Market orientation and business performance: Evidence from franchising industry

International Journal of Hospitality Management 44 (2015) 28–37

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International Journal of Hospitality Management journal homepage: www.elsevier.com/locate/ijhosman

Market orientation and business performance: Evidence from franchising industry Yong-Ki Lee a,1 , Soon-Ho Kim b,∗ , Min-Kyo Seo c,2 , S. Kyle Hight d,3 a

School of Business, Sejong University, 98 Gunja-dong, Gwangjin-gu, Seoul 143-747, Republic of Korea Cecil B. Day School of Hospitality, J. Mack Robinson College of Business, Georgia State University, 35 Broad Street, Suite 217, Atlanta, GA 30303, USA CEO, Maxcess Consulting Co., Woojong Bld. 3 Floor, 43-13, Gwancheol-dong, Jongro-gu, Seoul 110-111, Republic of Korea d Cecil B. Day School of Hospitality, J. Mack Robinson College of Business, Georgia State University, 35 Broad Street, Suite 220, Atlanta, GA 30303, USA b c

a r t i c l e

i n f o

Keywords: Franchisor’s market orientation Competitive strategy Business performance Top management factors

a b s t r a c t This paper examines the relationships between top management factors, franchisor market orientation, competitive strategy, and business performance within the context of Korean franchisor companies. 156 food-service franchise firms provide the basis for this empirical investigation. Findings show that top management factors such as management emphasis and risk aversion can lead to market orientation. Franchisor market orientation was found to lead differentiation and cost strategies, which, in turn, increase financial and non-financial business performance. Also, market orientation directly increases financial and non-financial business performance. The context of the franchise industry differs from other industries, and this paper discusses the implications of these findings for researchers and managers in the franchise industry. © 2014 Elsevier Ltd. All rights reserved.

1. Introduction In the last few decades, franchising has become a part of everyday life in developed countries. In particular, due to recent globalization efforts by firms looking to branch out of a saturated primary market, entry into developing countries has become a viable means of business growth. However, the global financial crisis of 2008 led to a rapid contraction of business credit, as economic uncertainties and decreased consumer spending led to an unstable economic environment. Recently, as the world’s economy starts to recover, both entrepreneurs and multi-national enterprises alike have again looked toward business expansion in developing countries, albeit with a cautious optimism. As a result, many firms in a variety of industries have adopted franchising as a key business strategy since markets have become highly competitive and turbulent and are constantly changing (Hsu and Jang, 2009). Environmental uncertainty is a major obstacle to decision making for the franchise industry (Boyle, 1999). Franchisees in

∗ Corresponding author. Tel.: +1 404 413 7619; fax: +1 404 413 7625. E-mail addresses: [email protected] (Y.-K. Lee), [email protected] (S.-H. Kim), [email protected] (M.-K. Seo), [email protected] (S.K. Hight). 1 Tel.: +82 2 3408 3158; fax: +82 2 3408 4310. 2 Tel.: +1 404 413 7619; fax: +1 404 413 7625. 3 Tel.: +1 404 290 5346. http://dx.doi.org/10.1016/j.ijhm.2014.09.008 0278-4319/© 2014 Elsevier Ltd. All rights reserved.

particular, which are often small business owners, face uncertainties in terms of business model, competitors, customers, marketing efforts, and overall viability. Since small businesses are crucial to the financial well being of an economy, franchising has become a popular business model because it alleviates pressures and uncertainty in starting a business via the transmission of best practices and marketing assistance (Chiou et al., 2004). The rapid growth of franchising has attracted the interest of researchers from a variety of academic fields (Elango and Fried, 1997; Hsu and Jang, 2009). The recent growth of the franchise industry in Korea needs systematic and strategic research to be successful in a competitive environment. Existing literature, however, has yet to address how market orientation and competitive strategy together influence business performance in the franchise industry, especially in Korea. Therefore, the significance of focusing on a key function of market orientation in the context of a dynamic environment to obtain a better understanding of competitive advantage and business performance is meaningful on both conceptual and strategic venues. The value of this research is twofold. First, despite abundant research on its theoretical construct – the role of market orientation on business performance – further investigation is needed as to whether specific top management factors facilitates or causes the relationship between market orientation and business performance in the franchise industry. Although much research suggests that market orientation plays a critical role in increasing a firm’s

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business performance, the issue of whether specific antecedents to market orientation, like risk aversion and management emphasis, influence the market orientation–business performance relationship has yet to be addressed explicitly in the franchise field. Namely, this study examines the contingent relationship between franchise businesses, market orientation, and competitive strategy to align franchise firms both internally and externally. Second, though the importance of market orientation on firm performance is widely known, the findings on the nature of the competitive strategy–business performance relationship is somewhat limited in strategic value for franchise managers. Accordingly, if the inclusion of the competitive strategy construct can contribute to identifying empirical regularities or reconciling irregularities in the competitive strategy–performance relationship, the level of confidence in competitive strategy would be advanced from a strategic standpoint. Our findings also can make a significant contribution to understanding how to enhance franchise performance through competitive strategy. The authors of this study identify Korea as an appropriate business context to conduct this research due to rapid growth and constant change in its business environment. Relevant to this study, the franchise industry in Korea has been growing significantly over the past 10 years. The trend was jumpstarted by fast food restaurants, which was followed by family restaurants, clothing chains, cleaning services, educational institutions and discount stores. In 2002, the number of franchise businesses in Korea was approximately 1600, overseeing 120,000 outlets. In just ten years, this number has more than doubled, with the number of franchise businesses and operating outlets increasing to 3500 and 488,000 outlets, respectively (KB Daily Knowledge Vitamin, 2012). In 2010, according to the Ministry of Knowledge Economy’s distribution and logistics division, the franchise industry in Korea was worth an estimated $70.2 billion. From this number, franchises for food services, including fast food chains and family restaurants, account for around 52 percent, or $36.5 billion; the retail sector, including convenience stores and consumer goods, account for 36.2 percent, or $25.4 billion; and the remaining sectors, including education, real estate, cleaning, and mailing services, account for 11.8 percent, or $8.2 billion. Despite its short franchise history of only 30 years, the Korean franchise industry has grown to make up 10% of the GDP in Korea due to its outstanding technologies, systems, capital capabilities, brand powers, etc. (KB Daily Knowledge Vitamin, 2012). Experts believe the potential for the franchise industry in Korea is bright because this segment has already been tried and tested with huge success. For example, the U.S. government website Export.gov indicates that Korean franchisees seek out and prefer to do business with U.S. franchisors that can offer established brand names to Korean consumers, and value the transfer of American management skills provided by U.S. headquarters (Export.gov, 2013). In addition, Tom Portesy, CEO of MFV Expositions (Global Franchise Corporation that organizes international franchise expos in NY, Houston, Anaheim, Mexico and UK) stated that Korean franchises have a very competitive edge in the US market thanks to effective systems, operations and services. Furthermore, the Korean government has consistent plans to assist franchise business to drive growth of international franchisors and entrepreneurs, creating new opportunities where otherwise growth becomes increasingly difficult in terms of local market saturation and increasing regulations. Despite the recent growth of the franchise industry in Korea, several challenges remain. For example, franchise business in Korea has only operated for an average of 5.4 years. More specifically, over 60% of franchisors have less than 5 years of business life expectancy and over 16% with less than one year of operation (KB Daily Knowledge Vitamin, 2012). Despite this challenging fact,

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more and more franchise systems are expanding into Korea. There is little doubt that many of the major opportunities for franchising lie in the Korea market of the Asia-Pacific region. While Europe and North America remain affected by the consequences of the global financial crisis, most of the Asian Economies are growing strongly. The demand for goods and services from increasingly affluent middle classes will fuel strong economic growth in the upcoming decades. Due to Korean franchisee’s preferences to do business with United States franchisors and the relative infancy of the Korean franchise industry, it is important for franchisors in all industries to accumulate relevant market information in order to become competitive in Korea’s fast-paced business environment. Although this study takes place in Korea, the authors purport that due diligence and competitiveness by a franchising firm is relevant in most business environments across the world. The objective of this study is, therefore, to identify how market orientation and competitive strategy affect firm performance. To this end, we explore whether top management factors enhance market orientation and further study the extent of the consequences on the level of business performance. Also, we take competitive strategy into account to identify the contingencies for the framework. In summary, we present a model that synthesizes the knowledge in market orientation and competitive strategy to understand the path to firm performance from the franchisor perspective, rather than from the franchisee viewpoint.

2. Theoretical foundations 2.1. Market orientation Market orientation is a marketing management concept that facilitates a firm’s ability to deliver superior products and services to both internal and external customers. This is especially important in today’s dynamic market environment where competition and uncertainty is intensifying. According to Kohli and Jaworski (1990), market orientation refers to company-wide acquisition of market intelligence, company-wide circulation of the material across departments, and company-wide reaction to it. In other words, this means that the company must first identify the various needs of such market participants as competitors, consumers, and suppliers, learn how to effectively respond to the changes in the market, and diligently work to create products and services that will provide a competitive advantage (Kohli & Jaworski, 1990). As such, Narver and Slater (1990) argue that profitability is the ultimate goal of a firm, and it results from successful market orientation. By definition, market orientation seeks to understand and capitalize upon exogenous factors surrounding a firm. In doing so, a firm is able to identify and respond to their customers’ needs and provide products and services that fit those needs, thus making market orientation a primary instrument in developing a sustainable competitive advantage (Jaworski and Kohli, 1993; Narver and Slater, 1990; Kumar et al., 2011). For the concept of top management emphasis, it is widely thought that top organizational leaders within a firm set the tone for the rest of the organization. Many studies have indicated that the actions of top management within an organization directly reflect the corporate culture and business ideologies of a firm (Senge, 1990; Hambrick and Mason, 1984; Slater and Narver, 1995). According to Slater and Narver (1995), a dynamic environment facilitates the need for a dynamic style of leadership from a visionary leader. Such leaders can educate cohorts, clients, and suppliers, as well as promote awareness toward relevant issues, ideas, and emerging trends. Additionally, these upper level managers can encourage an environment where innovation and non-conformation with the status quo is expected (Senge, 1990). In

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other words, a continuous innovative outlook is required of all management in order to achieve and/or sustain a competitive advantage in the marketplace. Jaworski and Kohli (1993) posited that top management emphasis was an antecedent to successful market orientation by a firm. They contend that top management emphasis on a market oriented approach by an organization will encourage and empower individuals within the organization to generate market intelligence, track changes, share all gathered data with others in the firm, and respond to market needs and demands. In addition, Kirca et al. (2005) also found that top management emphasis is necessary as a system for implementing market orientation. The concept of top management risk aversion relates to the tendency or stance of top management within a firm in regards to risk-taking activities. By definition, a market-oriented firm must respond to the constantly changing dynamics of its business environment in order to continuously provide relevant and timely goods or services that meet the needs and demands of its clients (Jaworski and Kohli, 1993). As Jaworski and Kohli (1993) point out, “new products, services, and programs often run a high risk of failure and tend to be more salient than established products.” Therefore, if a firm is unwilling to accept the possibility of a failed product, then that firm is unable to achieve a market-oriented culture, since a fear of failure will stifle creativity and information sharing. By contrast, if top management within a firm exhibits a willingness to take risks and accept occasional failures as a cost of competing within a competitive marketplace, then subordinates within the firm will share the same beliefs and will be more likely to share ideas and innovative thinking with the firm (Jaworski and Kohli, 1993). 2.2. Competitive strategy Competitive strategy refers to the comparative positional superiority in the market place that leads a firm to outperform its competitors (Porter, 1985). Extant literature has mainly focused on differentiation and cost strategies as means for competitive advantage. For example, a firm can achieve a differentiation advantage when customers consistently perceive its offerings as superior to those of its competitors. Also, a firm can achieve a cost advantage when the firm operates at a lower cost than its competitors but offers a comparable product (Porter, 1985). In differentiation strategy, customers perceive consistent value added differences on important product/service attributes between the firm’s offerings and those of competitors (Zhou et al., 2009). There are various forms of differentiation, such as brand differentiation, product differentiation, technological differentiation, and service differentiation (Kaleka and Berthon, 2006). Differentiation strategy is very different from cost advantage in that it is not always connected to the expansion of market share. When the strategy of differentiation becomes successful and highly profitable, the reinvestment to create a new differentiation and the building of a continuous competitive advantage become possible. The cost strategy is purportedly rooted in both scale economies and the experience curve (Makadok, 1999). This cost strategy is a method that expands market share by reducing cost through the economies of scale, oftentimes through joint ventures with firms that have achieved a pioneering advantage. Pioneers are likely to be the best positioned to achieve scale economies and to outperform future competitors. However, there are certain risks associated with cost advantage: technological changes that incapacitate the conventional production system, production design and experience effects; low cost imitation strategies by new or existing companies in the market; the lack of capability for the company to quickly respond to the changing needs of the customer and the market by stressing too much on the reduction of costs; and the inevitable increase of costs due to changes in the economical environment.

Cost advantage strategy must be determined after thoroughly analyzing business characteristics and the cost structure because, even though it is effective in business with scale and everyday commodities, it does not always to lead to profitability in dispersed type of business (Coeurderoy and Durand, 2004). 2.3. Business performance Measuring business performance has long been a method for all stakeholders invested in an organization to observe and make decisions based upon accumulated data. Business owners use business performance to track the completion of company goals and objectives; investors use business performance to gauge specific financial and productivity indicators; management uses business performance to analyze past performance and make necessary future adjustments; and employees use business performance to track productivity in an effort to meet bonus pay criteria. In fact, even non-profit organizations have begun to track strategic performance and management measures in order to compete for scarce resources and funds from donors, foundations, and government sources (Kaplan, 2001). Behn (2003) argues that there are eight purposes for measuring performance: (1) evaluate; (2) control; (3) budget; (4) motivate; (5) promote; (6) celebrate; (7) learn; and (8) improve. In other words, ultimately, firms measure performance in order to improve future performance. Traditionally, most stakeholders used financial measures (e.g., stock price, earnings per share, net income, revenue) to judge how well a business was performing. However, there have been recent arguments stipulating that non-financial performance measures are also worthwhile indicators of a firm’s long-term viability (Kaplan, 2001; Atkinson and Brown, 2001; Hunt and Morgan, 1995). Friedman (1970) argued that the only responsibility of a firm is to its shareholders through profit increase. Historically, this was the view of most firms, as measuring business performance through financial variables carried more emphasis for upper management. Also, measuring financial performance is easily quantifiable and, combined with generally accepted accounting principles’ standardization of accounting verbiage, simplifies side-by-side business comparisons. Financial performance variables, such as net profit, revenue, year-over-year increases in net income, and number of franchise contracts in relation to competition, are all data points that allow managers to measure their performance against top competitors and previously agreed upon goals. However, recent studies have indicated the benefits for businesses to track other performance measures; namely, those that are non-financial in nature (Atkinson and Brown, 2001; Ittner and Larcker, 1998; Miller and Lee, 2001; Kaplan, 2001). Non-financial performance measures like customer satisfaction, employee satisfaction, and franchisee’s satisfaction are metrics that can “tell more of a story” than static, quantitative data (financial performance indicators). Employee satisfaction is thought to be an antecedent to customer satisfaction, since happier employees are more productive, give better service, and are more loyal to a firm (Miller and Lee, 2001; Chiou et al., 2004; Jaworski and Kohli, 1993). Customer satisfaction is important because satisfied customers are more likely to return and provide repeat business, thus leading to customer loyalty (Chiou et al., 2004). Customer loyalty, in turn, leads to improved financial performance through an increase in word-of-mouth advertising and a decrease in marketing costs (Ittner and Larcker, 1998). Pertinent to this study, franchisee satisfaction is an important metric for a franchisor to track, as higher levels correspond to the intent of a franchisee to remain within a franchise system (Chiou et al., 2004). It is important to note that reliance on financial performance metrics is a reliance on past performance, which is a passive form of leadership (lag measures). Sole reliance on lag measures makes it difficult for a firm to look toward the future because they are

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more concerned with past data. This can lead to a shortsighted viewpoint by management, who is looking to meet current goals rather than focus on long-term metrics like employee and customer satisfaction (Atkinson and Brown, 2001). In contrast, focus on nonfinancial performance metrics is a management style that focuses on lead measures. Here, management looks to acquire and nurture relationships with employees, suppliers, and customers. In order to accomplish this, firms must be conscious of the business environment, aware of the needs of its clients, and ready to embrace innovative ideas in order to remain relevant as a company. This, by definition, makes the firm a market-oriented company.

3. Research model and hypotheses development Firms maximize their strengths and overcome their weaknesses in order to respond to the external opportunities and threats induced by recent environmental uncertainties. Market-oriented firms seek to understand exogenous factors in order to produce goods and services relevant to the market (Kohli and Jaworski, 1990). Raju et al. (2011) also found this to be true, specifically in small to medium-sized businesses. Their study argues that smaller firms are highly market-oriented due to the fact that they do not possess some of the key resources of larger firms, such as economies of scale and bargaining power with suppliers. Hence, higher operational flexibility and awareness is necessary for smaller firms to remain competitive in the marketplace. Jaworski & Kohli went on to argue that specific antecedents are apparent when achieving a market-oriented stance (Jaworski and Kohli, 1993). They found that top management’s risk aversion tendencies, combined with top management’s emphasis on conducting market-oriented activities, are two factors that affect a firm’s degree of market orientation. This is in line with Raju et al. (2011)’s study that identifies top management’s market focus and entrepreneurial proclivity as influences toward a firm’s degree of market orientation, which in turn affects firm performance. While studies such as this have adequately shown the correlation between these antecedents and market orientation, this relationship has not been addressed for the franchise industry. Therefore, we offer the following hypotheses: H1: Top management factors like risk aversion and emphasis influence the degree of a firm’s market orientation. H1-1: Top management’s risk aversion is positively associated with a firm’s market orientation. H1-2: Top management’s emphasis is positively associated with a firm’s market orientation. Business strategies can be regarded as a set of strategies designed to navigate a firm through its decision-making processes. Firms choose business strategies based on evaluations made regarding their external environment, including competitors, market mandates, and customer demands. According to Matsuno and Mentzer (2000), deciding on a business strategy requires organizational planning and routine observation in order to ascertain business performance in the competitive marketplace. As such, knowledge of the external business environment may influence the type of business strategy implemented by a firm. In other words, for the franchise industry, the type of services offered and the preferred target market will determine which type of business strategy a franchisor will implement. In addition, Li and Zhou (2010) found that firms should utilize a market-oriented strategy in order to achieve a differentiation or cost advantage. Wang et al. (2012) argue that hotels using a total quality management or market-oriented approach are more responsive to the changing needs of the business environment and therefore are better suited to adapt their

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strategies to the needs of all stakeholders. Thus, we offer the following hypotheses: H2: Market orientation within a firm influences differentiation strategy and cost leadership strategy. H2-1: Market orientation is positively associated with a firm’s differentiation strategy. H2-2: Market orientation is positively associated with a firm’s cost leadership strategy. According to Narver and Slater (1990), profitability is considered to be the result of market orientation. By definition, market orientation helps firms to understand and respond to the needs and services of the surrounding business environment. Hence, a market-oriented approach is necessary for a firm to achieve a competitive advantage in the marketplace (Jaworski and Kohli, 1993, Narver and Slater, 1990) by obtaining positional superiority over its competitors (Porter, 1985). In the franchise industry, a competitive advantage has been found to influence franchisee satisfaction, leading to greater intentions of the franchisee to remain in the franchise system (Chiou et al., 2004). In addition, a competitive advantage is important for franchisors when attracting new franchisees (Chiou et al., 2004). Due to the symbiotic relationship between franchisor and franchisee, it is important that the franchisor remain current on all happenings in the business environment, so that the policies and procedures they mandate to their franchisees results in positive business performance. More recently, Wang et al. (2012) found market orientation positively impacts firm performance in the hotel industry. Specifically, this study posits that both customer performance (non-financial) and financial performance are positively affected by a firm’s market-oriented stance. Similarly, Shoham et al. (2005) also found that market orientation positively influence business performance through increased employee commitment and positive financial returns. Therefore, we propose the following hypotheses: H3: Firms with high degrees of market orientation has a positive influence on financial performance and non-financial performance. H3-1: Market orientation positively influences financial performance. H3-2: Market orientation positively influences non-financial performance. The existing literature has adequately documented the positive effect of competitive advantage on performance, as competitive advantage provides a firm with the capability to outperform its competitors (Porter, 1985; Zhou et al., 2009). The current study adds to the literature by suggesting that, in franchise industries, competitive advantage enhances financial performance of firms. Ortega (2010) examines that the role of technological capabilities in moderating the relationship between competitive advantage and firm performance using a sample of 253 companies from the information and communications technology industry in Spain. Ruiz-Ortega and García-Villaverde (2008) further show that technical capabilities and the low cost orientation effect on the firm performance, regardless of the moment of entry into the market. In addition, Newbert (2008) found that the exploitation of valuable, rare resources and capabilities contributes to a firm’s competitive advantage, which in turn contributes to its performance. Drawing from these findings, hypotheses of the study are proposed as follows (Fig. 1): H4-1: Differentiation strategy has a positive influence on financial performance.

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Y.-K. Lee et al. / International Journal of Hospitality Management 44 (2015) 28–37

Fig. 1. A proposed research model.

H4-2 Differentiation strategy has a positive influence on nonfinancial performance. H5-1: Cost leadership strategy has a positive influence on financial performance. H5-2: Cost leadership strategy has a positive influence on nonfinancial performance. 4. Methodology 4.1. Sample and data collection The sample for this study consisted of 156 food-service franchise firms, which are listed by the Korea Fair Trade Committee. Data were collected from top management including brand directors or managers who fully understood the purpose of the study and the exact measures solicited by researchers. Data collection was carried out in the months of September and October of 2011. Because this study examined food-service franchise industries from the franchisor perspective, pure franchisee firms were not included in the study. Of the 528 food-service franchise firms contacted, a total of 192 (36.4%) firms responded. Out of 192 firms, 36 firms were deleted from the database because: (1) 8 firms did not complete and (2) 28 firms responded from several SBU units which were not the target of the current study. Thus, a total of 156 food-service franchise firms with an effective response rate of 29.5% were used for this study. A translation, back translation method was used to convert the questionnaire to Korean. Three bilingual Korean graduate students as well as a bilingual professor from the U.S. repeated 3 rounds of back and forth translation between the languages with the third version, in Korean, being compared to the original English version. The survey instrument was adopted after the three scholars were satisfied with the Korean translation (Table 1). 4.2. Measures Market orientation refers to the organization wide generation of market intelligence pertaining to current and future needs of customers, dissemination of intelligence within the organization, and responsiveness to it (Jaworski and Kohli, 1993, p. 468) and was classified into three sub-dimensions, intelligence generation (4 items), intelligence dissemination (6 items), and integrated response (5 items) based on Jaworski and Kohli (1993)’s work (see Table 2).

Each item was scored on a 5-point scale, ranging from “strongly disagree” to “strongly agree.” Top management factors which foster or discourage market orientation were measured by two separate scales: top management emphasis (4 items) and risk aversion (5 items) dimensions based on Jaworski and Kohli (1993)’s work (see Table 2). Top management emphasis on market orientation assessed the level of top management’s verbal reinforcement on market-oriented activities in organization wide. The top management’s risk aversion assessed top management’s disposition toward innovative actions in the face of risk and uncertainty. A 5-point scoring format (1 = strongly disagree; 5 = strongly agree) was employed for these items. Competitive strategy stems from its unique assets and distinctive capabilities (Gebauer et al., 2011). Competitive strategy literature commonly points to two types of positional superiority, Table 1 Profile of demographic characteristics (n = 156). Demographics Gender Male Female Age 29 and under 30–39 40–49 50 and over Education level High school or less Two-year college Four-year college Graduate school or more Sales (billion won) Less than 10 10–50 51 to less than 100 100 or more Position Top management Director Assistant chief/Head of Department Manager Number of employees at Franchise headquarters Less than 10 10–30 31–50 51–100 101 or more

Frequency

%

140 16

89.7 10.3

2 46 81 27

1.3 29.5 51.9 17.3

11 28 96 21

7.1 17.9 61.5 13.5

8 63 21 64

5.1 40.4 13.5 41.0

51 47 37 21

32.7 30.1 23.7 13.5

25 73 17 18 23

16.0 46.8 10.9 11.5 14.7

Y.-K. Lee et al. / International Journal of Hospitality Management 44 (2015) 28–37

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Table 2 Factor analysis and reliability test. Factors and variables Top management factors Top management emphasis (Cronbach’s ˛ = .77) 1. Top managers repeatedly tell employees that this business unit’s survival depends on its adapting to market trends 2. Top managers often tell employees to be sensitive to the activities of our competitors 3. Top managers keep telling people around here that they must gear up now to meet customers’ future needs 4. According to top managers here, serving customers is the most important thing our business unit does Top management risk aversion (Cronbach’s ˛ = .77) 1. Top managers here believe that higher financial risks are worth taking for higher rewards 2. Top managers here accept occasional new product failures as being normal 3. Top managers in this business unit like to take big financial risks 4. Top managers here encourage the development of innovative marketing strategies, knowing well that some will fail 5. Top managers around here like to implement plans only if they are very certain that they will work Total variance (%) KMO = .75, Bartlett’s Test of Sphericity = 427.34 (df = 28), p = .000 Franchise market orientation Intelligence generation (Cronbach’s ˛ = .91) 1. We understand customers’ demands in our products and services. 2. Our company is actively engaged in ongoing market research. 3. We periodically examine how recent changes in our operation affect our customers. 4. Our company quickly responds to changes in customers’ product preferences. Intelligence dissemination (Cronbach’s ˛ = .93) 1. We have groups that consist of different expertise that discuss current market trends and future development. 2. Our marketing manager and directors from other departments continuously discuss customer’s demands. 3. Our company pays great attention to everything that occurs in the process of our business operation and each member in every department shares these details. 4. All members in our company share important information about our competitors. 5. Our company reviews our development plan to apply customer’s demand to our new product. 6. In order to strategize our business plan for changes in the business environment, we have an active group of managers from each department that regularly meet to discuss these changes. Integrated response (Cronbach’s ˛ = .91) 1. Our company is very responsive to our competitors’ marketing strategy aimed toward our customers 2. Our teams actively interact and complement each other and revise our business activity based on the results 3. Our teams work together to improve our products and services by focusing on our customers’ demand 4. We do not neglect our customers’ feedback on our products and services 5. We are always ready to take great initiative on our marketing plan Total variance (%) KMO = .92, Bartlett’s Test of Sphericity = 1056.53 (df = 36), p = .000 Competitive strategy Differential strategy (Cronbach’s ˛ = .90) 1.Our new products and service development offer superior benefits to customers 2. We take great efforts in building a strong brand name 3. We successfully differentiate ourselves from others through effective advertising and promotion campaigns 4. We successfully differentiate ourselves from others through effective design (ex. brand identity, store identity) 5. We constantly offer overall differential advantage Cost strategy (Cronbach’s ˛ = .84) 1. Internal operation system has decreased the cost of our products 2. Manufacturing costs are lower than our competitors 3. We constantly offer lower opening costs than our competitors 4. We constantly offer overall cost advantage Total variance (%) KMO = .86, Bartlett’s Test of Sphericity = 681.80 (df = 28), p = .000 Business performance Financial performance (Cronbach’s ˛ = .92) 1. Achieved goal of net profit 2. Achieved goal of sales 3. Increased net profit 4. Increased sales 5. Achieved the number of franchise contracts Non-financial performance (Cronbach’s ˛ = .87) 1. Improved the capability of new products and services 2. Increased employee satisfaction 3. Increased customer satisfaction 4. Increased franchisees’ satisfaction Total variance (%) KMO = .89, Bartlett’s Test of Sphericity = 1018.08 (df = 36), p = .000

Factor loading

Eigen value

Variance explained (%)

2.68

32.21

2.43

30.33

.83 .68 .82 .76 .78 .81 .89 .75 – 63.54

2.97

32.96

2.58

28.61

1.84

20.45

.84 .73 .77 .76 – – .84 .80 .80 –

.72 – – – .86 82.02

3.47

43.36

2.32

29.05

.77 .78 .81 .84 .86 – .79 .82 .86 72.41

3.68

40.93

3.01

33.40

.84 .87 .85 .72 .78 .79 .78 .81 .77 74.33

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Table 3 Construct intercorrelations, mean and standard deviation. 1 1. Top management emphasis 2. Top management risk aversion 3. Market orientation 4. Differentiation strategy 5. Cost strategy 6. Financial performance 7. Non-financial performance Mean SD

2

3

4

5

6

7

1 .29** .22** .17* .07n.s .11n.s 4.38 1.26

1 .67** .57** .59** .76** 5.09 1.05

1 .55** .62** .65** 5.11 1.11

1 .48** .54** 5.01 1.17

1 .67** 4.68 1.13

1 4.99 .97

1 .18* .35** .38** .26** .26** .29** 5.62 .90

n.s, not significant. * p < .05. ** p < .01.

differentiation and cost (Porter, 1985). We adopted and developed a five-item (differentiation) and four-item (cost) measure based on Li and Zhou (2010) (see Table 2). All items were scored on a 5-point scale, ranging from “strongly disagree” to “strongly agree.” Business performance consists of financial and non-financial performance. Financial performance was measured using 5 items by the respondent perception of achieving goal of net profit and sales, increasing net profit and sales, and achieving the number of franchise contracts during last 3 years adopted from Han and Baek (2008) and Miller and Lee (2001) (see Table 2). A 5point scoring format (1 = strongly disagree; 5 = strongly agree) was employed for these items. Non-financial performance was measured using 4 items by the respondent perception of improving the capability of new products and services, increasing employee satisfaction, increasing customer satisfaction, and increasing franchisees’ satisfaction over last 3 years adopted from Kohli and Jaworski (1990) (see Table 2). A 5-point scoring format (1 = strongly disagree; 5 = strongly agree) was employed for these items.

5. Results 5.1. Measurement reliability Following research (Bagozzi and Heatherton, 1994; Sherman et al., 1997; Lee et al., 2008), factor analysis and structural equation modeling were performed for further analysis. As shown in Table 2, two underlying dimensions (top management emphasis and risk aversion) of top management factors, three underlying dimensions (intelligence generation, intelligence dissemination, and integrated response) of market orientation, two underlying dimensions (differentiation and cost leadership strategy) of competitive strategy, and two underlying dimension (financial and non-financial performance) of business performance were derived from factor analysis. All Bartlett’s test of sphericity and Kaiser–Meyer–Oklin statistics indicates that the data seemed suitable to identify factor dimensions. Most of the reliability coefficients for the data exceeded or were close to the minimum standard for reliability of .70 recommended by Nunnally and Bernstein (1994). In order to check for evidence of discriminant validity, we compared the correlation in each construct against the alpha coefficients representing its correlation with other factors. Tables 2 and 3 shows that the alpha coefficients in each construct exceed the square of correlation in each construct, suggesting evidence of discriminant validity (Gaski and Nevin, 1985). Also, we assessed convergent validity using factor analysis (Hill et al., 2014). As shown in Table 2, results of factor analysis for each construct indicate that extracting eigenvalue is greater than 1.0 suggesting a one-factor solution. This means that all variables converge on a common factor and thus are measuring the same construct. Finally, we conducted the Harmon’s one-factor test to examine evidence of

discriminant validity (Lee et al., 2011, 2014; Podsakoff et al., 2003). The results show that common method bias is not a serious threat to the study, because the fit of one-factor model (␹2 = 1913.100 with df = 527) is not better than the multidimensional model (2 = 828.895 and df = 491). Multiple items to measure top management emphasis and risk aversion, competitive strategy, and business performance were randomly split into two groups (separately for each variable) to represent two indicators of each construct (Bagozzi and Heatherton, 1994; Sherman et al., 1997; Lee et al., 2008). However, three dimensions (intelligence generation, intelligence dissemination, and integrated response) of market orientation were used as indicators of franchise market orientation. Table 3 shows the constructs’ intercorrelations, means, and standard deviations. 5.2. Testing the hypothesized structural models Maximum-likelihood estimates of the various parameters of the model are given in Table 4. Overall evaluation of the fit was based on multiple indicators (Bagozzi and Yi, 1988; Bollen, 1989). The Chi-square statistic suggests that the data fits the model well (2 = 131.099, df = 77; p < .01), and all other overall model fit indicators suggest that the data fits the model very well: GFI (.90), AGFI (.84), NFI (.92), CFI (.97), and RMSEA (.07). The standardized parameters are shown in Table 4 as well. The squared multiple correlations (SMC; R2 ) for the structural equations for market orientation, differentiation strategy, cost leadership strategy, financial performance, and non-financial performance are .24, .55, .42, .54, and .78, respectively (Fig. 2). 5.3. Hypotheses testing Hypothesis H1 posited that top management risk aversion would have a positive effect on market orientation. As shown in Table 4, the influence of top management risk aversion (coefficient = .24, p < .05) and top management emphasis (coefficient = .39, p < .01) on market orientation are positive and significant as predicted. Therefore, H1-1 and H1-2 were supported. H2 expected that market orientation would have a positive effect on differentiation strategy and cost leadership strategy. The result shows that market orientation has a positive effect on differentiation strategy (coefficient = .74, p < .01) and cost leadership strategy (coefficient = .64, p < .01), supporting H2-1 and H2-2. H3 stated the effect of market orientation on financial and nonfinancial performance. The results show that market orientation has a significant positive effect on financial (coefficient = .27, p < .05) and non-financial performance (coefficient = .65, p < .01). Hence, H3-1 and H3-2 were supported. Finally, H4 and H5 addressed the effect of differentiation strategy and cost leadership strategy on financial and non-financial performance. The results show that differentiation strategy has a significant positive effect on

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Table 4 Standardized structural estimates. Standardized estimate H1-1 H1-2 H2-1 H2-2 H3-1 H3-2 H4-1 H4-2 H5-1 H5-2

Top management risk aversion → Market orientation Top management emphasis → Market orientation Market orientation → Differentiation strategy Market orientation → Cost leadership strategy Market orientation → Financial performance Market orientation → Non-financial performance Differentiation strategy → Financial performance Differentiation strategy → Non-financial performance Cost leadership strategy → Financial performance Cost leadership strategy → Non-financial performance

.24 .39 .74 .64 .27 .65 .43 .22 .11 .08

SMC (R2 ) Market orientation Differentiation strategy Cost leadership strategy Financial performance Non-financial performance

.24 (24.0%) .55 (55.0%) .41 (41.0%) .54 (54.0%) .78 (78.0%)

2 df p

C.R.

p

2.48 3.76 9.72 7.37 2.21 6.13 3.50 2.25 1.13 .90

.013* .000** .000** .000** .027* .000** .000** .025* .260n.s .368n.s

Supported Supported Supported Supported Supported Supported Supported Supported Not supported Not supported

131.09 77 .000

2 = 131.09, df = 77, p = .000 (2 /df = 1.703), GFI = .90, AGFI = .84, NFI = .92, CFI = .97, RMSEA = .07. n.s: not significant * p < .05. ** p < .01.

financial performance (coefficient = .43, p < .01) and non-financial performance (coefficient = .22, p < .05). Hence, H4-1 and H4-2 were supported. However, cost leadership strategy does not have a positive effect on financial (coefficient = .11, n.s) and non-financial (coefficient = .08, n.s) performance, thus H5-1 and H5-2 were not supported.

Franchise industries are unique due to numerous differences from other industries. For example, a franchisor/franchisee are legally separate entities, professionally and economically dependent (symbiotic), and operationally indistinguishable from each other from the viewpoint of the consumer (Parsa, 1996). Therefore, this perspective on market orientation better fits with the way that franchise firms work in regards to environmental uncertainty and a dynamic environment.

6. Discussion and conclusions The key objective of this study is to explore the role that market orientation plays on business performance in the franchise context while focusing on the variables of top management factors and competitive strategy. In general, we empirically provide evidence that market orientation facilitate a firms’ business strategy, which, in part, positively influences its business performance. This paper expands the existing literature by studying market orientation’s relationships with business performance by emphasizing business strategies with differentiation and cost advantages.

7. Implications The findings of this study provide several important implications for managers in franchise companies. Our study notated that company-wide emphasis toward a market-oriented perspective and management’s degree of risk aversion are both antecedents to a firm developing market orientation. This is in line with the findings of Jaworski and Kohli (1993), among other subsequent studies. From the perspective of the franchise industry, these two

Fig. 2. Estimates of the structural model.

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antecedents are very important. As we have previously defined, a firm that is market-oriented focuses on both exogenous and internal factors when analyzing the surrounding business environment, and according to Senge (1990), top management within an organization should set the tone for all others. The tone can pertain to company strategies, corporate culture, target markets, environmental scanning, or target markets. Therefore, it is important for franchisors to emphasize a market-oriented emphasis to internal employees, as well as franchisees, for various reasons. First, the processes a firm undertakes in order to become market-oriented helps the company to remain competitive and relevant in a business context, thus identifying that market orientation is a precursor to competitive advantage (Jaworski and Kohli, 1993; Narver and Slater, 1990). Other studies have indicated that franchise firms that possess a competitive advantage are more attractive to franchisees, which helps attract new members (grow the business) as well as increase franchisee satisfaction (sustain the business). Additionally, by emphasizing a market-oriented approach, a franchise firm is essentially encouraging all franchisees to be aware of their business surroundings and to share any thoughts or ideas with the parent company. This establishes a two-way communication link between franchisors and franchisees, which, in turn, facilitates a relationship of trust and improved channel relationships (Mohr et al., 1999; Chiou et al., 2004). Another finding from the study relates to the relationship between market orientation and business performance. As previously illustrated, market orientation is a prerequisite tool to achieving a competitive advantage, and a competitive advantage is helpful in achieving franchisee satisfaction. As such, a model for growing the business (attract new franchisees) and sustaining the business (franchisee retention via franchisee satisfaction) is achieved by utilizing market orientation processes. In a franchise business context, a franchisee is very similar to an employee in that both look to upper management for resources like marketing and best practices, both are vital assets to the organization, and both need to be a strong focus of a firm. Therefore, studies that focus on employee satisfaction and its consequences are relevant in a franchising context. For example, studies indicate that satisfied employees devote more resources to their job, perform better, remain in the system (Miller and Lee, 2001), and create less conflict (Frazer, 2001; Chiou et al., 2004). An example that illustrates the benefits of franchisee satisfaction is the problem that sandwich franchise Quizno’s is having with its franchisees. Quizno’s was sued by franchisees that said that the parent company overcharged them for supplies and did not provide adequate marketing materials. As a result, hundreds of franchisees have since closed their business, and in 2010, Quizno’s had to pay $95 million to settle a class-action lawsuit (Raabe, 2013). As shown, market-oriented companies can directly or indirectly affect the performance level of a company. The application of such fundamental logic is rooted from the distinctive characteristics of the Korea franchise system. One of the few differentiating variables in the Korea franchising industry is that the revenue structure within the franchise market is different from the global market. Korean franchisors are dependent on revenue sources not only from royalty fees, but also from logistics and interior design or support, whereas other global franchise systems depend solely on a fixed royalty. Prospective franchisees depend on the franchisor to successfully strategize against uncertain environmental changes with a high level of competency. Therefore, a franchisor should focus on strengthening their market orientation stance in order to remain competitive, in order to meet the expectations of current franchisees as well as attract new prospects for business growth. Another finding of this study reveal that top management factors like emphasis and risk aversion drive market orientation, which in turn, have a similar impact on differentiation and cost

strategies as well as on financial performance. In other words, this study found that market orientation plays a mediating role in the relationship between top management risk aversion, and differential and cost leadership strategy. According to Baron and Kenny (1986), four conditions must be met in order to prove that a mediating relationship exists: (1) the independent variable is a significant predictor of the outcome variable; (2) the independent variable is a significant predictor of the mediator; (3) the mediator is a significant predictor on the outcome; and (4) the direct relationship of the independent variable to the outcome variable becomes significantly smaller with the addition of the mediator when compared to the direct relationship of the independent variable to the outcome variable without the mediator. As seen from the results of this study, all conditions are satisfied, thus making market orientation a mediator in the relationship between top management risk aversion, top management emphasis, and differential and cost leadership strategy. Additionally, once it has been established that a mediating role exists, the relationship must be tested to determine the extent of the mediating effect. In this study, top management risk aversion and top management emphasis does not have a significant effect on differential and cost leadership strategy, respectively. This, according to Ro (2012), implies that a complete mediation effect has been established. Another implication from the study shows that differentiation and cost strategies cannot be achieved without emphasis on a market-oriented approach within an organization. This is in line with the findings of our study, which show a direct effect between top management emphasis and differentiation strategy. In order for a company to provide higher value to customers compared to the competition, it must develop competitive business strategies through both marketing and operations. The former could be achieved by: new service development; good conditions; competitive pricing; provision of quality products; excellent delivery and logistics; alliancing; and effective communication. According to a survey done by the Ministry of Knowledge Economy of South Korea, the average lifespan of franchise companies has increased from 5.4 years in 2005 to 9.2 years in 2008. This fact gives testimony that the franchise industry in South Korea is overcoming environmental uncertainties and are adapting to the competitive nature of the franchise industry. Furthermore, franchise companies must discover the optimal combination of different competitive strategies by examining the suitability of strengthening internal competency, which, in turn, responds to external environment to gain a competitive advantage against the competition. Hence, in order to enhance financial performance, new product and service differentiation, brand differentiation including advertising and promotions, and different segmented products at markets are relatively more important than focusing on low opening cost and overall cost strategies.

8. Limitation and directions for future research Some of the limitations of this study must be addressed. First, this study only surveyed one management position in one foodservice franchise firm based on a single-country setting. The restricted nature of our sample suggests that any generalization of our findings to other contexts should be made with caution. However, given the prevalence of similar franchise systems (e.g., hotel) that require a market-oriented stance along with competitive strategies, our findings may be fairly reflective of the industry at large. In addition, this research collected data on all constructs, including performance, from a single respondent. While this is a prevalent practice in resource-based research, it is recommended that future researchers collect data from multiple respondents to improve the authenticity and generalizability of the results.

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An avenue that was not explored in this study, but came up intermittently during the research, is the timing of the implementation of a market-oriented perspective by an organization. Kumar et al. (2011) found that firms that adopt a market-oriented mentality earlier in the life cycle development of a business gain more in sales and profit over firms that adopt market orientation later in the cycle. Additionally, Frazer (2001) found that older franchise firms (firms in a later stage of life cycle development) are “more likely to suffer problems between franchisors and franchisees that result in substantial disputes. . .” Therefore, it can be assumed that by adopting a market-oriented approach as early as possible in the life cycle development, a firm is more likely to realize increased business performance and positive franchisee relationships. To our knowledge, no study like this exists for the franchise industry. Also, additional research across different countries and industries may be required for any complementary research in the future. By exploring the financial performance of franchise firms, this study raises the question of how much a difference exists concerning the mediating effects of a franchise firm’s market orientation on financial performance between Western societies and Asian societies. It would be premature to answer this question, since it was not included as a research purpose of this study and it is likely that differences do exist between the two cultures. Furthermore, future studies should try to improve the shortcomings of this study by including more exogenous variables (e.g., strategic marketing) so that optimal maximization of firm performance in franchise contexts may be more transparently revealed. References Atkinson, H., Brown, J.B., 2001. Rethinking performance measures: assessing progress in UK hotels. Int. J. Contempor. Hosp. Manage. 13 (3), 128–136. Bagozzi, R.P., Heatherton, T.F., 1994. A general approach to representing multifaceted personality constructs: application to state self-esteem. Struct. Equ. Model. 1 (1), 35–67. Bagozzi, R.P., Yi, Y., 1988. On the evaluation of structural equation models. J. Acad. Market. Sci. 16 (1), 74–94. Baron, R.M., Kenny, D.A., 1986. The moderator–mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. J. Personal. Soc. Psychol. 51 (6), 1173–1182. Behn, R.D., 2003. Why measure performance? Different purposes require different measures. Public Admin. Rev. 63 (5), 586–606. Bollen, K.A., 1989. Structural Equations With Latent Variables. John Wiley & Sons, NY. Boyle, E., 1999. A study of the impact of environmental uncertainty on franchise system: the case of petrol retailing in the UK. J. Consum. Market. 16 (2), 181–195. Chiou, J.S., Hsieh, C.H., Yang, C.H., 2004. The effect of franchisor’s communication, service assistance, and competitive advantage on franchisee’s intentions to remain in the franchise systems. J. Small Bus. Manage. 42 (1), 19–36. Coeurderoy, R., Durand, R., 2004. Leveraging the advantage of early entry: proprietary technologies versus cost leadership. J. Bus. Res. 57 (6), 583–590. Elango, B., Fried, V.H., 1997. Franchising research: a literature review and synthesis. J. Small Bus. Manage. 35 (3), 68–81. Export.gov, November 2013. Selling US Products and Services: Franchising, http:// export.gov/southkorea/doingbusinessinskorea/sellingusproductsandservices/ (retrieved 15.01.14). Frazer, L., 2001. Causes of disruption to franchise operations. J. Bus. Res. 54 (3), 227–234. Friedman, M., 1970. The social responsibility of business is to increase profits. N. Y. Times Mag., http://www.umich.edu/∼thecore/doc/Friedman.pdf Gaski, J.F., Nevin, J.R., 1985. The differential effects of exercised and unexercised power sources in a marketing channel. J. Market. Res. 22 (2), 130–142. Gebauer, H., Gustafsson, A., Witell, L., 2011. Competitive advantage through service differentiation by manufacturing companies. J. Bus. Res. 64 (11), 1270–1280. Hambrick, D.C., Mason, P.A., 1984. Upper echelons: the organization as a reflection of its top managers. Acad. Manage. Rev. 9 (2), 193–206. Han, S.-L., Baek, M.-Y., 2008. Effects of environmental uncertainty on transaction and industry characteristics in the franchising markets. J. Distrib. Res. (Korean J.) 13 (3), 55–77. Hill, A.D., Kern, D.A., White, M.A., 2014. Are we overconfident in executive overconfidence research? An examination of the convergent and content validity of extant unobtrusive measures. J. Bus. Res. 67 (7), 1414–1420. Hsu, L.T., Jang, S., 2009. Effects of restaurant franchising: does an optimal franchise proportion exist? Int. J. Hosp. Manage. 29 (1), 204–211.

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