Asia Pacific Journal of Social Science Research

abrn.asia journal

Volume 1, Issue 1(January 2016), PP 1- 6

Open Access

RESEARCH PAPER

OPEN ACCESS

A SEM Analysis of Environment Moderation on Market

Orientation and Performance

Affendy A.H.*¹, Asmat-Nizam², Farid M.S.³

Putra Business School, Universiti Putra Malaysia, Serdang, Malaysia

School of International Studies, Universiti Utara Malaysia, Sintok, Kedah, Malaysia

UNIKL Business School, Universiti Kuala Lumpur, Kuala Lumpur, Malaysia

*Corresponding author: Affendy A.H, Putra Business School, Universiti Putra Malaysia, Serdang, Malaysia. Tel:

+6019-2242888, E-mail: fnd.ahas.gmail.com

Abstract

There has been relatively little research that examines the relationship between strategic orientations,

such as market orientation and their consequences on firm performance in developing countries. This

research represents an attempt to do so from the Malaysian perspectives. This research examines the

relationships between market orientation and firm performance and on the role of external

environment factors as a moderator between market orientation and business performance

relationship. The consideration of putting moderator factors in this research allows more precise

descriptions on the relationship between the two variables mentioned and the outcome of the

research. Hypothesized relationships are tested using survey responses from a sample of 386 owners /

managers of SMEs in Malaysia which were obtain by mail survey. The analysis method of research

used SEM AMOS 18 and SPSS 17 applications. The findings show that the market orientation exerts a

positive effect on firm business performance. The external environmental factors do have a

moderating effect on the relationship between market orientation and firm performance. The results

reported in this research while contributing to the body of knowledge also present important ground

for SMEs manager in formulating and implementing strategies to improve their business

performance. Research’s limitations and recommendations for future research were also discussed

Keywords: Environmental Factors, Market Orientation, Business Performance, SMEs

1. INTRODUCTION

superior business performance. Owners or managers of

This study investigates the relationship

Malaysian SMEs need guidance

between firm capabilities affecting SMEs’

and new understandings to “prudently” utilize their

performance namely market orientation.

The

resources and findings of the influence of

findings and results obtained in this study may be

entrepreneurial orientation, market orientation, and

useful to academics, managers, and policy makers in

organisational innovation on business performance

Malaysia, by providing relevant empirical supports

could lead these managers towards better management.

about the relationship. In particular, this study is

SMEs management also needs guidance and

important to the owners or managers of Malaysian

new knowledge in designing and implementing an

SMEs since it examines the capabilities and

organisational culture that would put the organisation

organisational culture in terms of entrepreneurial

in the forefront namely through entrepreneurial

orientation, market orientation, and organisational

innovation and whether these capabilities lead to

innovation. This study contributes into it by

highlighting which firms’ capabilities the SMEs should

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Affendy et al Asia Pacific Journal of Social Science Research 1:1

Page 2 of 6

concentrate to maximise the firm’s long-term

operate. Firms need to be able to change accordingly

financial performance in Malaysia and in

and develop and implement new products and processes

international markets. Due to the repeat of decline in

to survive in dynamic and unstable competitive

growth, SMEs need to take serious initiatives to

environments where conditions are rapidly and

recover (SME Annual Report, 2011) and review their

continuously changing. Firm must be a step ahead than

performance from time to time (Najmi, Rigas, & Fan,

competitors to achieve sustainable competitive

2005). Earlier, Saleh and Ndubisi (2006) found that

advantages and superior firm performance. Hence, firms

Malaysian SMEs faced many domestic and global

in such turbulent industries may not survive in the

challenges in achieving economies of scale and in

market place without a market orientation, and the firms

competing internationally. This study believes that

that are more market oriented than their competitors

the situation has not changed completely. This could

should enjoy superior firm performance (Drnevich and

be observed in the lack of research and development

Kriauciunas,

2011; Jaworski and Kohli, 1993; Kohli

(R&D), technological capabilities, skilled human

and Jaworski, 1990)

capital, technology penetration, and a substantial

Previous studies have conceptually highlighted

orientation towards domestic markets. In fact, these

the moderating effect of external environment

are the problems that hinder SMEs to achieve

relationship between market orientation and business

superior firm performance. Therefore it is important

performance. Murray, Gao and Kotabe (2010) proposed

to study the behaviour of SMEs in order to find out

that external environmental factors, such as market

ways to an improved performance and enhanced

turbulence, technological turbulence and competitive

competitiveness since SMEs is the key driver to the

intensity moderate the strength of the relationship

economic growth.

between market orientation and business performance.

The relationship between market orientation and

business performance may be moderated by external

2. Literature Review

Market orientation is an organisational

environmental variables such as market or technological

culture that focuses on the understanding of the

turbulence (Han et al., 1998) and competitive intensity

market condition in terms of customer and competitor.

(Homburg & Pflesser, 2000; Jaworski & Kohli, 1993).

Ellis (2006) who studied on a meta-analysis of market

It is also one of the organisation capabilities that

contribute to superior business performance via

orientation and performance strongly support this

resource utilisation, as suggested by theory of resource

argument by suggested that moderators influence the

based view. This capability is related to the ability to

market orientation-performance relationship.

collect and utilise market information as well as

Competitive environment has long been

coordinating the firm resources in implementing the

suggested to moderate the relationship between market

market research activities. The importance of market

orientation and performance (Narver and Slater, 1990;

orientation has received great attention in the literature

Zuniga-Vincente, de la Fuente, Sabate, and Suarez-

over the past two decades

(Johnson, Dibrell &

Gonzalez, 2004). Houston (2004) argued that a firm’s

Hansen,

2009). Empirical research on market

need to be market-oriented as competitive intensity

orientation documents the positive effects of a firm's

increases, and in a highly competitive environment, a

market orientation on financial performance as well as

greater emphasis is placed on market orientation for

overall business performance (Milfelner, Gabrijan &

better performance (Day and Wensley, 1988; Delbaere,

Snoj, 2008). Market orientation also helps to improve

2002; Zuniga-Vincente et al., 2004).

performance of small and medium sized firm. Firms

According to Slater and Narver

(1994), the

competitive environment might affect the market

with a high degree of market orientation can enhance

their performance by understanding and satisfying

orientation and business performance relationship. The

basis for this is that effectiveness of a specific

customer needs as well as understanding the market

condition via gathering of information on competitor’s

orientation is dependent on external environmental

factors. For example, in a scenario where demand is

action. This capability allows firms to respond to the

market condition and competitive environment with

growing at a rate higher than the supply, a firm could

merely grab the opportunity without being highly

sufficient market information that they possess. The

study of Low et al (2007); Li et al. (2008); Laforet

market oriented (Kohli and Jaworski 1990). Likewise, if

the bargaining power of the buyer is low, the firms

(2008) and Mokhtar et al. (2009) suggests that market

orientation in small-medium

could simply take this advantage to profit from the

transaction with a minimal level of market orientation

sized business is positively correlated with

performance. Accordingly, the following hypothesis is

(Slater and Narver 1994). On the other hand, if the

market is characterised by strong competition, the firms

proposed: H1: Market orientation is positively related

to business performance

could not attain satisfactory levels of profit if they are

not market oriented (Slater and Narver 1994). Kohli and

Researchers have argued that firms should

monitor their external environment when considering

Jaworski (1990) proposed that the degree of market

orientation is influenced by the market environment

the development of a strong market orientation culture

(Kohli & Jaworski, 1990). They further stated that the

(i.e., market turbulence, competitive intensity, and

technological turbulence), which moderates the

need firms have for being market oriented may depend

on the environmental conditions under which they

Affendy et al Asia Pacific Journal of Social Science Research 1:1

Page 3 of 6

relationship between market orientation and business

data source.

performance.

For

data

collection

purposes,

900

Empirically, limited number of studies was

questionnaires were distributed to SMEs in Malaysia

found on the moderating effect of external

which were selected from the SME Business Directory

environment in the relationship between market

using a random sampling technique. Of the

900

orientation and SME business performance. Gao,

questionnaires mailed, only

398 responses were

Zhou and Yim. (2007) found that the impact of market

received resulting in a response rate of 44%. The data

orientation on business performance could turn from

analysis procedures involve several major steps, from

positive to negative in the dynamic and turbulent

descriptive analysis, preliminary data analysis, and

context of China. However, Aziz (2010) found that

model testing to hypothesis testing. This research

market-technology turbulence and competitive

therefore uses SPSS Version

17 to analyze the

intensity did not moderate the relationship between

preliminary data and Analysis of Moment Structures

market orientation and business performance in

(AMOS) version 18 to test the model and hypotheses.

Malaysian SME Agro-food industry. Based on the

To infer the hypotheses, the regression was conducted,

above arguments, the following hypothesis is

which is tested in SEM simultaneously. However,

developed: H3: Environmental factors have positive

before conducting the analysis to infer the hypotheses,

moderating impacts on market orientation and firm’s

the data were already tested for linearity, normality,

business performance relationship.

homoscedasticity and multi-collinearity in data

screening process. All these basic assumptions were

3. Research Model

acceptable and prove that the data meet the conditions

There are evidences in entrepreneurship

of basic assumption in regression analysis (Hair et al.,

studies that SMEs’ performance is very important to

2010). Consequently, the SEM analysis technique by

the owner, managers, policy makers, and society, but

Zhao and Cavusgil (2006) was followed for evaluating

Awang et al. (2009) found a lack of knowledge on

the moderator effect. In this particular task, Zhao and

which and how entrepreneurial factors influence

Cavusgil

(2006) recommends to first evaluate the

SMEs performance.

Also, existing literatures

independent variables towards dependent variable; then

consistently show a positive influence of market

second, examine the interaction effects towards

orientation on firm performance. Traditionally, the

dependents variable. In addition, investigation on the

literatures concerning marketing concept assumed that

relationship between independent variables and

the implementations of the market orientation would

interaction variables is also needed to support the

lead to superior organizational performance (Piercy et

moderating analysis. If the interaction term is

al.,

2002). However, Jaworski and Kohli

(1993)

significant, there is a moderating effect

(Zhao &

suggest that external environment such as market

Cavusgil, 2006).

turbulence, competitive intensity, and technological

Hence, this study firstly examined the

turbulence may influence the market orientation-

relationship between market orientation and business

performance relationship. Based on those factors,

performance, followed secondly by examining the

specific questions as follow should be answered:

relationship between environmental factors towards

business performance and thirdly examined the

Does firm’s market orientation have any

relationship market orientation and environmental

influence

on the

firm’s

business

factors towards interaction variables. Finally, the

performance?

interaction

between market orientation

and

environmental factors towards business performance

II.

Do the firm’s environmental factors moderate

was investigated.

the relationship between the market

orientation and its business performance?

5. Result and discussion

In testing the first hypothesis

(H1) that is

“Market orientation is positively related to business

4. Methods

The study is conducted with the intention to

performance”, it is hypothesized that there is a positive

and significant relationship between market orientation

determine the relationship between market orientation

capabilities towards firm’s business performance

and business performance. Having tested the data, the

t-value is found 2.517 (p-value = 0.012 < 0.05). This

among SMEs in Malaysia. The basic research design

utilised for this study is a survey design. Survey

evidences that the market orientation influences the

business performance. This supports the literatures on

method is one of the most widely

used techniques in the social sciences

(Creswell,

the positive effect of market orientation on business

performance within SMEs in Malaysia. On top of that,

2009) and conducted on many respondents, which

were asked the same questions about their

the β value is 0.215, which means when changes in

market increases by

1, the performance of SMEs

characteristics, behaviours, and experiences. The unit

of analysis for this study is the Small Medium

increases by 21.5%. With reference to the results in

Table

5.1 the value of regression weights between

Enterprise

(SME) in Malaysia and this study deals

with each SME manager response as an individual

market orientation and business performance is 0.430,

which shows a moderate path. This may suggest that

Affendy et al Asia Pacific Journal of Social Science Research 1:1

Page 4 of 6

the higher the level of market orientation within SMEs

marketing orientation and business performance. In

in developing performance, the higher business

this case, this study expects that environmental factor

performance is. Therefore, hypothesis one

(H1) is

interacts with marketing orientation as a predictor

supported.

variable to change the degree or direction of the

Hypothesis 2 (H2) is to test whether the

relationship between the marketing orientation and

environmental factor moderates the relationship of performance.

Table 5.1: Standardized Regression Weights

Latent to Latent Variables

Estimation

Business Performance

<---

Environmental Factor

0.630

Business Performance

<---

Market Orientation

0.430

Business Performance

<---

MOllENV

-1.622

MOllENV

<---

Market Orientation

0.483

MOllENV

<---

Environmental Factor

0.560

Table 5.2: Regression Weights Results

Latent to Latent

Variables

Estimation

S.E.

C.R.

Performance

<---

Market Orientation

0.215

0.103

2.517

0.012

Performance

<---

Environmental Factor

0.308

0.143

1.766

0.077

Performance

<---

MOllENV

-0.089

0.023

-2.151

0.031

MOllENV

<---

Market Orientation

4.38

0.189

23.147

***

MOllENV

<---

Environmental Factor

4.968

0.19

26.187

***

Figure 4.1: The Moderating Effects of Environmental Factors on Market Orientation and Business Performance

The results are detailed in Table

5.2. The

variable

(environmental and market orientation-

results reveal that the market orientation is has a

MOIIENV).

significant relationship towards business performance.

However, when environmental factors interact

Meanwhile, there is no significant relationship

with market orientation, there is a significant

between environmental factors and business

relationship between interaction variable

(MOIIENV)

performance. It is proven by looking at the critical

and business performance.

ratio, which is t-statistics (1.766) and p-value (0.077),

Particularly, t-value is -2.151 (p-value = 0.031 < 0.05),

which is greater than the significance level

(0.05).

which implies that it evidences that the interaction

Market orientation influences

the

business

variable (environmental factors and market orientation)

performance significantly, while environmental factor

influences business performance.

Further, when

does not significantly influence business performance.

interaction variable is significant, it indicates that the

On top of that, the results also show that market

environmental factor has certain moderating impacts on

orientation statistically

significantly influences

the relationship of market orientation and corporate

interaction variable

(environmental and market

business performance

(Zhao & Cavusgil,

2006).

orientation-MOIIENV). Similar to the environmental

Although the moderating impacts exist, the β value is -

factors, it impacts positively towards interaction

0.089, which means when environmental factors effects

to the market orientation increases by 1, the business

Page 5 of 6

performance decreases by

0.089

(8.9%). Besides,

that implementing market orientation needs to consider

standardized regression weight result also reports that

the external environment that firms operate in to

the greater the moderating impacts on environmental

maximise the effects of its implementation on SME

factors towards the relationship between market

business performance.

orientation and business performance, the prediction

of business performance among SMEs will decrease.

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