INTRODUCTION
Market orientation (MO), which is defined as an approach in corporate culture that places the priority on customer value and highlights staying close to customers, is well acknowledged as a key strategic resource that can improve firm performance (Hult, Ketchen, & Slater, Reference Hult, Ketchen and Slater2005; Slater & Narver, Reference Slater and Narver1998). Yet, firms often find it difficult to capitalize on MO (Cano, Carrillat, & Jaramillo, Reference Cano, Carrillat and Jaramillo2004; Ellis, Reference Ellis2006; Kirca, Jayachandran, & Bearden, Reference Kirca, Jayachandran and Bearden2005). This is due to the fact that MO does not automatically improve firm performance; instead, to achieve higher performance through adopting MO a firm should implement appropriate supporting processes (Hult et al., Reference Hult, Ketchen and Slater2005; Murray, Gao, & Kotabe, Reference Murray, Gao and Kotabe2011). Thus, ‘simply assessing the direct link between MO and performance is not fruitful; rather, the key question must be [asked is] what are the processes by which MO affects performance’ (Zhou, Li, Zhou, & Su, Reference Zhou, Li, Zhou and Su2008: 985). In other words, it is vital to clarify the mediators of the relationship between MO and firm performance (Im & Workman, Reference Im and Workman2004; Wei & Lau, Reference Wei and Lau2008).
The resource-strategy-performance framework indicates that resources contribute to firm performance through supporting appropriate value-enhancing strategies (Ketchen, Hult, & Slater, Reference Ketchen, Hult and Slater2007). Drawing on this framework, we argue that growth strategy may mediate the relationship between MO and firm performance. Specifically, growth can increase a firm's visibility and prestige, achieve economies of scale and scope, strengthen its ability to manage environmental shocks, and enhance its performance (Chandler, Reference Chandler1990; Hannan & Freeman, Reference Hannan and Freeman1984). Although MO enables a firm to identify growth opportunities (Murray, Gao, Kotabe, & Zhou, Reference Murray, Gao, Kotabe and Zhou2007), without a growth strategy in place the firm can hardly take advantage of these opportunities to capitalize on MO and then achieve higher performance. Growth strategy, accordingly, may act as a key mediator of the relationship between MO and firm performance.
Extant studies have examined the mediating effects of a range of customer- and innovation-related factors such as customer loyalty and innovativeness on the MO-performance linkage, yet few have investigated the mediating role played by growth strategy (Kirca et al., Reference Kirca, Jayachandran and Bearden2005). Because customer- and innovation-related factors only partially mediate the relationship between MO and firm performance, they cannot completely illustrate the processes through which MO affects firm performance (Kirca et al., Reference Kirca, Jayachandran and Bearden2005). Thus, scholars must uncover the role played by other potential mediators such as growth strategy (Im & Workman, Reference Im and Workman2004; Wei & Lau, Reference Wei and Lau2008). Consequently, the lack of research taking growth strategy as a mediator of the MO-performance linkage represents a serious gap (Gebhardt, Carpenter, & Sherry, Reference Gebhardt, Carpenter and Sherry2006).
Moreover, successful implementation of any strategy depends on factors such as resource commitments and the ability to overcome resistance (Lockett, Wiklund, Davidsson, & Girma, Reference Lockett, Wiklund, Davidsson and Girma2011; Penrose, Reference Penrose1959). Although MO is a catalyst for growth strategy, it alone is not sufficient to support the strategy; rather, its effect on growth strategy is contingent on factors, which facilitate the fulfillment of resource requirements and help to overcome resistance. Given that a firm's external connections can function as such factors (Luo, Huang, & Wang, Reference Luo, Huang and Wang2013; Peng & Luo, Reference Peng and Luo2000), this study argues that external connections may moderate the linkage of MO to growth strategy. Support for this view contributes to the MO literature by showing that the implications of MO are embedded in a firm's external connections. However, while scholars have called for testing how the matters of MO are contingent on external connections (Zhou et al., Reference Zhou, Li, Zhou and Su2008), few studies have tested the moderating effects of external connections on the relationship between MO and growth strategy, which is another research gap.
This study addresses these gaps. In particular, market and product expansions are two key engines of growth, yet they differ in resource requirements and suffered resistance (Mishina, Pollock, & Porac, Reference Mishina, Pollock and Porac2004). Hence, this study employs growth strategy that involves market and product expansion strategies. And, as the most important types of external connections for a firm, political and business ties function differently. Political ties help a firm obtain regulatory resources and overcome resistance generated by institutional factors (Li & Zhang, Reference Li and Zhang2007; Sheng, Zhou, & Li, Reference Sheng, Zhou and Li2011), whereas business ties facilitate acquiring market resources but offer little help in addressing resistance generated by institutional factors (Park & Luo, Reference Park and Luo2001; Su, Xie, & Wang, Reference Su, Xie and Wang2015). These two types of external connections are likely to moderate the MO-growth strategy linkage in different ways, which calls for investigating external connections including political and business ties. Overall, this study builds a conceptual model, as shown in Figure 1, to examine the mediating effects of market and product expansion strategies on the relationship between MO and firm performance and the moderating effects of political and business ties on linkages between MO and market and product expansion strategies, respectively.
Figure 1. The conceptual model
THEORETICAL BACKGROUND AND HYPOTHESES
MO and Firm Performance
Based on the central idea that to achieve sustained success a firm should identify and satisfy customers’ needs more effectively than its competitors (Kotler, Reference Kotler2002), MO highlights that a firm should thoroughly understand existing and potential customers and competitors as well as inter- functionally coordinate its resources and activities to continuously create and maintain superior customer value (Slater & Narver, Reference Slater and Narver1994, Reference Slater and Narver1998). Hence, MO has three subcomponents: customer orientation (understanding customers’ needs and wants), competitor orientation (understanding rivals’ strengths and weaknesses and how they satisfy customers’ needs and wants), and inter- functional coordination (the firm-wide use of resources in creating superior customer value) (e.g., Narver & Slater, Reference Narver and Slater1990; Slater & Narver, Reference Slater and Narver1998).[Footnote 1]
It is well known that a firm's competitive advantage stems from valuable, rare, inimitable, and non-substitutable resources (Barney, Reference Barney1991). MO focuses on understanding and satisfying customers and provides insight into how to enhance customer value, enabling a firm to better serve its target markets (Zhou, Kin, & Tse, Reference Zhou, Kin and Tse2005). Thus, MO is valuable. And ‘MO is also rare’ (Zhou et al., Reference Zhou, Li, Zhou and Su2008: 988) insofar as the knowledge required to facilitate it remains ‘surprisingly limited’ (Gebhardt et al., Reference Gebhardt, Carpenter and Sherry2006: 37). This is particularly true with regard to firms in emerging economies (He, Brouthers, & Filatotchev, Reference He, Brouthers and Filatotchev2013). Moreover, as ‘MO encompasses a complex set of values and beliefs deeply entrenched in organizational routines’ (Zhou et al., Reference Zhou, Li, Zhou and Su2008: 988), it is difficult to imitate and non-substitutable (Gebhardt et al., Reference Gebhardt, Carpenter and Sherry2006). Thus, MO is viewed as an important strategic resource that can lead to competitive advantage and superior performance (Hult & Ketchen, Reference Hult and Ketchen2001; Hult et al., Reference Hult, Ketchen and Slater2005).
However, extant studies fail to report a consistently positive relationship between MO and firm performance (e.g., Ellis, Reference Ellis2006; Kirca et al., Reference Kirca, Jayachandran and Bearden2005). Although the majority of studies find that MO is positively related to firm performance, others find an insignificant or even negative MO-performance linkage (e.g., Bhuian, Reference Bhuian1997; Sandvik & Sandvik, Reference Sandvik and Sandvik2003). A plausible explanation for these mixed findings is that MO does not automatically lead to higher performance; instead, to achieve its performance benefits appropriate processes must be adopted (e.g., Hult et al., Reference Hult, Ketchen and Slater2005; Murray et al., Reference Murray, Gao and Kotabe2011). Thus, scholars have examined mediators of the relationship between MO and firm performance in order to identify the processes through which MO affects performance (e.g., Im & Workman, Reference Im and Workman2004; Wei & Lau, Reference Wei and Lau2008; Zhou et al., Reference Zhou, Li, Zhou and Su2008).
Scholars have thus far examined the mediating role in the EO-performance linkage played by a range of variables such as customer loyalty, innovativeness and new product development, product quality, and marketing capability (e.g., Im & Workman, Reference Im and Workman2004; Sandvik & Sandvik, Reference Sandvik and Sandvik2003; Zhou et al., Reference Zhou, Li, Zhou and Su2008). In a meta-analysis of prior MO literature, Kirca et al. (Reference Kirca, Jayachandran and Bearden2005) indicated that although extant studies have tested the mediating effects of various customer- and innovation-related factors, they cannot fully illustrate how MO affects firm performance in that customer- and innovation-related factors only partially mediate the MO-performance linkage. As a result, we ‘still have limited knowledge in revealing the exact process through which market orientation influences firm performance’ (Murray et al., Reference Murray, Gao and Kotabe2011: 253), making it imperative to identify other mediators (Gebhardt et al., Reference Gebhardt, Carpenter and Sherry2006; Zhou et al., Reference Zhou, Li, Zhou and Su2008).
The resource-strategy-performance framework states that resources enhance performance through supporting appropriate value-enhancing strategies (Ketchen et al., Reference Ketchen, Hult and Slater2007). Accordingly, to achieve the potential performance enhancement of a strategic resource – MO, a firm should adopt appropriate strategies (Hult et al., Reference Hult, Ketchen and Slater2005; Murray et al., Reference Murray, Gao and Kotabe2011). Since adopting MO enables a firm to identify growth opportunities (Murray et al., Reference Murray, Gao, Kotabe and Zhou2007), the right growth strategy could be a mediator of the relationship between MO and firm performance. However, few studies have investigated the mediating effect of growth strategy (Kirca et al., Reference Kirca, Jayachandran and Bearden2005). Given that the lack of research examining the mediation of growth strategy relative to the MO-performance linkage limits our knowledge on how MO affects firm performance (Gebhardt et al., Reference Gebhardt, Carpenter and Sherry2006), this study conducts such an investigation.
Before identifying the mediators, it is imperative to confirm the relationship between MO and firm performance. Because most extant studies report a positive relationship and the findings of the meta-analyses conducted by both Ellis (Reference Ellis2006) and Kirca et al. (Reference Kirca, Jayachandran and Bearden2005) are positive, we suggest that there is a positive relationship between MO and firm performance. Therefore,
Hypothesis 1: There will be a positive relationship between MO and firm performance.
Growth Strategy and the Mediating Effects
Growth is one of the primary goals of most firms (Mishina et al., Reference Mishina, Pollock and Porac2004), and studies have evidenced the importance of growth (McKelvie & Wiklund, Reference McKelvie and Wiklund2010). Penrose (Reference Penrose1959) highlighted growth as comprising a double-sided strategy of diversifying into new markets and new products within the constraints of a firm's pool of available resources. She further indicated that to grow a firm can enter new markets with current products or introduce new products to current markets. Ansoff (Reference Ansoff1965) and Abell (Reference Abell1980) both found that the combination of markets and products lies at the heart of a firm, which suggests that a firm can grow through expanding along one dimension. Levitt (Reference Levitt1975) also argued that a firm should be the master of certain products for which it seeks markets or the master of markets for which it seeks customer-satisfying products.
Drawing on these studies, Mishina et al. (Reference Mishina, Pollock and Porac2004: 1180) stated that a firm can grow by either ‘extending the market for an existing set of products’ or ‘developing new products for existing markets’. They thereby emphasized the market expansion strategy, which highlights growing though extending markets for existing products, and the product expansion strategy, which facilitates growth by developing new products for existing markets, as two fundamental types of growth strategy.[Footnote 2] It is noteworthy that some firms try to grow by introducing new products to new markets, yet this dual strategy creates significant challenges in terms of gaining and utilizing knowledge pertaining to both new customers and new markets (Penrose, Reference Penrose1959). As a result, firms, especially small and medium-sized enterprises, rarely adopt this strategy (Ansoff, Reference Ansoff1965). Previous studies also report that firms seldom pursue growth through introducing new products to new markets (Abell, Reference Abell1980; Levitt, Reference Levitt1975; Mishina et al., Reference Mishina, Pollock and Porac2004). Hence, these studies identify market and product expansion strategies as two distinct types of growth strategy, whereas the strategy of introducing new products to new markets is not included.
Since market and product expansion strategies, respectively, enable a firm to take advantage of opportunities for market and product expansion generated by MO and thereby achieve higher performance (Mishina et al., Reference Mishina, Pollock and Porac2004; Murray et al., Reference Murray, Gao, Kotabe and Zhou2007), this study argues that they both mediate the relationship of MO to firm performance. Specifically, customer orientation enables a firm to understand target customers, find out whether customers in new markets need existing products (potential market expansion opportunities), and determine whether customers in existing markets have new needs (potential product expansion opportunities) (He et al., Reference He, Brouthers and Filatotchev2013; Slater & Narver, Reference Slater and Narver1994). Competitor orientation aids a firm in understanding its rivals’ strengths and weaknesses and learning how they satisfy customer needs (Zhou et al., Reference Zhou, Kin and Tse2005). This helps to estimate whether potential expansion opportunities can be pursued from the competition's perspective (Kirca et al., Reference Kirca, Jayachandran and Bearden2005; Slater & Narver, Reference Slater and Narver1998). And, by utilizing firm-wide resources to create superior customer value, inter-functional coordination assists a firm in selecting potential opportunities based on its resource conditions (Ellis, Reference Ellis2006; Hult et al., Reference Hult, Ketchen and Slater2005). In summary, MO enables a firm to identify market and product expansion opportunities (He et al., Reference He, Brouthers and Filatotchev2013; Murray et al., Reference Murray, Gao, Kotabe and Zhou2007).
However, without deploying a growth strategy to take advantage of these opportunities, a firm can hardly capitalize on MO to achieve higher performance. To make good use of market expansion opportunities, the firm needs to adopt a market expansion strategy; in turn, to capture product expansion opportunities, it should employ a product expansion strategy (Mishina et al., Reference Mishina, Pollock and Porac2004). Accordingly, the MO-performance linkage is a mediated one in which MO facilitates a firm adopting both market and product expansion strategies to pursue identified market and product expansion opportunities and then achieve the performance benefits of MO. Therefore,
Hypothesis 2a: The relationship between MO and firm performance will be mediated by market expansion strategy.
Hypothesis 2b: The relationship between MO and firm performance will be mediated by product expansion strategy.
External Connections and the Moderating Effects
Although MO serves as a catalyst for growth strategy, its relationship with growth strategy is contingent on factors that help meet the resource requirements and overcome resistance of growth strategy (Lockett et al., Reference Lockett, Wiklund, Davidsson and Girma2011; Penrose, Reference Penrose1959). External connections can function as such factors (Luo et al., Reference Luo, Huang and Wang2013; Peng & Luo, Reference Peng and Luo2000), and they thereby may moderate the relationship of MO to growth strategy. Since political and business ties, two key types of external connections play distinct role in acquiring resources and coping with resistance to growth strategy (Sheng et al., Reference Sheng, Zhou and Li2011; Wu, Reference Wu2011), this study tests their respective moderating effects.
Political ties reflect ‘a firm's informal social connections with government officials’, and business ties refer to ‘a firm's informal social connections with business organizations’, such as customers, suppliers, and competitors (Sheng et al., Reference Sheng, Zhou and Li2011: 2). Both ties are important for firms, but they function differently (Su et al., Reference Su, Xie and Wang2015; Wu, Reference Wu2011). Specifically, political ties help firms obtain regulatory resources. Governments manage economic activities through setting regulatory policies and devising industry development programs (He & Tian, Reference He and Tian2008). Political ties provide access to regulatory resources distributed by these policies and programs (Li & Zhang, Reference Li and Zhang2007). In addition, political ties improve a firm's political legitimacy by reassuring government officials or agencies that its actions are proper and desirable (Sheng et al., Reference Sheng, Zhou and Li2011). Political legitimacy aids the firm in receiving government endorsements and favorable treatments, and political ties help the firm overcome resistance to growth generated by institutional factors (Su et al., Reference Su, Xie and Wang2015).
In contrast, business ties aid firms in acquiring market resources (Park & Luo, Reference Park and Luo2001). For example, close relations with customers lead to improved consumer insights and create customer loyalty, higher sales volume, and reliable payment schedules; interactions with suppliers promote the acquisition of quality materials and superior services, and ensure timely and reliable delivery; and good connections with competitors facilitate possible inter-firm collaboration and reduce the possibility of cut-throat responses to a firm's actions such as launching new products (Li & Zhou, Reference Li and Zhou2010; Peng & Luo, Reference Peng and Luo2000; Shu, Page, Gao, & Jiang, Reference Shu, Page, Gao and Jiang2012). Hence, business ties enable a firm to benefit from sharing market resources. However, business ties do little to overcome resistance to growth caused by institutional factors, in that such ties cannot affect them directly (Sheng et al., Reference Sheng, Zhou and Li2011; Su et al., Reference Su, Xie and Wang2015).[Footnote 3]
This study expects that political ties positively moderate the relationship between MO and market expansion strategy. Specifically, market expansion strategy facilitates growth through extending markets for existing products (Mishina et al., Reference Mishina, Pollock and Porac2004). The key challenge of this strategy is coping with resistance to new entrants in new markets (Lockett et al., Reference Lockett, Wiklund, Davidsson and Girma2011). Such a resistance is driven by two factors. First, because there are strong differences in institutions such as laws, regulations, and rules between markets; in order to enter a new market a firm must adapt to the institutional requirements of the market, leading to resistance to market expansion strategy. Second, protectionism is a significant obstacle to entering new markets. Protectionism is prevalent in many countries, and it also can exist in a single country, especially in a large emerging economy. For example, Meyer (Reference Meyer2008) indicated that Chinese markets are fragmented and have erected regional barriers against new entrants. Therefore, when entering a market, a firm also needs to overcome resistance due to protectionism.
Due to the resistance to market expansion strategy, whether a firm will adopt the strategy to pursue growth opportunities generated by MO depends on whether it can overcome such resistance. Thus, the facilitating role of MO in helping market expansion strategy succeed is contingent on factors that are important for coping with resistance to this strategy. When a firm has good relationships with government officials and their agencies, it can leverage political ties to cope with resistance caused by institutional differences and protectionism (Luo et al., Reference Luo, Huang and Wang2013; Peng & Luo, Reference Peng and Luo2000). The firm accordingly is able to leverage MO to support its market expansion strategy and achieve a strong relationship between MO and that strategy. In contrast, when the firm lacks political ties, it cannot overcome resistance to entering new markets by leveraging political ties. Such a firm, therefore, is less likely to employ a market expansion strategy to pursue opportunities generated by MO. Hence, the facilitations of MO to market expansion strategy cannot be easily achieved, leading to a weak linkage of MO to market expansion strategy. Overall, as political ties contribute to overcoming resistance to entering new markets, they help a firm employ a market expansion strategy to capture opportunities generated by its MO. Therefore,
Hypothesis 3a: Political ties will positively moderate the relationship between MO and market expansion strategy.
This study has two reasons to argue that business ties negatively moderate the relationship between MO and market expansion strategy. First, since business ties cannot directly help firms overcome institutional challenges to entering new markets (Sheng et al., Reference Sheng, Zhou and Li2011; Su et al., Reference Su, Xie and Wang2015), they offer very little assistance in overcoming resistance to the market expansion strategy. Second, business ties create social obligations between existing business partners and preclude a firm from entering new markets (Bock, Opsahl, George, & Gann, Reference Bock, Opsahl, George and Gann2012). For example, as strong ties with customers encourage a firm to focus on extant customers, the firm will spend considerable time, resources, and effort in maintaining good connections with them, which limits the time, resources, and effort left for entering new markets. Moreover, customers may worry that the quality of the firm's products and services will decline if the firm serves too many markets; they thereby oppose the firm adopting a market expansion strategy and entering new markets (Rowley, Reference Rowley1997). Hence, a firm with strong business ties is often locked into its current markets and constrained from adopting a market expansion strategy to pursue opportunities identified by MO (Granovetter, Reference Granovetter1985).
Specifically, when a firm has strong business ties, it not only cannot overcome resistance to entering new markets through leveraging business ties, but also suffers from opposition to such a strategy. The firm thereby is less likely to adopt a market expansion strategy to capture market expansion opportunities identified by MO, resulting in a weak MO-market expansion strategy linkage. In contrast, if the firm lacks business ties, it faces less opposition to a market expansion strategy. Accordingly, it is more likely to adopt the strategy to take advantage of market expansion opportunities identified by MO. In other words, a firm with weak business ties is better at leveraging the benefits of MO in support of a market expansion strategy, resulting in a strong relationship between MO and market expansion strategy. Overall, business ties undermine the advantages generated by MO for market expansion strategy. Therefore,
Hypothesis 3b: Business ties will negatively moderate the relationship between MO and market expansion strategy.
Product expansion strategy reflects growth through developing new products for existing markets (Mishina et al., Reference Mishina, Pollock and Porac2004). It does not suffer from resistance to new entrants; instead, the key challenges to its success are identifying real demand in existing markets and developing and launching new products to meet that demand (Lockett et al., Reference Lockett, Wiklund, Davidsson and Girma2011; Penrose, Reference Penrose1959). MO emphasizes staying close to customers and understanding them, it aids firms in identifying real demand and then finding product expansion opportunities (Murray et al., Reference Murray, Gao, Kotabe and Zhou2007). Yet, to capture these opportunities and leverage the advantages of MO in support of a product expansion strategy, firms should be able to develop and launch new products to meet identified demand.
This study argues that political ties negatively moderate the relationship of MO to product expansion strategy for two reasons. First, since regulatory resources offered by political ties can hardly facilitate developing and launching new products (Shu et al., Reference Shu, Page, Gao and Jiang2012), political ties do little to leverage the advantages of MO for product expansion strategy. Second, political ties can lead to organizational inertia against adopting product expansion strategy. Good connections with government officials and their agencies generate political protection, particularly if the officials and agencies advocate rules favorable to a firm (Oliver & Holzinger, Reference Oliver and Holzinger2008). Political protection makes the firm unwilling to develop and launch new products for growth because they may open the firm to competition that political ties cannot control. And, such protection makes the firm be risk-averse and insensitive to environmental changes, which runs counter to developing and launching new products (Wu, Reference Wu2011). Moreover, when it enjoys such protection, the firm feels less pressure to enhance its capabilities (Shu et al., Reference Shu, Page, Gao and Jiang2012). Yet, to develop and launch new products, the firm should improve its capabilities (Li, Su, & Liu, Reference Li, Su and Liu2010). As a result, political ties inhibit the firm from leveraging the benefits of MO for a product expansion strategy.
Particularly, when a firm has strong political ties, it not only cannot leverage political ties to facilitate developing and launching new products, but also suffers from organizational inertia against adopting a product expansion strategy generated by political ties (Oliver & Holzinger, Reference Oliver and Holzinger2008). The firm thereby is less likely to employ a product expansion strategy to pursue growth opportunities generated by MO, which inhibits the contributions of MO to product expansion strategy. In contrast, when a firm lacks political ties, it escapes from the organizational inertia generated by such ties. It accordingly is more likely to adopt a product expansion strategy to pursue opportunities identified by MO. In other words, a firm with weak political ties is better at benefiting from the advantages of MO in support of product expansion strategy. Therefore,
Hypothesis 4a: Political ties will negatively moderate the relationship between MO and product expansion strategy.
Regarding the moderating effect of business ties on the linkage between MO and product expansion strategy, it is expected to be positive because business ties contribute to facing key challenges to product expansion strategy in terms of developing and launching new products in existing markets. On the one hand, business ties aid a firm in acquiring market resources, which can facilitate new product development (Shu et al., Reference Shu, Page, Gao and Jiang2012). Several studies have reported that business ties have a positive impact on new product development (e.g., Gao, Xu, & Yang, Reference Gao, Xu and Yang2008; Wu, Reference Wu2011). On the other hand, business ties help the firm introduce new products into target markets. For example, good connections with customers spur customer loyalty, which is vital to introducing new products to current markets (Park & Luo, Reference Park and Luo2001; Sheng et al., Reference Sheng, Zhou and Li2011). Similarly, providing timely delivery is important when launching new products. Ties with suppliers enable the firm to acquire quality materials, good services, and timely delivery, all of which ensure reliable logistics for launching new products (Peng & Luo, Reference Peng and Luo2000; Shu et al., Reference Shu, Page, Gao and Jiang2012). And, good relationships with competitors discourage cut-throat responses to new product launches (Li & Zhou, Reference Li and Zhou2010; Luo et al., Reference Luo, Huang and Wang2013). Overall, business ties aid the firm in developing and launching new products in existing markets and thereby support the firm benefiting from the advantages of MO in support of product expansion strategy.
When a firm has strong business ties, it can cope with challenges to its product expansion strategy by leveraging business ties to develop and launch new products in existing markets. Thus, the firm is able to employ a product expansion strategy to capture growth opportunities identified by MO. In other words, business ties enable the firm to leverage the benefits of MO for product expansion strategy, leading to a strong linkage between MO and product expansion strategy. In contrast, when a firm lacks business ties, it can hardly overcome the challenges to a product expansion strategy through leveraging business ties. The firm thereby is less likely to adopt the strategy to take advantage of opportunities identified by MO, resulting in a weak MO- product expansion strategy relationship. Therefore,
Hypothesis 4b: Business ties will positively moderate the relationship between MO and product expansion strategy.
METHOD
Sample and Data Collection
This study selected China as its empirical setting for three specific reasons. First, Chinese firms often lack resource-based advantages such as superior technology, thus they compensate by adopting a market-oriented approach (Zhou et al., Reference Zhou, Kin and Tse2005). Moreover, the lack of resource-based advantages brings a sharper focus on the role played by the market-oriented approach. Hence, ‘China offers a rich setting to examine how MO contributes to performance’ (Zhou et al., Reference Zhou, Li, Zhou and Su2008: 990). Second, Chinese firms are actively pursuing growth and therefore represent a good context for testing growth strategies (Deng, Reference Deng2009). Third, the longstanding tradition of using external connections makes China an excellent laboratory in which to examine political and business ties (Sheng et al., Reference Sheng, Zhou and Li2011).
We obtained data through conducting a survey on manufacturing firms from six Chinese provinces (Beijing, Guangdong, Hebei, Henan, Jiangsu, and Shaanxi). We gathered the data in three phases. First, we developed a questionnaire based on previous literature and modified it to reflect actual conditions that firms face in China. These changes were minor, but they ensured the validity of the questionnaire. We then conducted a pilot test with 15 firms, whose responses were excluded from the final study. We revised the questionnaire using feedback from the pilot study. We prepared the questionnaire in English and then translated it into Chinese. We finally had a third party subsequently back-translate the Chinese version. We found no substantial difference between the two translations with respect to the meanings of the scales.
Second, we randomly selected 1,000 manufacturing firms from a list provided by local governments and business research firms in the selected provinces. To increase the response rate, we conducted a telephone inquiry before administering the formal survey. In all, 263 firms agreed to participate in the survey.
Third, we used the direct interview method to obtain responses to our survey instrument. Since this method enables the interviewer to answer respondents’ queries on the spot, prevents a busy executive from delegating the task of filling in the survey to a secretary, and ensures that responses are complete and usable for data analysis, we chose it over a mail survey or an online survey. All interviewers were PhD students and professors in Chinese universities, and most of them had taken part in at least one interview survey. Before embarking on the interview process, interviewers were trained on background information, interview skills, and the exact meaning of every question on the questionnaire. To ensure the reliability of measures, two executives at each firm completed questionnaires separately. First, interviewers showed respondents a letter explaining the intent of the survey and promised to keep responses confidential. Then, they interviewed two executives. The final score of each item was the average value of responses from two executives.
We got responses from 241 firms from October 2009 through March 2010. We deleted responses with missing data, firms in which only one executive responded, and firms in which the two executives’ answers differed significantly. Finally, we obtained usable responses from 212 firms, with an effective response rate of 21.2%.
To check for non-response bias, we compared responding and non-responding firms with respect to major attributes such as firm age and ownership status using t-tests. All t-statistics were insignificant. Moreover, there was no significant difference between the 212 usable firms and the 29 deleted firms. In addition, we split the total sample into two groups based on the times at which they agreed to be interviewed (Armstrong & Overton, Reference Armstrong and Overton1977). A comparison of the two groups revealed no significant difference, indicating that respondents did not differ significantly from non-respondents.
Measures
All questionnaire items, unless stated otherwise, were answered on a five-point scale in which ‘1’ represented ‘strongly disagree’ and ‘5’ represented ‘strongly agree’. The average value of all listed items, a widely used method, is employed to operationalize all multi-item constructs (Kumar, Jones, Venkatesan, & Leone, Reference Kumar, Jones, Venkatesan and Leone2011).
To measure firm performance, each respondent was asked to rate the performance of his/her firm relative to those of the principal competitors over the last three years with respect to return on assets (ROA), return on investments (ROI), and return on sales (ROS). Subjective measures were used for three reasons. First, perceived scales permit comparisons across firms and contexts; second, subjective and objective performance data have high correlations; and third, objective financial data are often not available in China in that firms consider the data confidential and are reluctant to divulge it (Song, Droge, Hanvanich, & Calantone, Reference Song, Droge, Hanvanich and Calantone2005). Thus, subjective measures yield more complete and reliable performance information in China (Su, Peng, Shen, & Xiao, Reference Su, Peng, Shen and Xiao2013).
Following extant studies (e.g., Im & Workman, Reference Im and Workman2004; Murray et al., Reference Murray, Gao, Kotabe and Zhou2007), we measured MO by fifteen items. And, based on Mishina et al. (Reference Mishina, Pollock and Porac2004), we measured both market expansion strategy and product expansion strategy by three items. Moreover, political ties and business ties were measured by items adapted from Li and Zhang (Reference Li and Zhang2007). All measures are shown in Table 1.
Table 1. Standard estimates and alpha coefficients.
Notes: 1The other three items concerning whether a firm devoted substantial resources to maintaining good relationships with (1) customers, (2) suppliers, and (3) competitors were deleted due to low factor loadings. Based on the criteria suggested by Churchill (1979), our six-item measures of business ties have strong content validity.
Control variables. We controlled for six variables. The first one, firm size, was measured by the number of full-time employees on a five-point scale (from 1 = less than 50 to 5 = more than 1,000). Second, we controlled for firm age. Third, we controlled for industry using dummies as textile, metal processing, chemicals, electronics, mechanical, and others. The last three control variables were technological turbulence, market turbulence, and competitive intensity. Their measures adopted from Jaworski and Kohli (Reference Jaworski and Kohli1993) and Zhou (Reference Zhou2006) are also shown in Table 1.
Reliability and Validity
We estimated composite reliability using Cronbach's alpha. Table 1 shows that all alpha values are above the cut-off point of 0.70 (Cronbach, Reference Cronbach and Thorndike1971). A factor loading of 0.70 or more is the suggested level for convergent validity (Fornell & Larcker, Reference Fornell and Larcker1981). As shown in Table 1, only one loading is lower than 0.70 (0.686, the third item for technological turbulence). Moreover, we ran a confirmatory factor analysis to further test composite reliability and convergent validity. Table 1 reports that all composite reliabilities (CR) exceed the 0.70 benchmark and the average variance extracted (AVE) for each construct exceeds the 0.50 benchmark (Fornell & Larcker, Reference Fornell and Larcker1981). Thus, both composite reliability and convergent validity are statistically demonstrated.
To test for discriminant validity, we applied chi-square difference tests to all multi-item constructs in pairs (Fornell & Larcker, Reference Fornell and Larcker1981). The process involves collapsing each pair of constructs into a single model and comparing the resulting fit with that of a two-construct model (Anderson & Gerbing, Reference Anderson and Gerbing1988). The chi-square difference is significant in each case, providing evidence of discriminant validity.
Drawing on Chang and colleagues (2010), we took both the ex ante and ex post approaches to address common method bias. Specifically, we employed various ways suggested by the ex ante approach, such as taking a pilot test to avoid ambiguous items, conducting face-to-face interviews, explaining the intent of the survey, promising to keep responses confidential, and deleting firms with highly different answers to reduce respondents’ personal bias (Podsakoff, MacKenzie, & Lee, Reference Podsakoff, MacKenzie, Lee and Podsakoff2003). Moreover, we used the ex post approach to test for common method bias. This bias makes one general factor account for the majority of covariance among variables (Podsakoff & Organ, Reference Podsakoff and Organ1986). We conducted Harman's one-factor test on all multi-item variables including MO, firm performance, market and product expansion strategies, political and business ties, technological turbulence, market turbulence, and competitive intensity. The test extracted nine factors accounting for 69.56% of total variance, with the first one explaining 32.57%. No single factor is apparent. Thus, common method bias is not a serious issue in this study.
Because the score for each item is the average value of responses from two executives, we tested inter-rater reliability using the correlation coefficient between each variable scored by two executives (Shrout & Fleiss, Reference Shrout and Fleiss1979). All variables show high correlation coefficients (significant at the 0.001 level). Thus, our data has good inter-rater reliability.
RESULTS
Table 2 presents the basic information on each factor and correlations between them.
Table 2. Descriptive statistics and correlation matrix.
Notes: *Significant at 5%; **Significant at 1%.
We used regression analysis to test our hypotheses and entered variables in steps. All incremental R-squares between steps are significant (Finkle, Reference Finkle1998). We then calculated variance inflation factor (VIF) statistics to check for multicollinearity. All VIFs are well below the cut-off point of 10, indicating no major threat of multicollinearity (Neter, Wasserman, & Kutner, Reference Neter, Wasserman and Kutner1985).
To test whether market expansion strategy and product expansion strategy mediate the relationship between MO and firm performance, this study adopted the widely used three-step method suggested by Baron and Kenny (Reference Baron and Kenny1986). First, the dependent variable is regressed on the independent variable. Then, the mediator is regressed on the independent variable. Third, the dependent variable is regressed on both the independent variable and the mediator. To establish mediation, three conditions must hold: first, the independent variable significantly affects the dependent variable in the first equation; second, the independent variable significantly affects the mediator in the second equation; and third, the impact of the mediator on the dependent variable is significant in the third equation, and the effect of the independent variable on the dependent variable is weaker in the third equation than in the first one (Wu, Reference Wu2008).
Table 3 reports the results regarding the test of the mediating effects of market and product expansion strategies. Model 1b shows that the relationship between MO and firm performance is positive (β = 0.260, p < 0.001), which supports Hypothesis 1. Model 2b finds that MO is related to market expansion strategy positively (β = 0.370, p < 0.001), and Model 3b reports that MO is positively related to product expansion strategy (β = 0.473, p < 0.001). In addition, Model 1d finds that the relationships of both market expansion strategy (β = 0.184, p < 0.05) and product expansion strategy (β = 0.196, p < 0.001) to firm performance are positive, and that of MO to firm performance becomes insignificant (β = −0.017, p > 0.10). All criteria regarding mediation thereby are satisfied. We further conducted a Sobel test to check for the mediating effects (Sobel, Reference Sobel1982). The Sobel test value of product expansion strategy is 2.188, and that of market expansion strategy is 2.066. Both values exceed the benchmark of 1.96, confirming the mediating effects of product and market expansion strategies. Thus, Hypotheses 2a and 2b are both supported.
Table 3. Results for the mediating effects of market and product expansion strategies.
Notes: + Significant at 10%; *Significant at 5%; **Significant at 1%; ***Significant at 1‰.
Industry dummies are not included in the table for save space.
Table 4 reports the results pertaining to the moderating effects of political and business ties. Model 4d indicates that the moderating effect of political ties on the relationship between MO and market expansion strategy is positive (β = 0.140, p < 0.05), whereas the moderating effect of business ties on this relationship is negative (β = −0.168, p < 0.01). Model 5d shows that political ties negatively moderate the relationship of MO to product expansion strategy (β = −0.132, p < 0.05), whereas business ties play a positive moderating role (β = 0.285, p < 0.001). Therefore, Hypotheses 3a, 3b, 4a, and 4b all are supported.
Table 4. Results for the moderating effects of political and business ties.
Notes: + Significant at 10%; *Significant at 5%; **Significant at 1%; ***Significant at 1‰.
Industry dummies are not included in the table for save space.
To enhance interpretation of the results of our tests, we plotted the moderating effects of political and business ties. Figure 2 indicates that political ties increase the slope that relates MO to market expansion strategy whereas business ties reduce the slope, in line with Hypotheses 3a and 3b. Figure 3 shows that the linkage between MO and product expansion strategy weakens as political ties increase but becomes stronger as business ties increase. The findings are the same as predicted in Hypotheses 4a and 4b.
Figure 2. The moderating effects of political and business ties on the relationship between MO and market expansion strategy.
Figure 3. The moderating effects of political and business ties on the relationship between MO and product expansion strategy.
DISCUSSION
Theoretical Contributions
This study makes two contributions to the MO literature. First, it enriches our knowledge of how MO affects firm performance. As extant findings on the mediators of the MO-performance linkage fail to fully illustrate the processes through which MO affects firm performance (Kirca et al., Reference Kirca, Jayachandran and Bearden2005), it is imperative to identify new mediators (Im & Workman, Reference Im and Workman2004; Wei & Lau, Reference Wei and Lau2008). Building on the principle of the resource-strategy-performance framework that a firm should take appropriate strategies to capitalize on MO (Hult et al., Reference Hult, Ketchen and Slater2005; Zhou et al., Reference Zhou, Li, Zhou and Su2008), this study finds that growth strategy is an important conduit through which MO influences firm performance. The findings show that, to harness the potential of MO and achieve better performance, a firm should adopt product and market expansion strategies to pursue growth opportunities generated by MO. Thus, this study aids in providing a more fine-grained analysis of how MO affects firm performance and thereby contributes to the MO literature.
Second, our examination on the moderating effects of political and business ties on the MO- growth strategy relationship contributes to understanding how the implications of MO vary with a firm's external connections. Scholars who have suggested that external connections influence the effectiveness of MO strongly call for investigating this question (Zhou et al., Reference Zhou, Li, Zhou and Su2008). This study expects that the effect of MO on growth strategy is contingent on external connections. It finds that the relationship between MO and market expansion strategy is positively moderated by political ties but negatively moderated by business ties, whereas the linkage of MO to product expansion strategy is moderated negatively by political ties but positively by business ties. Hence, in responding directly to the call of these scholars, this study reports that the implications of MO are embedded in a firm's external connections, further improving our understanding of the value of MO.
Overall, by combining mediating and moderating effects in a framework that integrates MO, growth strategy, external connections, and firm performance, this study shows that the implications of MO are more complex than prior studies have indicated. Hence, scholars should expand investigations on the implications of MO through testing other potential mediators and moderators. Without accounting for such complexity in these investigations, key insights into MO may be missed.
In addition, this study contributes to research on firm growth by offering insight into the antecedents of growth strategy. Due to the importance of growth, understanding the drivers of a successful growth strategy is a key research objective (McKelvie & Wiklund, Reference McKelvie and Wiklund2010). Both MO and external connections have strong implications for firms, but the role they play in driving growth strategy has been largely overlooked. This study finds that MO has positive effects on both market and product expansion strategies. Moreover, political and business ties affect the contributions of MO to these two strategies differently. Specifically, the combination of MO and political ties contributes to a market expansion strategy, and that of MO and business ties facilitates a product expansion strategy. These findings indicate that MO as well as political and business ties all are important for growth strategy and they should be appropriately integrated to maximize their benefits. Hence, this study enhances our knowledge on the drivers of growth strategy, in suggesting in particular that firms should leverage MO and political and business ties to facilitate growth through market and product expansions.
Building on the findings above, we also offer two suggestions for future research on firm growth. First, studies should test the interactive role played by a firm's internal and external resources in supporting its growth strategy and facilitating growth. Although scholars state that both internal and external resources are important for firm success, they often focus on them in isolation (Su, Tsang, & Peng, Reference Su, Tsang and Peng2009). This study suggests that a firm should combine internal resources such as MO with external resources, such as external connections, to maximize their contributions to growth strategy. And, such a suggestion has been empirically evidenced by our findings. Second, the antecedents of distinct types of growth strategy differ. For example, this study finds that the market expansion strategy benefits from the interaction of MO and political ties whereas the product expansion strategy benefits from the interaction of MO and business ties. Thus, future research should identify a range of growth strategies and consider their differences to determine how best to facilitate firm growth.
Managerial Implications
This study also yields managerial implications for practice. First, it offers insight into how firms can capitalize on MO. Given that firms often have trouble in translating MO into higher performance (Cano et al., Reference Cano, Carrillat and Jaramillo2004; Ellis, Reference Ellis2006), ‘from a managerial perspective, the explication of the routes through which market orientation influences performance is vital’ (Kirca et al., Reference Kirca, Jayachandran and Bearden2005: 38). This study finds that the positive linkage between MO and firm performance is mediated by growth strategy, in particular market and product expansion strategies. The findings indicate that while MO enables a firm to identify opportunities for growth, in order to capitalize on MO and achieve higher performance, the firm must adopt market and product expansion strategies to take advantage of these growth opportunities. Thus, in addition to focusing on understanding existing and potential customers and competitors as well as inter-functionally coordinating firm resources and activities to continuously create superior customer value (being market oriented), firms should extend existing products into new markets (adopting a market expansion strategy) and develop new products for existing markets (adopting a product expansion strategy) to capitalize on MO. Overall, although nurturing MO is critical for a firm, the firm must have a growth strategy in place to take advantage of its MO.
Second, the findings of this study could guide firms successfully to take market and product expansion strategies. We argue that a firm can adopt market and product expansion strategies to grow, and that both strategies contribute to firm performance (as per the results of Model 1c in Table 3). Hence, for the purpose of facilitating growth, a firm must be able to adopt market and product expansion strategies successfully. This study finds that the positive relationship of MO to market expansion strategy is positively moderated by political ties but negatively moderated by business ties; and, the positive linkage between MO and product expansion strategy is moderated negatively by political ties but positively by business ties. The findings demonstrate that MO aids a firm in identifying market and product expansion opportunities and thereby facilitates the firm in adopting market and product expansion strategies. Accordingly, the firms should focus on MO in support of market and product expansion strategies. Furthermore, the moderating effects of political and business ties indicate that to better harness the potential of MO, the firm also needs to appropriately combine its MO with different types of external connections. Specifically, the firm should integrate MO and political ties to support market expansion strategy, yet it should not combine MO with business ties to pursue this purpose. And, the firm can combine MO and business ties to support a product expansion strategy, but it should not integrate MO with political ties to do so. Overall, MO and political ties make up a proper combination to support a market expansion strategy, and MO and business ties can be useful for a product expansion strategy.
Limitations and Future Research Directions
This study is subject to several limitations. First, because the findings are based on data collected from Chinese firms only, they should be viewed cautiously when generalized to other countries. Second, using cross-sectional data may cast doubt on causal statements derived from empirical findings. Therefore, longitudinal data and associated estimation approaches are needed to address this issue. Third, we encourage researchers to expand the discipline's knowledge on MO through exploring richer sets of mediating and moderating variables that may influence the relationship between MO and firm performance. Finally, we cannot fully rule out the potential impact of common method bias, although we found little trace of it. Procedural methods (i.e., collecting data from multiple sources) and statistical techniques (i.e., taking the latent variable approach) are powerful tools for reducing common method bias (Podsakoff et al., Reference Podsakoff, MacKenzie, Lee and Podsakoff2003). Thus, future research should integrate them to overcome this problem.
We have several suggestions for future research as well. First, because our knowledge of the processes through which MO affects firm performance remains limited (e.g., Murray et al., Reference Murray, Gao and Kotabe2011), future research should further investigate how MO influences firm performance, especially based on the resources-strategy-performance framework. Second, to better understand how to facilitate firm growth, scholars should identify more antecedents of growth strategy. Two suggestions have been provided above. Further research should follow them to investigate how a wider range of antecedents might work. Finally, to draw a more comprehensive picture on the value of a firm's external connections, scholars should distinguish political and business ties in their analyses (e.g., Sheng et al., Reference Sheng, Zhou and Li2011, Wu, Reference Wu2011). This study offers a good threshold and thereby opens the door to further elaborating these factors.
CONCLUSION
This study combines mediating and moderating effects in a framework that integrates MO, growth strategy, external connections, and firm performance. It opens up new perspectives on the MO-performance linkage. We hope that this study lays the foundation for future study of this important domain. Moreover, the interconnections between MO, growth strategy, external connections, and firm performance that we analyze offer particularly rich fields for further study. We thus fully expect scholars to build on and expand the foundation developed here.
