Social Impact

The impact of market orientation on the financial performance of small and medium-sized construction firms in South Africa

By USB MBA student Odirile Rapereng Mametse (supervisor: Dr Marietjie Theron-Wepener)

 

What this study is about

The construction industry in South African was boosted by the infrastructure development brought about by the Soccer World Cup in 2010. Growth slowed down after this although some firms continued to perform well. This research therefore focused on the impact of market orientation on the financial performance of construction firms, asking: Why is management’s understanding of the firm’s customers and competitors important for the financial performance of the firm?

This research therefore wanted to determine whether the market orientation of SME companies in the construction industry has an impact on their financial performance with the assumption that financially successful companies will report stronger growth and employ more people.

The relationship between the financial performance of a business and the three components of market orientation – namely customer orientation, competitor orientation and inter-functional coordination – was also investigated.


The context

Since the early 1990s, research on business performance has increasingly focused on the impact of market orientation on business (financial) performance. Market orientation is defined as the organisational culture that creates behaviours that generate superior value for the customer and great performance for the firm. A market-oriented firm is continuously examining the environment in search of a sustainable competitive advantage. Over the years, research has overwhelmingly found market orientation to have a positive relationship with business performance.

However, very few South African studies have looked at the relationship between market orientation and business performance as this pertains to small and medium-sized enterprises (SMEs). Yet, this is where change is needed most as the SME sector can absorb thousands of workers, especially from among the unskilled and semi-skilled.

Worldwide, SMEs have been identified as significant contributors to the creation of employment. As recently as 1996, South Africans were resisting entrepreneurship, preferring formal employment with fixed remuneration. But this has changed. People have begun to realise the importance of entrepreneurial business. In South Africa, the construction industry is one of the leading employers, also in the SME market.


Undertaking a literature review to provide understanding

Firstly, Lafferty and Hult’s five perspectives of market orientation were investigated:

  • Decision-making perspective: This is about understanding the markets and the people who make the decision to buy or not to buy the firm’s products or services.
  • Market intelligence perspective: This perspective covers the needs and preferences of customers as well as the external factors that influence those needs and preferences. It also covers the competitor landscape.
  • Strategic perspective: This refers to the degree to which a business unit obtains and uses customer information and then develops and implements a strategy to meet these customer wants and needs.
  • Customer orientation perspective: This refers to the strong focus on customer interests but without ignoring other stakeholders.
  • Culturally based behavioural perspective: To offer a sustainable competitive advantage and superior value for customers, a business needs to create a culture that will produce the necessary behaviours to achieve this.

Next, the general agreement areas of the five perspectives of market orientation were investigated, namely the emphasis on customers, on information gathering and sharing, on inter-functional coordination, and on leveraging the intelligence gathered by the company. The literature review also looked at traditional performance measures and non-traditional performance measures, and at the South African construction industry which employs about half a million people.

The literature review then looked at two views on the relationship between market orientation and business performance, namely that of Kohli and Jaworski (1990) who focused on leveraging market intelligence and that of Narver and Slater (1990) who focused on customer and competitor orientation, and the inter-functional operation of a firm.


How was the study conducted?

A quantitative research design was used to gain insight into the impact of a firm’s market orientation on its financial performance. To gather primary data, questionnaires were sent to 488 small and medium-sized Gauteng-based construction companies all belonging to the Master Builders South Africa. A total of 60 people responded. IBM SPSS software was used for data analysis.

Market orientation and its components (customer orientation, competitor orientation and inter-functional coordination) were used as the independent variables while the financial performance of the business (measured by revenue, profit margin and return on assets) was used as the dependent variable. The MKTOR scale as defined by Narver and Slater (1990) was used to measure three aspects of market orientation, namely customer orientation (6 items), competitor orientation (5 items) and inter-functional coordination (3 items). Business financial performance (3 items) was measured by using revenue growth, profit margin and return on assets/investment over the past three years.


What did the research results show?

The primary objective of the study was to assess the relationship between the marketing orientation and financial performance of small to medium-sized construction firms in South Africa.

The results of the study confirmed the view that there is a positive relationship between market orientation and business financial performance, albeit in this study the relationship is weak as expressed by the Pearson correlation of 0.318. (The closer the Pearson correlation to positive 1 the stronger the relationship between the constructs being measured.)

The secondary objectives included assessing the relationship between the three components of market orientation (customer orientation, competitor orientation and inter-functional coordination) against the financial performance of SME construction firms in South Africa. The measured Pearson correlations of the three components of market orientation were 0.259, 0.292 and 0.165 respectively, showing a weak relationship between market orientation and financial performance.

Market orientation, customer orientation and competitor orientation have a p-value less than 0.05, meaning there is a significant relationship with financial performance. Hence there is a positive weak relationship between customer and competitor orientation and financial performance, and between market orientation and financial performance. Inter-functional coordination has a p-value greater than 0.05, meaning there is not a signification relationship between this component and financial performance.

The implication of the study for management and other interested parties is the need to put more emphasis on understanding the customer and competitor landscape in order to be market-oriented and to have an impact on the financial performance of the business. In essence, management’s understanding of the firm’s customers and competitors is important for the financial performance of the firm.

The implications of the research are that market-oriented businesses outperform those that are not market-oriented. Also, market-oriented businesses will employ more people.

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