's one-factor test ([64] O'Cass and Pecotich, 2005), in which all items, presumably measuring a variety of different constructs, were subjected to a single factor analysis. The results indicated that one factor was not present (or a common factor underlying the data) and because the majority of the variance was not accounted for by one general factor, we determined that a substantial amount of common method variance was not evident.

Assessing measurement validity is important. [26] Fornell and Larcker (1981) argue that convergent validity is achieved if the AVE in items by their respective constructs is greater than the variance unexplained (i.e. AVE>0.50). Therefore, to assess the constructs, convergent validity, the squared multiple correlations from the factor analysis were used to calculate the average variance explained. All factors had an AVE greater than or equal to 0.50, therefore meeting the recommended criteria for convergent validity. Table I [Figure omitted. See Article Image.] presents the AVEs, composite reliabilities and component loadings for each construct.

Having computed the composite measures, we next assessed discriminant validity as recommended by [29] Gaski and Nevin (1985) and [61] O'Cass (2002). First, the discriminant validity is exhibited if the square root of the AVE is greater than all corresponding correlations ([26] Fornell and Larcker, 1981). As shown in Table II [Figure omitted. See Article Image.], these values are consistently greater than the off-diagonal correlations, suggesting discriminant validity. Second, [29] Gaski and Nevin (1985) and [61] O'Cass (2002) suggest that satisfactory discriminant validity among constructs is obtained when the correlation between two constructs is not higher than their respective reliability estimates. Table II [Figure omitted. See Article Image.] demonstrates that no individual correlations (which ranged from 0.72 to 0.18) are higher than their respective reliabilities (which ranged from 0.94 to 0.85), indicating satisfactory discriminant validity.

Hypotheses testing

Because the measurement models were satisfactory, we applied PLS to test the hypothesised relationships depicted in H1 -H6 . We used the bootstrapping procedure in PLS Graph to test the significance of the regression coefficients. Table III [Figure omitted. See Article Image.] presents the path coefficients, variance due to path (recommended to be greater than 0.015), r2 values (recommended to be greater than 0.10) and critical ratios (CR) (recommended to be greater than 1.645 for a one-tailed test). Differentiation strategy positively affects RMO (path=0.36, CR=3.55) and cost-leadership positively affects RMO (path=0.22, CR=2.28). Hence, H1 and H2 are supported. The findings also suggest that differentiation affects PMO (path=0.41, CR=4.44) and cost-leadership positively affects PMO (path=0.20, CR=2.77). Hence, H3 and H4 are supported. Lastly, both RMO (path=0.20, CR=1.86) and PMO (path=0.40, CR=4.01) positively affect performance[3] . Hence, H5 and H6 are supported. Furthermore, all the r2 are greater than 0.10 (RMO=0.22, PMO =25, and performance=0.33) and the AVA is 0.26. In summary, the findings suggest that all hypotheses are supported.

Indirect and direct effects

Additional or supplementary findings can be an important component of research, as seen in [34] Homburg et al. (2004). In their work, they undertook further analysis to investigate the indirect effects of differentiation strategy on performance through market orientation. We build on this philosophy by exploring the effect of strategy on performance through market orientation. Therefore, in the same vein as [34] Homburg et al.(2004), we analysed the indirect effects of the competitive strategies through RMO and PMO, which highlights the intervening role of market orientation. This allows us to understand the role of market orientation in the implementation of competitive strategies - specifically, whether the indirect effects of competitive strategies on the performance through RMO and PMO are important when compared with the direct effects of strategy on performance.

PLS is a well-established method for examining the direct and indirect effects of several variables simultaneously. The indirect effect is determined by understanding the product of a particular variable on a second variable through its effect on a third intervening or mediating variable ([1] Alwin and Hauser, 1975). Furthermore, "the sum of the direct and indirect effect reflects the total effects of the variable on the endogenous variable" ([60] O'Cass, 2001, p. 56). Table IV [Figure omitted. See Article Image.] illustrates that the indirect effects are stronger than the direct affects. The results show that, first, in the context of RMO as an intervening variable, the effect of differentiation on performance is 0.04, the indirect effect on performance is .08 and the total effects are 0.12. Second, in the context of RMO as an intervening variable, the effect of cost-leadership on performance is 0.00, the indirect effect on performance is 0.06 and the total effects are 0.06. In the context of PMO as an intervening variable, the effect of differentiation on performance is 0.04, the indirect effect on performance is 0.13 and the total effects are 0.17. Last, in the context of PMO as an intervening variable, the effect of cost-leadership on performance is 0.00, the indirect effect on performance is 0.06 and the total effect is 0.06. Collectively, these results highlight the importance of indirect effects and the intervening role of RMO and PMO between competitive strategies and performance.

Furthermore, we applied [8] Baron and Kenny's (1986, p. 1177) four-step method for identifying mediation to examine the indirect effects and to corroborate the results of PLS. The results support those obtained through PLS, showing that when the independent variable differentiation and the mediator RMO were regressed on firm performance, differentiation became non-significant ( p >0.1), whilst RMO positively affected performance (p<0.001). When the independent variable cost-leadership and the mediator RMO were regressed on performance, cost-leadership became non-significant (p >0.5) whilst RMO positively affected performance (p<0.001). When the independent variable differentiation and the mediator PMO were regressed on performance, differentiation became non-significant (p >0.5), whilst PMO positively affected performance (p<0.001). Last, when the independent variable differentiation and the mediator PMO were regressed on firm performance, differentiation became non-significant (p >0.5) whilst PMO positively affected performance (p<0.001).

Discussion and implications

This study is couched in the research addressing strategy implementation, and it adds to this research domain by conceptualising and testing the antecedents and consequences of RMO and PMO. Particularly, by integrating the strategy implementation approach and the RB theory, this study examined the role of two key marketing capabilities, i.e. RMO and PMO, in the competitive strategies-firm performance relationship. Therefore, the current study extends the works of [27] Frambach et al. (2003) and [34] Homburg et al. (2004), and contributes to the strategy implementation literature by examining the effects of competitive strategies on both PMO and RMO. This model essentially shows:

- a direct link between differentiation (H1 ) and cost-leadership strategies (H2 ) on RMO;

- a direct link between differentiation (H3 ) and cost-leadership (H4 ) on PMO; and

- a direct link between RMO (H5 ) and PMO (H6 ) on performance.

This study applied PLS to analyse complex relationships by simultaneously examining both the direct and indirect effects. The findings support the conceptual model. Differentiation and low-cost strategies drive RMO and PMO, and RMO and PMO in turn affect firm performance. Furthermore, the findings suggest that the treatment of market orientation as RMO and PMO is important, as they can fully capture the benefits of the competitive strategies and, more importantly, act as critical mechanisms for transmitting the benefits of competitive strategies to performance.

The findings contribute in several ways to the market orientation literature, specifically the emerging literature related to RMO and PMO (i.e. [5] Atuahene-Gima et al. , 2005; [16] Coltman et al. , 2008; [57] Narver et al. , 2004; [70] Saini and Johnson, 2005). The study confirms the argument that RMO and PMO are statistically related but theoretically distinct constructs. Furthermore, it provides evidence that RMO and PMO are capabilities that are important sources of competitive advantage and uniquely contribute to performance ([5] Atuahene-Gima et al. , 2005). Therefore, it is possible to pursue RMO or PMO individually, with some success. Last, it validates the claim that PMO should have higher impact on performance than RMO, as [57] Narver et al.(2004) and [16] Coltman et al. (2008) argue. For example, the relative importance of PMO is evidenced by the higher coefficient between PMO and performance (0.40) than the coefficient between RMO and performance (0.20). This further validates the argument that industry and customer foresight (PMO) may be the most important component of market orientation ([16] Coltman et al. , 2008) with empirical evidence. It is important, however, that as the findings suggest that these capabilities together fully intervene between competitive strategies and performance, for optimal performance outcomes, firms must simultaneously invest in and nurture both RMO and PMO when implementing competitive strategies.

Extant literature that has related PMO to performance (i.e. [5] Atuahene-Gima et al. , 2005; [57] Narver et al. , 2004) has only related this capability to one specific performance outcome: new product success. However, this study conceptualises performance as comprising five items relating to market share and financial performance and empirically finds a positive relationship between PMO and performance. Although this finding has been extensively confirmed in the context of RMO, this study is amongst the first to empirically illustrate the essential nature of PMO as it affects various important broader performance outcomes.

The findings also show that differentiation strategy had a stronger effect on RMO and PMO (as evidenced by the coefficient on both RMO, 0.36, and PMO, 0.41), than did cost-leadership strategy (on RMO, 0.22, and PMO, 0.20). This is consistent with the argument that market-oriented firms are inherently externally focused, emphasising understanding customer needs (both expressed and latent) and attempting to satisfy them better than their competitors ([55] Narver and Slater, 1990; [74] Slater and Narver, 1996; [81] Vazquez et al. , 2001). This does not discount the pursuit of cost-leadership strategy, but it does show that differentiation is more likely to be more successfully implemented with RMO and/or PMO.

Marketing scholars have called for adopting the strategy implementation approach ([10] Bonoma, 1984; [13] Chebat, 1999). In the context of competitive strategies and RMO and PMO, we contribute to the discussion by showing that the extent of market orientation in a firm must be congruent with the competitive strategy pursued (see also [17] Conant et al. , 1990) to ensure successful implementation. This study contributes to the strategy implementation literature by finding empirical support for this approach. In fact, the findings strongly support the strategy implementation approach, as the competitive strategies only affect performance through RMO or PMO. Essentially, the findings suggest that competitive strategies create and shape RMO and PMO, which then result in increased performance outcomes. Furthermore, the strategy implementation literature is increasingly emphasising organisational capabilities, as opposed to traditional organisational dimensions such as organisational structure, as key intervening dimensions between strategy and performance. This study conceptualises RMO and PMO as capabilities, and because the findings illustrate the fully intervening nature of these capabilities, they give credence to the RB theory's claim that capabilities are critical for strategy implementation.

Practical implications

There are several implications for practice. First, the empirical findings present managers with an insight into the role of firm capabilities in the competitive strategies-performance relationships. It provides a viable path for building competitive advantage. For example, little research exists on the interrelations among competitive strategies, capabilities (specifically RMO and PMO) and performance. The findings suggest that these interrelationships collectively serve to provide performance outcomes and therefore are important to understand.

Second, strategy implementation is a valid route to organisational performance. Specifically, the development of RMO and PMO is essential for the effectiveness of competitive strategies, suggesting that in their quest for competitive advantage, managers must not only develop competitive strategies but simultaneously develop capabilities that act as key mediators. Therefore, an important message from the evidence to managers is that having competitive strategies in the absence of RMO and PMO is likely to be substantially less effective in facilitating the firm's achievement of relevant performance outcomes. Third, the findings suggest that managers should emphasise strategy implementation over strategy formulation; strategy implementation is more likely to be effective because it is more operational than the intellectual process underlying the strategy formulation approach ([34] Homburg et al. , 2004).

Last, the manner in which market orientation is conceptualised has implications for practice. Whereas market orientation has traditionally been viewed as being responsive, PMO highlights the importance of understanding latent needs. This approach encourages organisations to adopt a holistic view of market orientation that includes proactively understanding customers' latent needs in examining the influence of competitive strategies on performance.

Limitations and future research directions

Applying the strategy implementation approach, this study examines two important capabilities as intervening variables. However, other capabilities may play an important intervening role. A firm's ability to create, disseminate and utilise knowledge, or organisational learning , has been argued to be important. For example, [71] Sinkula et al. (1997, p. 316) suggest that "cultivating a learning culture may indeed become one of the primary means to attain and maintain a competitive advantage". Furthermore, because the business environment is characterised by technological uncertainty, competitive advantage depends on the firm's capability to adopt new technologies in a strategic manner (e.g. [67] Porter, 2001). Therefore, a firm's ability to understand and respond to new technologies, or technological opportunism, is critical ([78] Srinivasan et al. , 2002). Lastly, leadership is important in implementing strategy. Future research could examine the role of strategic leadership capability ([84] Voola et al. , 2004) in the competitive strategies-performance relationships.

This study emphasised two competitive strategies: differentiation and cost-leadership. There is scope for future research to include focused competitive strategy and simultaneously examine the concurrent effects of all three competitive strategies on firm capabilities and performance. Furthermore, another dominant conceptualisation of competitive strategies is that of [50] Miles and Snow (1978) typology, which has been extensively applied in marketing (e.g. [54] Morgan et al. , 2003). Therefore, understanding the relationships among [50] Miles and Snow's (1978) typology, RMO, PMO and performance would provide an alternative perspective and would be a fruitful extension to the strategy implementation approach.

Conclusion

We argue that businesses strategies influence two key marketing capabilities: RMO and PMO, which in turn influence performance. The findings support this contention. These arguments and findings contribute to the strategy implementation and the RB theories, especially the market orientation literature, by empirically showing that RMO and PMO fully capture the benefits of the competitive strategies and act as fundamental mechanisms for transmitting the benefits of competitive strategies to performance. Therefore, this research contributes to the identified need for work in the area by [85] Vorhies and Morgan (2003) who contend that organising marketing activities in ways that successfully enable business strategy implementation is a difficult challenge facing managers, and yet researchers know little about how marketing activities should be organised to enable business strategy implementation.

Footnote

1. Our focus on SMEs and the industries represented is consistent with a number of studies found within the literature that reported comparable sample size, and/or firm size focus (SMEs), and/or industries represented within samples. Such studies, like this study, did not specifically test for differences across firm size or industry (see, for example, [63] O'Cass and Ngo, 2007b; [27] Frambach et al. , 2003).

2. We followed similar procedures outlined in the literature by a number of scholars who also studied various aspects of either strategy or capability and performance issues, with similar sampling procedures and sample sizes and all adopted PLS for data analysis (see, for example, [63] O'Cass and Ngo, 2007b; [77] Slotegraaf and Dickson, 2004; [88] White et al. , 2003).

3. Moreover, [33] He and Wong (2004) highlight the issue of ambidexterity in the context of fit as matching and fit as moderating. Utilising their procedures, our regression results show that there is evidence for fit as moderating, but no evidence for fit as matching. As such, there is evidence of ambidexterity in firms pursing both RMO and PMO. We thank one of the reviewers for highlighting these procedures.