How market orientation and outsourcing create capability and impact business performance

In t roduct ion

Firms use capabilities developed by resource utili-zation to manage the environment and perform (Day, 1994). In doing so, firms often explore new

competencies for a long-term viability (Levinthal & March, 1993; March, 1991). The literature suggests that

a market orientation has a long-term viability in terms of profit (Felton, 1959), long-term investment perspec-tive (P. Anderson, 1982), and survival (Day, 1994), and that a market-oriented firm builds capability (Day, 1994, p. 41; Hurley & Hult, 1998, p. 47) by exploring and developing new products and services to satisfy current and potential needs of customers (Chandy &

457

For most firms, developing the capability to compete and perform is crucial. The literature sug-

gests that market orientation and outsourcing are two such sources for building capabilities in the

marketplace. However, the relative contribution of market orientation and outsourcing to capability

and superior business performance is unclear. To bring clarity, two pathways through which market

orientation and outsourcing build capability and enhance business performance are proposed. Using

data from foreign and Indian firms, the results indicate that both market orientation and outsourcing

contribute to building capability, and that outsourcing further contributes to business performance.

Also, it was discovered that low-risk market-oriented and high-risk outsourcing firms experienced a

positive impact on business performance. The implication of these results for managers is that market

orientation and outsourcing can be complementary tools in their efforts to build capability, enhance

business performance, and manage risky environmental conditions. © 2009 Wiley Periodicals, Inc.

How Market Orientation and Outsourcing Create Capability and Impact Business Performance

Correspondence to: Dr. Satyendra Singh, Director, Centre for Emerging Markets, Faculty of Business and Economics, University of Winnipeg, 515 Portage Avenue, Winnipeg R3B 2E9 Canada, 204.786.9424 (phone), 204.774.8057 (fax), [email protected].

FEATURE ARTICLE

By

Satyendra Singh

Published online in Wiley InterScience (www.interscience.wiley.com). © 2009 Wiley Periodicals, Inc. • DOI: 10.1002/tie.20283

Tellis, 2000; Slater & Narver, 1995). It is well estab-lished that market orientation leads to better business performance (e.g., Jaworski & Kohli, 1993; Narver & Slater, 1990), and that it builds competitive advantage for firms (Narver & Slater, 1990). However, firms also create capability through outsourcing (Gottfredson, Puryear, & Phillips, 2005; Kotabe & Murray, 2004). For example, Thomas Cook once suffered from an industry recession and an unaligned operating structure, result-ing in a significant loss. By partnering with a leading provider of outsourcing services, the firm was able to reduce costs and improve its performance significantly. This case is not unique. Many multinational corpora-tions (e.g., 7-Eleven stores) are altering their strate-gies in favor of outsourcing (Gottfredson et al., 2005). Consistent with other researchers, we use the terms competence and capability interchangeably (Atuahene-Gima, 2005; Danneels, 2002; Day, 1994; Grant, 1996; Henderson & Cockburn, 1994). In this study, capability and outsourcing mean product development capability and global outsourcing, respectively.

Several reasons motivate firms to outsource. First, outsourcing allows for a quick response to changes in the environment (Dess, Rasheed, McLaughlin, & Priem, 1995), and it does not increase costs associated with bu-reaucracy (D’Aveni & Ravenscraft, 1994). Second, global-ization can yield economies of scale and scope in research and development, manufacturing, and marketing (Yip, 1995). Third, using cross-functional teams that include product development and manufacturing can increase coordination and reduce lead-time (Bettis, Bradley, & Hamel, 1992), due to the fact that manufacturers that have adopted just-in-time production processes are under pressure to compete on the basis of improved cost, qual-ity, and on-time delivery. Also, because different suppliers may be located in different countries, the coordination among them further increases, as there is a need to man-age a fluctuating exchange rate (Kotabe & Murray, 2004). Indeed, outsourcing requires a close coordination among research and development (R&D), manufacturing, and marketing activities across national boundaries (Kotabe & Helsen, 2004).

Such arguments have been present in the literature for many years and are now widely accepted.

Recently, firms’ preference for outsourcing over de-veloping market orientation, as evidenced by a decline in competitive advantage of the Western companies (Bettis et al., 1992), has been proposed as a fourth reason for firms to move toward global outsourcing. Research indi-cates that costs versus benefits appear to be a compelling argument for outsourcing services previously performed

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internally (Kakabadse & Kakabadse, 2002), and that out-sourcing capital-intensive production activities improves firms’ ability to respond flexibly to changes in technology or demand, to accumulate external knowledge, to avoid coordination inefficiencies, and to compress product-development cycle times (e.g., Helper & Sako, 1995). Although the notion that outsourcing improves business performance is widely asserted, it can be challenged. For example, outsourcing contributes to depreciation in existing capabilities, failure to seize opportunities to develop new capabilities (Bettis et al., 1992; Quinn & Hilmer, 1994), and loss of strategic advantage (Gupta & Gupta, 1992).

The purpose of this study is to bring clarity to this unresolved debate by studying the relevance of outsourc-ing in conjunction with the concept of market orienta-tion. In doing so, we address three research gaps in the extant international business literature. First, it appears that it is the first empirical study to relate simultaneously the concepts of market orientation and outsourcing in the context of the emerging market of India that has been a focal point for outsourcing for the last decade. Therefore, this study extends our emerging knowledge to a non-U.S. setting, making it useful for international managers. Second, we extend the study by examining the mediating role of the capability in determining business performance. Finally, we speculate that a trade-off exists between market orientation and outsourcing. True, mar-ket orientation calls for resources to develop capability; for example, increasing or maintaining a magnitude of market orientation is a complex process that requires a considerable expenditure of resources such as money and time (Slater & Narver, 1994, p. 53). However, out-sourcing from emerging markets can cut the costs and borrow the capability due to inexpensive labor and manu-facturing costs. Thus, it can be argued that any financial savings from outsourcing programs should be redeployed to enhance market orientation to create the capability. Specifically, we contribute to the literature by addressing the issue of whether and how outsourcing contributes to a firm’s performance by attempting to identify the comple-mentary role of market orientation and the mediating role of the capability.

This study is timely and relevant for both scholars and managers. We conducted this study in India where recently much of the scholarly attention, particularly related to outsourcing, is concentrated. This is because many Western firms have been unable to match the costs, quality, and product development pace of Asian firms, which is indicative of the overall decline in competitive-ness of Western firms (Bettis et al., 1992). Therefore, if

How Market Orientation and Outsourcing Create Capability and Impact Business Performance 459

DOI: 10.1002/tie thunderbird International Business review Vol. 51, No. 5 September/October 2009

of market orientation or outsourcing. The questions of interests here are (1) whether market orientation or out-sourcing or both contribute to business performance and (2) if so, how (i.e., through which pathway).

Market Orientation, Capability, and Business PerformanceFor this study, we refer to Narver and Slater’s view of mar-ket orientation, as the fundamental benefit of being mar-ket-oriented is purported to be the creation of superior customer value and “continuous superior performance for the business” (Narver & Slater, 1990, p. 20). This view consists of three behavioral components—customer orientation, competitor orientation, and interfunctional coordination. Scholars posit that market orientation is a precursor to building capability (Day, 1994, p. 41; Hurley & Hult, 1998, p. 47). Firms build capability by allocating resources to exploit existing capabilities and to develop new ones through their knowledge of current and future customers and competitors; Barclay Bank’s competitive position in the banking industry (Varley, 2007) and Hewlett-Packard’s leadership position in the printer busi-ness (“Can HP’s Printer Biz,” 2003) are examples of capa-bility building through strong market orientation. Such capabilities sustain competitive advantage because they are difficult for competitors to imitate (Reed & DeFil-

the proposed complementary effects of market orienta-tion and outsourcing are identified, it will provide manag-ers with clues as to what action to take when outsourcing is being considered. In the following section, we draw on the source-position-performance theory to discuss the conceptual framework and develop the hypotheses. Next, we explain the methodology and report the results, then provide a discussion and outline the contribution of the study, along with its limitations and directions for future research.

Conceptual framework

We propose a conceptual framework that adopts Day and Wensley’s (1988) source-position-performance frame-work, in which market orientation and outsourcing are the sources, competitive capability is a positional media-tor, and business performance is the outcome (see also Han, Kim, & Srivastava, 1998). Figure 1 presents these relationships and hypotheses graphically. To investigate a preference for outsourcing over market orientation, or vice versa, we hypothesize two pathways—direct and indirect. The direct pathway involves the direct impact of market orientation or outsourcing on business perfor-mance, whereas the indirect pathway is posited to occur indirectly through the competitive capability association

figure 1 The Conceptual Framework

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core outsourcing occurs when firms acquire activities that are significantly important to long-term success. How-ever, there is a debate between the definitions of the two (Gilley & Rasheed, 2000). Our definition of outsourcing refers to the flow of components and finished parts from the supplier to the outsourcing firm, which could pro-duce and market but has decided otherwise to devote its internal resources to maintaining its core competencies (Deavers, 1997).

Williamson (1985) cautions the firms that using an excessively complex outsourcing structure for a simpler relationship may result in a firm losing capability and decision-making speed due to the imposition of bureau-cratic controls. Similarly, locating manufacturing activi-ties outside of a firm’s boundaries can degrade a firm’s capabilities by impairing cross-functional coordination (Hatch & Mowery, 1998; Teece, 1996).

However, firms can increase cross-functional coor-dination and borrow capability through the access of suppliers’ capability by making use of the Internet and increasingly sophisticated telephone infrastructure that can transfer the necessary information and output at high speed and low cost (Gottfredson et al., 2005). Thus, the globalization and advancement in technology facilitates global outsourcing strategy, which in turn builds capabil-ity. Therefore, we propose:

H3: Outsourcing leads to enhanced capability.

Outsourcing reduces fixed costs of in-house manu-facturing facilities, and thus decreases the break-even point and increases outsourcing firms’ performance. In a highly competitive environment, manufacturers begin to either produce in low-cost locations or outsource compo-nents and finished products from low-cost producers on a contractual original equipment manufacturer basis. How-ever, Kotabe and Omura (1989) found that the degree of intrafirm sourcing of major components is a crucial determinant of business performance, not the sourcing or production locations. Building factories or outsourc-ing activities in emerging markets is immaterial unless it contributes to capability and performance. We propose that firms whose outsourcing decisions are firmly rooted in the concept of building capabilities are likely to make meaningful contributions to achieving overall business performance. Thus:

H4: Outsourcing leads to superior business performance.

Capability and Business PerformanceBased on Day’s (1994, p. 38) definition, we define a firm’s capability as its ability to develop new products or

lippi, 1990). Further, with deeper knowledge of current and future customers and competitors, managers become dissatisfied with the inadequacies of their current capa-bilities, leading them to invest in new capabilities (Huff, Huff, & Thomas, 1992). Developing new capabilities is particularly important for market-oriented firms because they (1) respond to current market environmental condi-tions, (2) anticipate future market conditions (Chandy & Tellis, 2000; Kohli & Jaworski, 1990; Slater & Narver, 1995), and (3) play a role in building capabilities for in-novation (Atuahene-Gima & Ko, 2001; Hurley & Hult, 1998; Sorescu, Chandy, & Prabhu, 2003). Therefore, we propose:

H1: Market orientation leads to enhanced capability.

In a competitive environment, a firm must identify its customers’ changing needs and preferences and respond accordingly (Steel & Webster, 1992). Competition leads to a hostile environment, characterized by competitors attacking each other aggressively on numerous dimen-sions—for example, pricing, promotions, distribution, and product development (Golden Doney, Johnson, & Smith, 1995). Further, the globalization of activities in emerging economies provides the firms with the op-portunities to outsource activities and resources. These opportunities give rise to an intense competition in the market, because they create a situation in which busi-nesses pay close attention to their competitors’ costs and strategies and are aware of their competitive moves. Thus, firms evaluate the costs and benefits of increasing market orientation, because the costs associated with the chang-ing market orientation may become disproportionately high relative to sales revenue at high levels of market tur-bulence, and market conditions may be such that revenue cannot be increased, thus resulting in a decline in profits (Greenley, 1995).

However, a standard argument in the market orienta-tion literature suggests that market-oriented firms are in a better position to satisfy the needs of their customers. Em-pirical research supports this assertion (Jaworski & Kohli, 1993; Slater & Narver, 1994). Therefore, researchers expect market orientation to be manifested in enhanced performance in the context of a normal environment. Therefore, we propose:

H2: Market orientation leads to superior business performance.

Outsourcing, Capability, and Business PerformanceIn general, two kinds of outsourcing are proposed in the literature: peripheral outsourcing occurs when firms acquire less strategic activities from suppliers, whereas



Sourcing directly from for-eign suppliers is risky and requires greater purchasing know-how than sourcing from local wholesalers and representatives.

Outsourcing encompasses risks too. Sourcing directly from foreign suppliers is risky and requires greater pur-chasing know-how than sourcing from local wholesalers and representatives. Locally based representatives are subject to local laws and assume some of the currency risks associated with importing. Clearly, an outsourcing firm inevitably places part of its destiny in the hands of other firms that are seeking to maximize their profits. Though outsourcing is often described as a strategic alliance, the parties to the outsourcing contract have potentially conflicting interests (Lacity & Hirschheim, 1995). Therefore, a firm must have compelling reasons to outsource its manufacturing activities, because it runs the risk of losing innovation that could lead to a loss of long-term R&D competitiveness (Teece, 1987). As a re-sult, firms that outsource are likely to lose touch with new technological breakthroughs that offer opportunities for product and process innovations (Kotabe, 1992), a risky proposition. Stated formally:

H6a: The relationship between market orientation and business performance is stronger under low-risk-aversion behavior.

H6b: The relationship between outsourcing and business perfor-mance is stronger under high-risk-aversion behavior.

Control VariablesAlthough our interest lies in determining pathways through which market orientation and outsourcing influ-ence business performance, other exogenous influences are likely. Theoretically, several variables can be candi-

services to create and deliver superior customer value. This definition reflects the notion that to create a value, a firm tends to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of exchange in the open market or the costs of organizing in another firm (Coase, 1937). Thus, firms invariably re-duce cost of operations through outsourcing. However, Bettis et al. (1992) suggest that firms should move away from the mind-set of reducing costs or improving returns, because such measures may look attractive only for a lim-ited period, significantly masking the decline in skills and competence in the short term and its competitiveness in the long term. Further, Ritter and Sternfels (2004) found that low wage rates were hardly a critical factor in deter-mining the firms’ overall performance.

Instead, consistent with the view of Barney (1999), we propose that outsourcing should be a strategic alliance that renders outsourcers the suppliers’ capabilities such as the ability to compete on the basis of improved cost, quality, just-in-time production capabilities, and resource utilization. Because creating capability warrants upfront expenditures such as increased advertising, promotion, product development, sales forces, and so on, outsourc-ing capability can lead to superior business performance. Therefore, we propose:

H5: Capability leads to superior business performance.

the Moderating role of risk-averse BehaviorFailure to include risk variable in the proposed model may impede our understanding of the effects of the relation-ship between market orientation and outsourcing, and business performance through the capability. We adapt Jaworski and Kohli’s (1993) definition of risk aversion that relates to firms’ willingness to take risks (i.e., tolerance for risks) to undertake activities connected to market orienta-tion or outsourcing. Market orientation often calls for the introduction of new products and services to match the evolving needs and expectations of the market. However, new products, services, and programs often run a high risk of failure, which tends to be more salient than the risk with already established products (Jaworski & Kohli, 1993). Fur-ther, firms need to have a tolerance for risk, such as sup-ply interruptions, cost variations stemming from currency fluctuations, or compromised intellectual property rights relating to products or processes (Ritter & Sternfels, 2004). Even riskier is losing their technological competencies and skills on which their competitive capability ultimately depends. When faced with uncertainty, firms often exhibit risk aversion and risk-sharing behavior.

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composition of the firms’ population. These cities, be-cause of their vast size and significant economic activities, are the most likely candidates for outsourcing for both manufacturing and service activities. We selected three prominent industrial areas in New Delhi (Okhla Phase, PIN 110020; Naraina, PIN 110028; and Wazirpur, PIN 110052) and in Mumbai (Laxmi, PIN 400053; Powai, PIN 400076; and Thane Wagle, PIN 400604). Based on reported experiences in other Asian countries (Kumar, 2000, p. 313), data were collected in person over a period of three months by local, trained interviewers to ensure sufficient responses. The use of locally trained interview-ers decreases the potential for interviewer bias (Malho-tra, 2004). This method of collecting data is somewhat similar to collecting data via mall-intercept method, as the researchers have the ability to have a face-to-face interview with respondents. Bush and Hair (1985) found in their comparison study that the overall quality of mall-intercept data surpassed that of the telephone interview-ing technique and provided more complete and fewer distorted responses.

Respondents were asked to circle a number on a seven-point Likert scale to reflect the extent to which they performed activities listed in Table 1. Subjective measures of performance are frequently used in market-ing research and have been found to be reliable and valid (Dess & Robinson, 1984; Pearce, Freeman, & Robinson, 1987). India being a Commonwealth country, there was no need to translate the questionnaire into Hindi; English is widely spoken and understood in a business context. We used the double-respondent survey method-ology to test the hypotheses. The top executive of each firm was contacted over the phone to ascertain if the firm pursued market-oriented and outsourcing strategies to be competitive in the marketplace. If a positive response was obtained, a meeting time and date was set up. The pur-pose of the meeting was to complete the questionnaire and to seek the name of another executive within the firm who was familiar with the firm’s market orientation and outsourcing strategies. To assess respondents’ quality about their knowledge of the strategies, we asked on a seven-point scale their degree of knowledge (1 = limited knowledge to 7 = substantial knowledge) about market orientation and outsourcing strategies. The means for the first (6.21) and second (6.15) respondents indicated no significant differences between their responses on the questions, suggesting a convergence. Therefore, we took the average of the responses. In fact, the averaging method avoids confounding effects in measure and trait variance because “using multiple informants and aggre-gating their responses into a single composite score helps

dates for covariates, but to maintain parsimony three per-tinent firm-specific covariates are included in this study. First, firm size is included, because past research indicates that larger firms have greater market power or positional advantages (in relation to their smaller rivals) that affect their incentives and abilities to changing environments (Baum & Oliver, 1991). Firm size, defined as the number of employees in a firm (Chandy & Tellis, 2000; Narver & Slater, 1990), controls for the impact of a firm’s resources on new product success. Second, firm age is included to control for the possibility that older firms benefit from ac-cumulated knowledge and experience (Amburgey, Kelly, & Barnett, 1993), although they may become ossified as well (Ranger-Moore, 1997). Finally, we added a dummy variable to control for foreign and Indian firms’ attitudes toward market orientation and outsourcing.

Methodology

India is an ideal setting for this study. Nearly 20% of Fortune 500 firms outsource from India. Similarly, In-dian firms (for example, Mittal Steel and TCS Limited, among others) have the ambition and confidence to tap the global market in the area of their competencies by outsourcing within India. The data for this study were collected from both foreign and Indian firms based in India. Foreign firms were defined as those with some proportion of foreign ownership. We chose to differen-tiate between foreign and local firms for three reasons: (1) past research has shown that foreign firms outper-formed domestic counterparts in developing countries in most areas of business activities, such as superior customer service, on-time delivery, and delivery of supe-rior products, among others (Akaah & Riordan, 1988; Chong, 1973), so we expect the same, as the concept of market orientation and outsourcing is still recent in India; (2) a comparison serves as a benchmark, so it identifies areas for improvement and learning for both foreign and local managers; and (3) research findings based on Western samples typically cannot be general-ized in India, so a non-Western sample is needed to un-derstand foreign firms’ responses to business practices that are fostered by the culture of their head offices in other Western countries. In fact, cultural differences in the management of foreign and local firms provide a stringent test of the generalizability of hypotheses (Van de Vijver & Leung, 1997).

To ensure sample representativity, we randomized cluster sampling using the postal index number (PIN) from the Kompass directory (2007) of companies for New Delhi and Mumbai and stratified it to mirror the



table 1 Reliability and Validity Assessment of the Theoretical Construct Measures

Variables Foreign Sample Indian SampleFactor Loading (Std.) t-Value Factor Loading (Std.) t-Value

Customer Orientation (Narver & Slater, 1990)(Foreign Sample: α = .81, CR = .91, AVE = .72; Indian Sample: α = .79, CR = .85, AVE = .68)Customer commitment .71 9.56 .73 9.56Create customer value .76 10.68 .77 11.81Understand customer needs .81 11.76 .79 10.73Customer satisfaction objectives .82 12.73 .83 13.85Measure customer satisfaction .73 10.66 .78 11.39After sales service .76 10.84 .74 10.45Customer Orientation (Narver & Slater, 1990)(Foreign Sample: α = .83, CR = .87, AVE = .64; Indian Sample: α = .82, CR = .92, AVE = .74)Salespeople share competitors’ information

.81 12.55 .78 10.32

Respond rapidly to competitors’ actions

.80 11.34 .80 10.91

Top managers discuss competitors’ strategies

.77 10.17 .83 17.23

Target opportunities for competitive advantage

.76 10.16 .78 11.92

Interfunctional Coordination (Narver & Slater, 1990)(Foreign Sample: α = .81, CR = .77, AVE = .73; Indian Sample: α = .79, CR = .91, AVE = .67)Interfunctional customer calls .78 11.34 .80 13.71Information shared among func-tions

.82 12.32 .77 11.86

Functional integration in strategy .81 11.76 .74 10.12All functions contribute to customer value

.87 18.89 .80 11.87

Share resources with other busi-ness units

.86 17.16 .83 14.43

Outsourcing (new)(Foreign Sample: α = .78, CR = .81, AVE = .84; Indian Sample: α = .77, CR = .87, AVE = .73)Ratio of outsourced production to in-house production

.74 11.13 .78 12.75

Ratio of outsourced products to manufactured products

.73 11.01 .75 11.89

Capability (atuahene-Gima, 2005)(Foreign Sample: α = .79, CR = .83, AVE = .78; Indian Sample: α = .81, CR = .94, AVE = .71)Speedy introduction of new prod-ucts to market

.85 14.12 .81 14.34

Access to a wide distribution net-work for products

.77 12.64 .79 12.11

Creative marketing strategies for new products

.78 12.22 .80 12.01

Secure resources for marketing new products

.74 10.83 .73 10.21

Business Performance (Kotabe & Murray, 1990)(Foreign Sample: α = .93, CR = .86, AVE = .92; Indian Sample: α = .89, CR = .87, AVE = .88)Market share .77 10.73 .76 10.32Sales growth .78 11.26 .80 13.16Pretax profitability .79 11.86 .81 14.83

Model fit IndicesForeign: χ2 (392) = 641.35 (p = .00), RMSEA = .05, GFI = .88, CFI = .95India: χ2 (412) = 745.63 (p = .00), RMSEA = .06, GFI = .89, CFI = .96

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this study. As defined earlier, outsourcing is a firm’s de-sire to outsource an activity despite its ability to perform it in-house so that it can focus on its core competencies (Deavers, 1997). We measured outsourcing with two items indicating the extent of the proportion of outsourcing (ratio of production outsourcing to in-house production) and the extent of diversity of plant mix (ratio of distinct products outsourced to total distinct products manufac-tured by a firm).

Cross-Group Measurement ValidationThe measurement and structural models were tested using confirmatory factor analysis and structural equation modeling with AMOS 4.0. The models tested all measures simultaneously, including the second-order market ori-entation measure with its three dimensions—customer orientation, competitor orientation, and interfunctional coordination. These dimensions exhibited a reliability of over .7 as recommended by Nunnally and Bernstein (1994). Further, we calculated second-order reliability of market orientation using the method of liner combina-tions (see Nunnally & Bernstein, 1994, pp. 266–273). This method gave us the reliability of .91.

Before investigating structural paths of interest, we conducted configural and metric invariance using mul-tigroup confirmatory factor analysis across foreign and Indian samples (Steenkamp & Baumgartner, 1998). Configural invariance is supported if confirmatory fac-tor analyses provide evidence for: (1) the overall fit of the specified model; (2) the significance of salient, nonzero factor loading; and (3) the discriminant valid-ity of the measures under investigation. The measures

minimize error” (Van Bruggen, Lilien, & Kacker, 2002, p. 470).

We made 1,200 calls—200 in each industrial area. A total of 426 (213 sets) useable questionnaires were obtained, a response rate of 18%. Given the exploratory nature of the study in the emerging market where the re-sponse rate is traditionally low, this reasonable response rate implies that the respondents were interested in this study. Although these observations are not independent, several authors have established that bias due to noninde-pendence of observations is small when samples are large (Hunter & Schmidt, 1990, p. 452). Table 2 reports sample characteristics. In fact, 83% of foreign respondents and 78% of Indian respondents asked for a copy of the results of this study, thus suggesting the timeliness and impor-tance of the study.

Development of Measures and tests of reliabilityAll scales used, along with their sources and coefficients of reliability, are presented in Table 1. It provides evidence of good levels of reliability (> .70) for all the measures. Market orientation was measured using 15 items (Narver & Slater, 1990) from its three dimensions—customer orientation, competitor orientation, and interfunctional coordination. The capability measure was adapted from Atuahene-Gima’s study (2005) on product development capability. Risk aversion was operationalized using items from Jaworski and Kohli (1993). Consistent with the defi-nition of Kotabe and Murray (1990), we measured three performance indicators—market share, sales growth, and pretax profitability—in relation to the product’s three largest competitors. Only the outsourcing scale is new in

table 2 Sample Characteristics

Foreign IndianTotal Sample Size (N = 426) 221 (52%) 205 (48%)Manufacturing Products 104 (47%) 115 (56%)Providing Services 117 (53%) 90 (44%)Sales Turnover (< Rs.99m) 69 (31%) 88 (43%)Sales Turnover (Between Rs.100 and Rs. 149m) 95 (43%) 74 (36%)Sales Turnover (> Rs.150m) 57 (26%) 43 (21%)Employee Turnover (< 49) 64 29%) 66 (32%)Employee Turnover (Between 50 and 99) 104 (47%) 84 (41%)Employee Turnover (> 100) 53 (24%) 55 (27%)Respondents’ Designation (CEO/MD/Proprietor) 126 (57%) 125 (61%)Respondents’ Designation (Senior Manager) 77 (35%) 57 (28%)Respondents’ Designation (Midlevel Manager) 18 (8%) 23 (11%)Respondents’ Relevant Business Experience (in Years) 22.5 11.8Respondents’ International Business Experience (in Years) 19.7 10.7Proportion of Outsourcing Activities 62% 48%



tests of reliability and Validity of Measures

Unidimensionality, convergent validity, and discriminant validity of the measures were assessed according to the procedure suggested by J. C. Anderson and Gerbing (1988). The composite reliability coefficients for all the measures were well above the usual guidelines of .60 (Bagozzi & Yi, 1988). Furthermore, the structural param-eter estimates varied little when the method factor was incorporated into the analysis, suggesting reliability of the measures. The good model fit between foreign and Indian groups, and the significant high factor loadings in Table 1 and 3, support the unidimensionality and conver-gent validity of the measures (J. C. Anderson & Gerbing, 1988). Table 4 suggests the discriminant validity between the measures, as all factors’ correlations were significantly below one (p < .001) (J. C. Anderson & Gerbing, 1988). Further, discriminant validity was found for all pairs of measures by comparing the average variance extracted for each measure to the square of the correlation be-tween each pair of measures (Fornell & Larcker, 1981). The chi-square test for the measurement model was χ2 (34) = 75.32 (p < .001).

theoretical ModelTo test the hypotheses, using structural equation model-ing, each latent measure was measured by a single indica-tor scale, formed by averaging multiple items and fixing error variance at a level appropriate to its coefficient

were analyzed simultaneously to test for the psychomet-ric properties. Configural invariance for the five-factor model was supported, as fit indices for the measure-ment model were good: χ2(392) = 987.45 (p < .001), comparative fit index (CFI) = .941, Tucker-Lewis index (TLI) = .931, and root mean square error of approxi-mation (RMSEA) = .041. Table 1 suggests that that fac-tor loadings were well above 0.5 and were significant at p < .05. Metric invariance was tested by estimating con-firmatory measurement models across samples and sta-tistically comparing (1) the fit of a model in which the measurement loadings that were not set to be equal to 1 (i.e., to define the scale of the latent measures) were constrained to be the same across samples with (2) the fit of a model in which these same loadings were unconstrained across samples. Metric invariance and equality of factor loadings were supported: χ2(399) = 1035.45 (p < .001), CFI = .940, TLI = .935, and RMSEA = .043. The fact that CFI decreased insubstantially by .001 and TLI, an indicator of goodness of fit and model parsimony, increased by .004 provides strong evidence to support the metric invariance of the measures.

We also obtained configural invariance for risk aver-sion measure. The fit of the one-dimensional measure was good: χ2(5) = 29.65 (p < .001), CFI = .950, TLI = .941, and RMSEA = .063. All factor loadings were significant at p < .001 and above .05. Metric variance was also supported for the measure: χ2(8) = 43.56 (p < .001), CFI = .961, TLI = .923, and RMSEA = .042.

table 3 Confirmatory Factor Analysis

Variables Foreign Sample Indian SampleFactor Loading (Std.) t-Value Factor Loading (Std.) t-Value

risk-aversive Behavior (Jaworski & Kohli, 1993)(Foreign Sample: α = .82, CR = .75, AVE = .87; Indian Sample: α = .86, CR = .84, AVE = .83)1. Financial risks are worth the rewards

.77 11.45 .81 12.76

2. Managers take big financial risks

.76 11.03 .77 11.43

3. Develop innovative but risky marketing strategies

.83 12.83 .86 13.54

4. Managers are likely to play it safe (R)

.75 11.12 .75 11.43

5. Managers implement activities only if it works (R)

.89 14.67 .84 12.51

(R) Reverse-scored itemsModel fit IndicesForeign: χ2 (5) = 37.76 (p = .00), RMSEA = .04, GFI = .91, CFI = .94India: χ2 (5) = 46.31 (p = .00), RMSEA = .05, GFI = .89, CFI = .95

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tional competing models. TLI reduced further in the competing models compared to the theoretical model. In fact, none of the reverse effects was significant. These findings suggest that our proposed causal unidirectional theoretical model has the best fit. In the next section, we present estimates for the established model.

Main effectsFigure 1 shows the unstandardized structural coeffi-cients, appropriate in a cross-national setting (Singh, 1995), and goodness-of-fit statistics for both the groups. Market orientation is significantly positively related to capability (H1) in both the groups, foreign (b = .31, p < .01) and Indian (b = .29, p < .05). H2 posits a direct association between market orientation and business performance, after adjusting for the effects of capability. Although this relationship was in the expected direc-tion, it failed to reach statistical significance in both the groups, foreign (b = 14, n.s.) and Indian (b = .07, n.s.). Therefore, our analysis of pooled data across all firms does not suggest a direct effect of market orientation on business performance. Similarly, consistent with H3, out-sourcing is significantly positively related to capability in both the groups, foreign (b = .19, p < .05) and Indian (b = .21, p < .05). H4 proposes a direct association between outsourcing and business performance, after adjusting for the effects of capability. This causal relationship was statistically supported in both the groups, foreign (b = .36, p < .01) and Indian (b = .37, p < .05). Consistent with H5, capability had a significant positive effect on busi-ness performance in both the groups, foreign (b = 1.33, p < .01) and Indian (b = 1.31, p < .05). The fit indices for

alpha reliability (J. C. Anderson & Gerbing, 1998). Sum-mated indicators are commonly used when the model is complex. In fact, this approach typically leads to more precise structural estimates if the measures are unidi-mensional (Bandalos, 2002). Control variables—firm size and firm age—were added to each structural equation to control for possible confounding effects. The theoretical multigroup model (simultaneous) indicated a good fit: χ2 (34) = 75.32 (p < .001), CFI = .965, TLI = .957, and RMSEA = .040.

Competing ModelsTo check if the hypothesized model fit better than other possible competing models, we conceptualized two such models and estimated their parameters. The first compet-ing model specifies the reverse causal direction between market orientation and capability. It could be argued that capability enables firms to become market-oriented, as they have the capability to meet the customers’ needs. The fit of the model (χ2 (34) = 129.31 (p < .001), CFI = .961, TLI = .932, and RMSEA = .043) is significantly weaker than our hypothesized theoretical model. Our second competing model specifies a bidirectional rela-tionship between market orientation and capability. This conceptualization posits that market orientation renders a firm’s capability as hypothesized (H1), and that when the firm has this capability, it is more market-oriented. Thus, the cycle continues. The fit for the bidirectional compet-ing model is: χ2 (31) = 53.36 (p < .001), CFI = .964, TLI = .925, and RMSEA = .044). The difference in χ2 statistics (χ2(4) = 6.76, n.s.) indicated no significant difference between our theoretical and reverse causal and bidirec-

table 4 Correlation and Descriptive Statistics of Foreign and Indian Samples

Variables CUO COO IFC OS CAP PERMean 6.45 6.37 6.05 5.94 6.13 6.24Standard Deviation .98 .87 .54 1.05 .91 .85

Customer Orientation (CUO) 1.00 .32 .25 .36 .22 .33Competitor Orientation (COO) .24 1.00 .32 .23 .34 .27Interfunctional Coordination (IFC) .32 .28 1.00 .23 .21 .39Outsourcing (OS) .26 .31 .24 1.00 .37 .23Capability (CAP) .21 .29 .31 .27 1.00 .41Performance (PER) .36 .32 .43 .39 .34 1.00

Mean 6.21 6.01 5.97 6.31 6.34 6.12Standard Deviation .78 .67 .63 .92 .87 1.52

All the correlations are significant at .05 level.Note: The foreign sample is below and the Indian sample above the diagonal.



Moderating effects

Table 5 reports unstandardized structural coefficients and related statistics for the moderating effects. To test these moderating effects of risks (H6a and H6b), it was split by median to form low- and high-risk-aversive firms on foreign and Indian groups. We obtained a set of esti-mates by modeling the four groups simultaneously. The fit of the simultaneous model is good: χ2(87) = 97.43 (p < .001), CFI = .973, and TLI = .945. Consistent with H6a, the total effect of market orientation was significantly reduced for high-risk foreign (b = .12, n.s.) and for In-dian (b = .08, n.s.) firms, and significantly increased for low-risk foreign (b = .63, p < .01) and Indian (b = .52, p < .01) firms. The Fisher’s Z-test indicated that the total ef-fect of market orientation on business performance was significantly stronger for low-risk firms (.63 versus .12 in foreign and .52 versus .08 in Indian) than high-risk firms in both the groups. Hence, H6a was supported. However, for H6b, a complementary picture emerged in both the groups. It was found that the total effect of outsourcing significantly increased for high-risk foreign (b = .72, p < .001) and Indian (b = .73, p < .001) firms, and significantly decreased for low-risk foreign (b = .14, n.s.) and Indian (b = .16, n.s.) firms. The Fisher’s Z-test showed that the total effect of outsourcing on business performance was

the model are: χ2 (34) = 75.32 (p = .001), goodness-of-fit index (GFI) = .86, adjusted goodness-of-fit index (AGFI) = .81, RMSEA = .04, normed fit index (NFI) = .92, TLI = .96, and CFI = .96.

Further, to test the nature of pathways, direct or indirect, we compared the magnitudes of the direct market orientation on business performance with its indirect effect via capability by using the method sug-gested by Hair, Black, Babin, Anderson, & Tatham, 2006 (p. 868). The total effects (sum of direct and indirect) of market orientation on business performance for foreign and Indian firms are .55 (i.e., .14 + .31 1.33) and .45 (i.e., .07 + .29 1.31), respectively. And the total effects of outsourcing on business performance for foreign and Indian firms are .61 (i.e., .36 + .19 1.33) and .65 (i.e., .37 + .21 1.31), respectively. These findings suggest that market orientation (foreign, local) contributes to capability (74%, 84%) and business performance (26%, 16%), respectively. Similarly, outsourcing (foreign, In-dian) contributes to capability (41%, 43%) and business performance (59%, 57%), respectively. Therefore, the effect of market orientation and outsourcing is medi-ated by capability. Further, the effect of outsourcing is greater than market orientation on business perfor-mance. Given that we controlled for firm size and firm age, this finding is meaningful.

table 5 Direct, Indirect, and Total Effects (Unstandardized Structural Coefficients)

Direct Indirect (via Capability) Total EffectsForeign Indian Foreign Indian Foreign Indian

Full sample

MOàBP .14 .07 .41** .38** .55* .45*

OSàBP .36 .37 .25* .28* .61** .65**

Low-risk

MOàBP .27* .31* .36* .21* .63** .52**

OSàBP .13 –.02 .01 .18 .14 .16

High-risk

MOàBP –.02 .01 .14 .07 .12 .08OSàBP .39* .34* .33* .39* .72** .73**

Model fit Indicesχ2 (87) = 97.43 (p = .001), GFI = .87, AGFI = .82, NFI = .91, RMSEA = .05, NNFI = .93, TLI = .95, CFI = .97

GFI = goodness of fit index, AGFI = adjusted goodness of fit index, NFI = normed fit index, RMSEA = root mean square of error of approximation, NNFI = non-normed fit index, TLI = Tucker-Lewis index, CGI = comparative fit index.* p < .05, ** p < .001.

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2000). Therefore, it seems reasonable to seek outsourc-ing activities to build capabilities that can impact firm performance. It is imperative for many firms to develop a sound sourcing strategy to exploit R&D, manufactur-ing, and marketing on a global basis. Without established sourcing plans, distribution, and service networks, it is dif-ficult to exploit simultaneously both emerging technol-ogy and potential global markets. Outsourcing should be done where firms can consistently get the best product at the lowest costs, so that firms are able to create value for their customers. In sum, the results of this study appear to be consistent with our suggestion that firms be both market-oriented and outsourcers.

The second contribution of the study is its test of the moderating effects of firms’ risk-aversive behavior on the market orientation- and outsourcing-performance relationships. Our finding suggests, for superior business performance, that low-risk firms prefer development of market orientation, and that high-risk firms prefer outsourcing. A possible explanation and implication for managers is that firms accept the risks of outsourcing in return for improved market performance but ignore the potential for extracting benefits by learning (Bettis et al., 1992). This scenario is applicable to low-risk market-oriented firms. By contrast, market-oriented firms “scan the market broadly, have a longer term focus, and are more likely to be generative learners” (Slater & Narver, 1998, p. 103). Outsourcing is not meant for cutting costs but for achieving market orientation through developing capabilities. Given that market orientation and outsourc-ing complement each other, our recommendation is that the effects of individual sourcing decisions should be contingent upon the ability to achieve market orienta-tion in a risky contracting environment. Indeed, such a concurrent approach is a fundamental aspect of market orientation. Although risks are involved in outsourcing, developing a market orientation also contains significant financial risk. Thus, the impact of outsourcing decisions on continued learning skills and capability accumulation should be assessed. In any event, benefits of outsourcing should outweigh risks of outsourcing.

Finally, a noteworthy contribution of this study is the foreign vs. local setting of this research. Due to the global-ization of economies and expansion of markets, foreign firms take risks in outsourcing in emerging markets, whereas Indian firms take risks in going global. Thus, an understanding of the interplay between market orienta-tion, outsourcing, and business performance in light of the mediating role of capability and the moderating role of risks is important for managers. The study takes a step in developing such understanding. The fact that we

significantly stronger for high-risk firms (.72 versus .14 in foreign and .73 versus .16 in Indian) than low-risk firms in both the groups. Hence, H6b was supported.

Discussion

In this study, we developed a conceptual model that posits that firms improve business performance directly (direct pathway) either from the concept of market orientation or the practice of outsourcing, and indirectly (indirect path-way) from the capability built by market orientation and outsourcing. The results of our empirical test of this model indicate that, interestingly, both market orientation and outsourcing have a direct significant impact on building ca-pability. This, in turn, influences business performance. In addition, outsourcing contributes directly and significantly to business performance, whereas market orientation does not. However, low-risk market-oriented and high-risk out-sourcing firms have significant positive impacts on business performance. In this regard, this study brings clarity as to the complementary roles of market orientation and outsourcing in building capability and enhancing performance. In short, support was found for the complementary role of market orientation and outsourcing on business performance. To assist managers in developing and maintaining a capability, we must understand the trade-off between market orienta-tion and outsourcing.

theoretical Contribution and Managerial ImplicationsThis study makes three contributions to the literature and offers implications for managers. First, we attempted to bridge two areas of research—namely, market orientation and outsourcing—and tested their ability to build capa-bility and to enhance business performance. In prior re-search, these two areas were researched either separately or in a Western setting. Our findings indicate that firms desire market orientation to build capability, and out-sourcing to build capability and boost performance. This finding is new and interesting. It leads us to two manage-rial questions: does outsourcing require a market orien-tation to have a positive impact on performance, or does a market orientation greatly benefit from outsourcing’s proclivity to have a substantial impact on performance? We suggest that managers aim to attain capability, either from market orientation or outsourcing. A market ori-entation alone may not be sufficient to build capabilities and capture market opportunities successfully, because narrowly practicing market-oriented firms merely rein-force current beliefs about existing customers, competi-tors, and market environments (Jaworski, Kohli, & Sahay,



Based on the findings of this study, we recommend that firms should pursue market-oriented strategy for building long-term capability and im-proving business performance, particularly when firms have low tolerance for risks.

firms. Therefore, findings of this study should be in-terpreted in light of the fact that we used perceptual measures of business performance—market share, sales growth, and pretax profits. We suggest that future research should also include performance measure-ment indicators based on relationship and customer satisfaction. When work is outsourced, the relationship is in fact also outsourced. For example, a foreign firm wishing to form a partnership with a call center in India should measure indicators beyond service accu-racy and efficiency. Emphasizing these indicators may result in customers being unsatisfied with the service associates’ short and quick responses to customers’ questions. Indeed, counselors who take the time to fur-ther explore customers’ questions to better understand and address underlying customer needs would reduce efficient performance. Such calls last longer and there-fore would reduce the calls-per-counselor ratio (M. C. Anderson, 1997).

Second, for simplicity, we did not take into account cultural (the Western and Eastern) differences system-atically. We expect that a country’s degree of cosmo-politanism affects the adoption of market orientation, because it is largely a Western phenomenon, and that the degree of power distance (Hofstede, 1991) may moderate the outsourcing-performance relationship. Future studies should examine hypotheses relating to specific national culture- and country-specific drivers on

conducted the study using foreign and Indian firms and across industries and product categories increases the generalizability of our results.

recommendat ions for Managers

We recommend two specific strategies for building capa-bility in order to improve business performance: market-oriented strategy and outsourcing-based strategy. Based on the findings of this study, we recommend that firms should pursue market-oriented strategy for building long-term capability and improving business performance, particularly when firms have low tolerance for risks. We also recommend that firms need to invest in developing market orientation when the environment is somewhat munificent rather than to wait until it has become hostile. Being market-oriented has a positive impact on business performance. Thus, managers should develop positive attitudes toward market orientation and be willing to take calculated risks. True, it may be risky for a manager to modify a firm’s market orientation to match current market conditions, because achieving market orientation requires the commitment of resources. Thus, to mitigate the risks, we recommend that managers should increase the overall magnitude of market orientation of their firms while remaining sufficiently flexible (through outsourc-ing) in adjusting resources between the activities of mar-ket orientation and outsourcing.

On the other hand, outsourcing-based strategy is particularly effective for building capability and improv-ing business performance for those firms that have high tolerance for risks. The key point, while outsourcing, is that managers should avoid becoming locked into a particular activity (e.g., cutting cost, labor, etc.), and thus becoming too dependent on outsourcing. Depending upon the level of tolerance for risks for firms, we recommend that manag-ers should manage a proportion of outsourced activities by calculating the ratios of outsourced production to in-house pro-duction and outsourced products to manufactured products. The basis for outsourcing should be strategic, and the emphasis should be on creating superior value for buyers, and thus attaining a competitive advantage. The goal of this strategy is to enhance competitiveness by achieving a higher mar-ket share, sales growth, and pretax profitability through less commitment of resources and increasing the ability to adjust quickly to current market conditions.

Limi ta t ions and future research

Due to confidentiality reasons, we were unable to get objective data for business performance from private

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Note1. The authors are grateful to the anonymous reviewer for drawing our attention to this line of enquiry.

acknowledgment

The financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC 4A Research Grant # 0-40-8460-61000-000) is gratefully ac-knowledged.

the pathways in which market orientation and outsourc-ing build capability.

Finally, we were able to interview only two individu-als per organization, one of which was nominated by the CEO. Hence, what is seen as core and critical (in terms of outsourcing) by the members of the senior manage-ment may be quite different individual by individual. Further, whether outsourcing is a strategic concept or not is debatable. Thus, future research should examine the strategic differences amongst members of the senior management team.1

Satyendra Singh is an associate professor of marketing and international business and director of the Centre for Emerging Markets, Faculty of Business and Economics, University of Winnipeg, Canada. He has published sev-eral articles in reputed journals, such as Industrial Marketing Management, Service Industries Journal, the Inter-national Journal of Nonprofit and Voluntary Sector Marketing, the Journal of Services Marketing, and the Journal of Global Marketing, among others. He has authored two books, titled Market Orientation, Corporate Culture and Business Performance (Ashgate, 2004) and Business Practices in Emerging and Re-emerging Markets (Palgrave Macmillan, 2008). He is also editor-in-chief of the International Journal of Business and Emerging Markets.

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How market orientation and outsourcing create capability and impact business performance

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