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Achieving Sustainable Performance Through TQM and Market Orientation: A Proposed Framework for Empirical Investigations - Page 5

Effect of TQM practices on market orientation

Quality performance under TQM perspective directly affects customer perceived quality outcome, such as of Garvin’s (1988) eight dimensions of quality. For example, product features, reliability, operations flexibility, singly and in combination enable strategies of product variety, reputation, and customisation. Additionally, these factors form the basis for product differentiation; offering product with distinctive features by design, engineering variables or communication variables (Webster, 1994, p. 104). Product differentiation in combination with market knowledge, in turn made possible the variety-based positioning, need-based positioning, and access-based positioning, which constitute three sources of strategic positioning (Porter, 1996). In conclusion, quality performance will enable firms to exploit advantageously market opportunities.

Earlier, market advantage is identified as a strategic content of TQM (Reed et al., 1996) and also as one of the objectives of market driven companies. Gaining market advantage is the objective of market orientation that is the result of responding to changing customer needs earlier or better than competitors (Day, 1994). According to Reed et al., (1996) a market advantage means a firm is generating supernormal profits by getting more customers, keeping them longer, or charging higher price for the products that are valued by the customers. Other than differentiation (pricing) and customer relationships, market advantage can be exploited through intangible strategic assets like reputation, patents, trademarks, brand equity, knowledge and learning orientation. Achieving market advantage is also possible by leveraging technological innovation, mass customisation, globalisation, and competitive orientation strategies such as benchmarking, positioning and competitive objective setting.

Some of the strategic assets are purely the result of ‘creative phase’ in the firm value added chain, but generally they are supported by the performance of ‘productive phase’. Branding, for example, is a most powerful form of differentiation that can create lasting market advantage because of its not imitable characteristic. Brand equity, the newer concept than brand image and brand loyalty, is putting value to the brand and nurturing this value through investment in advertising and communication (Webster, 1994). Brand equity is therefore a measure of market advantage created by the brand. Customer patronage of a brand however, is sustainable only when operation performance and product reliability eventually meet the expectation of the brand, Similarly, patents, trademarks, reputation all are dependent on the effectiveness of operational excellence to produce consistency of quality performance in the marketplace.

Deployment of strategic assets to create market advantage can possibly be achieved when firm has a high degree of market orientation. The reasons being those with extensive customer database and greater customer knowledge are able to leverage those knowledge as well as technology to connect with customers (Wayland and Cole, 1997), thus can stay close to customers and ahead than competitors (Day, 1990, 1994). Additionally, knowledge-rich firms are better able to exploit targeting, positioning, customising, and adjust marketing strategies to the market requirements. This also means that market oriented firms can offer superior solutions and experience on matters that customer value most highly e.g. “always the low price” at Wal-Mart and “mass customising” at Dell Computers (Day, 1998).

Market advantage in terms of customer oriented strategies mean that firms can improve customer retention rate thus lead to substantial improvement in profits (Buchanan, 1990; Reicheld and Sasser, 1990). Additionally, as Gronrooss (1990) noted that marketing or transaction costs for every customer can be reduced within long-term relationship, in particular it could lead to facilitation of relationship customisation. Long-term customer relationships would likely easier to create structural bonding such as joint investment in value delivery system (Berry and Parasuraman, 1991), which create difficult-to-imitate competitive advantage hence are likely sustainable. Customer-oriented firms should convert customer satisfaction to customer retention and loyalty (Day, 1998) and creating customer partnership realising that all those are important drivers to profitability. It can be postulated that TQM companies that establish customer relationships are likely to retain customers and achieve higher profitability.

Positional advantage is created in the market place when firm perform the value delivery activities differently from competitors, or perform different activities from competitors. This is the meaning of strategy (Porter, 1980; 1996). In either case, it is also means strategic positioning or differentiation strategy-deliberately choosing a different set of activities to deliver a unique mix of value. Specifically, Porter (1980) identified low-cost advantage and differentiation as the sources of competitive advantage, which businesses may emphasises either or both (Hall, 1980). According to these sources of advantage, differentiation or market niche is also interpreted to be additional product benefits and can take many forms including brand image, product image, product features, customer service, dealer network, and technology (Porter, 1996).

Despite of its many sources, differentiation is most often characterised by superior quality of the products (Phillips et al., 1983). The unique product offering permits higher prices thus allow excess return to the firm. However, a firm actual profitability is determined by its relative cost and differentiation (price) advantage over and above its relative potential profit attributed to the industry or segment ‘attractiveness’ factors (Hamel and Prahalad, 1994, p. 301). These differentiation effects are essentially external and concerned with an attempt to shift a business’s demand curve upward (Narver and Slater, 1990). These arguments clarify the simplified statement that market advantage leads to increased revenue and sustainable performance (e.g. Reed et al., 1996).

On the contrary, a low cost advantage is essentially the effect of operational excellence that can be shared between provider and customer buyer as lower acquisition and use costs. Total customer cost is the bundle of costs customer expects to incur in evaluating, obtaining, and using the product or service (Kotler, 1997, p.38). Total customer value is the difference between total customer costs and the total benefits gained from purchase and product use. The cost saving may be derived from economies of scale, volume, or cost reductions in value delivery processes such as R&D, production, service, sales-force, and advertising (Narver and Slater, 1990). For example, IKEA co-produces furniture with customers and share the cost saving thus increasing value for both parties (Gummesson, 1998).

Firms pursuing cost leadership strategy could accept cheaper components, use standardised processes, and advancing market share in order to reduce unit costs (Phillips et al., (1983). Some TQM practices such as process improvement, changeover flexibility, variety flexibility and efficient design, zero defect and the like, allow some cost containment be achieved. Simply stated, TQM efforts help to make cost leadership strategy possible. At the same time TQM efforts also help firms to support market advantage created by their marketing activities.

Prior to TQM era, firms view cost leadership and high quality are mutually exclusive, otherwise their profitability stuck in the middle. Within TQM perspective, market performance may be related more to the intensity of commitment to quality strategy rather than to the polarity of differentiation or low cost. Current thinking and industrial experience shows that product quality and cost leadership are compatible strategies. Phillips et al., (1983) for example, empirically conclude that quality and cost control interact to generate above average ROI. Although mutually supportive capabilities, these two emphases operationally compete for management time and employee attention, therefore, those firms not attaining leading edge in both areas should focus on variety and cost in sequence (Hamel and Prahalad, 1994, p. 178).

In their study, Narver and Slater (1990) found a higher correlation between the three market orientation components and differentiation strategy (.45) than between those components and low cost strategy (.27), which they claim has provided supports for concurrent validity of the market orientation constructs used in the study. This implies that conceptually differentiation strategy being an external emphasis is more compatible to an SBU with a strong market orientation than a low cost strategy, which is not likely external emphasis. Since TQM efforts could affect differentiation and positioning therefore, TQM and market orientation is related through this relationship. Furthermore, as earlier argued firms’ market advantage could be supported by activities that constitutes both quality and market orientation practices.

While conceptually, the two approaches are compatible, simultaneous implementation of a comprehensive system as separable initiatives are less favourable in light of commitment, resources and time required for effective implementation. Given the right resources and organisational culture, TQM and market orientation can promise a powerful contribution in enhancing firm performance. This effect would be empirically tested in this thesis.

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