The Development and Impact of Marketing Capabilities in Central Europe
Author(s): John Fahy, Graham Hooley, Tony Cox, Jozsef Beracs, Krzysztof Fonfara, Boris
Snoj
Source: Journal of International Business Studies, Vol. 31, No. 1 (1st Qtr., 2000), pp. 63-81
Published by: Palgrave Macmillan Journals
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The
Marketing
Development
in
Capabilities
and
Impact
of
Europe
Central
John Fahy*
UNIVERSITYOF LIMERICK
GrahamHooley**
ASTON BUSINESSSCHOOL
Tony Cox***
ASTON BUSINESSSCHOOL
Jozsef Beracs****
BUDAPESTUNIVERSITYOF ECONOMICSCIENCES
KrzysztofFonfara*****
BUSINESSSCHOOL
WIELKOPOLSKA
Boris Snoj******
UNIVERSITYOF MARIBOR
The industrial organisation and
evolutionary economics traditions
in international business and the
resource-based view of the firm in
strategic management provide a
rich and related set of perspectives
on the question of performance in
an international environment. This
*John Fahy is Professor of Marketing at the University of Limerick. He and his colleagues,
below, have been engaged in an extensive program of work in Central Europe that has
been going on for the past eight years and has been widely reported at conferences and
in leading marketing and international business journals.
**Graham Hooley is Professor of Marketing and Director of Research at Aston Business
School.
***Tony Cox is Senior Lecturer in Marketing at Aston Business School.
*****Joszef Beracs is Professor of Marketing and Chair of the Marketing Department at the
Budapest University of Economic Sciences.
* * * * *Kryzsztof
**** **Boris
Fonfara is President of the Wielkopolska Business School.
Snoj is Professor of Marketing at the University of Maribor.
The research reported in this paper was funded by the European Union under its ACE94
initiative. The contributions of Professors David Shipley, Krizstina Kolos, Irma Agardi, Marin
Marinov, Svetla Marinova, Damjan Mumel, Matjaz Irsic and Vladimir Gabrijan to the wider four
country study are gratefully acknowledged.
JOURNAL OF INTERNATIONALBUSINESS STUDIES, 31, 1 (FIRSTQUARTER2000):
63-81
63
MARKETINGCAPABILITIESIN CENTRALEUROPE
paper draws on these perspectives
to examine the nature of marketing
capabilities across a range of firm
types in Hungary, Poland and Slovenia. A number of key strategic capabilities are examined including
market orientation, the time horizon of strategic decision making
and positioning capability. The
study finds that firms with foreign
participation have been able to de-
velop a sophisticated level of marketing capability with a resulting
positive impact on financial and
market performance. Wholly-owned
subsidiaries and international joint
ventures emerge as equally effective
mechanisms for the transferof marketing capability. Conclusions are
drawn and implications from the
research are outlined.
INTRODUCTION
Levitt (1983) in particular, generated
some intense debate on both sides (See
for example, Boddewyn, Soehl and
Picard [1986], Douglas and Wind [1987],
Kashani [1989] and Robinson [1986]).
Subsequent empirical studies have offered mixed levels of support for the contention that the efficiencies derived from
standardization enable the generation of
superior levels of financial performance
(See Shoham [1995] for a review). Correspondingly, many authors have offered
the view that standardization may prove
most suitable in industries exhibiting
like relatively
global characteristics
high levels of homogenous demand or
cross-national business interdependencies (Henzler and Rall 1986; Lewis and
Harris 1992; Porter 1986; Yip 1992).
apHowever, this contingency-based
proach to the performance question has
also failed to find support in empirical
work conducted within the tighter confines of global industries (See for example, Samiee and Roth 1992). Furthermore, in the strategic management literature, contingency-based explanations of
performance heterogeneity, popularized
by the work of Porter (1980), have also
fallen out of favor as much subsequent
research has cast doubt on the strength of
industry effects (Hansen and Wernerfelt
1989; Rumelt 1991). Attention is increasingly being focused on the idiosyncratic
nature of the firm's resource endowments and how these resources can be
deployed to gain positions of competitive advantage. This line of research, labeled as the resource-based view of the
firm (RBV), offers an explanation of sustained superior performance that is not
rooted in industry conditions and potentially offers a way out of the standardization/adaptation duality.
In the strategy literature, the resourcebased view of the firm has grown in popularity since its original conceptualization by Wernerfelt (1984). Grounded in
economic models of imperfect competition, the RBV proposes that sustained
profitability accrues from the possession
and deployment of resources that are
limited in supply which in effect, gives a
firm a quasi-monopoly in their use. A
64
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
Understandingthe determinantsof superiorbusinessperformanceis a subject
of regulardebateand of centralinterest
to both researchersand practitioners.In
the internationalmarketingand managementliterature,this dialogueis generally
framedin terms of the standardization/
adaptationdichotomy.The relativemerits of adoptinga standardisedapproach
to strategyhas been of interestsince the
1960s, and the controversialwork of
ToNY Cox, JOZSEF
JOHNFAHY,GRAHAM
KRZYSZTOF
HOOLEY,
BERACS,
ANDBoRis SNOJ
FONFARA,
resource-based explanation of performance heterogeneity has much appeal in
the international sphere because resources, both at the level of the country
and the firm, have long been of interest.
For example, the development and exploitation of firm-specific advantages in
foreign markets is a core element of the
industrial organisation theory of the
multinational enterprise (Caves 1971;
Hymer 1960) while more recent work in
the evolutionary economics tradition has
focused on relationships between the
characteristics of certain firm-specific resources and their mode of transfer to foreign markets (Kogut and Zander 1993).
This paper draws on these disparate,
but related streams of literature to examine the relationship between the firm's
marketing capabilities and its overall
performance. The study is set in Central
Europe (CE), an area undergoing rapid
transition to a market-led environment
and one where the development of marketing capabilities would be expected to
be of crucial importance. As such, the
research seeks to make a number of contributions. First, it aims to provide insights into both the development and deployment of key resources by firms in the
CE region. While a great deal of research
has looked at the activities of foreign
firms in Central Europe, relatively little
is known about the competitive strengths
of local firms. Second, by drawing on
perspectives from industrial economics,
strategic management and international
business, the research responds to repeated calls for a more interdisciplinary
approach to international business research (Buckley 1991; Dunning 1989). It
provides insights into both the development of resources (which has not yet
been considered in any great depth by
writers in strategic management) and the
deployment of resources to gain competVOL. 31, No. 1, FIRST QUARTER, 2000
itive advantages (which has received less
attention in the international business
literature). Finally, by focusing on the
relationships between capabilities and
performance, this study offers a possible
alternative to the standardization/adaptation duality with consequent implications for further research and practice.
LITERATURE REVIEW AND RESEARCH
PROPOSITIONS
Literature Review
The question of how firms acquire and
develop valuable assets and capabilities
is being given increased attention in the
literature. Dickson (1992) notes that heterogeneity in resource supply (and product demand) is a virtuous cycle with no
clear beginning or end as firms respond
to changing demand by experimenting
with new ways of serving customers.
Consequently, ongoing resource decisions place firms on a path trajectory
which may be positive or negative relative to market movements and even firms
with the best products may lose out in
the marketplace because they have
locked into inferior technologies (Teece,
Pisano and Shuen 1997). Research in the
field of international business demonstrates that resource endowments are
firmly rooted in an organisation's context. In particular, it highlights the role
of economic and institutional factors in
the development of firm-level resource
stocks. For example, Dunning (1981) has
argued that firm-specific advantages (resources), though endogenous to particular firms, are not independent of their
industrial structure, economic systems
and institutional environments. Thus,
for example, much of the international
success of Japanese firms has been attributed to the role of their home government and its ministries (Pascale and
65
MARKETINGCAPABILITIESIN CENTRALEUROPE
Athos 1982; van Wolferen 1989) as well
as the ethos of the Japanese population
towards work, authority and living standards (Lodge and Vogel 1986).
These asymmetries in resource endowments across national boundaries
are also of central interest to the industrial organization perspective on the
multinational enterprise (Hymer 1960;
Kindleberger 1969). Firms operating in
foreign markets face disadvantages viz. a
viz. local competitors, such as the latter's
greater familiarity with local conditions,
political and exchange risks and the
travel and communication
costs incurred in conducting foreign business
(Caves 1971). Consequently, MNEs possess idiosyncratic resources which enable them to overcome these disadvantages and generate economic returns
over and above their opportunity costs
when used in foreign markets (Graham
1978). Thus, the unequal distribution of
advantages between firms in different
countries is itself a sufficient condition
for foreign direct investment (Hymer
1960). Particular firm-specific advantages which have been identified in the
IO literature include knowledge, information or techniques (Caves 1971), technological expertise or entrepreneurial
skills (Graham 1978), ownership of a
brand name, possession of special marketing skills, patented technology, favorable access to sources of finance, teamspecific managerial skills, plant economies of scale and economies of vertical
integration (Kindleberger 1969). Hymer
(1960) noted that the kinds of abilities
that lead to international operations will
most often be possessed by only a few
firms, given that if many firms possess
these abilities, then they are probably
not too difficult for local competitors to
also acquire.
More recently, the evolutionary perspective on the multinational enterprise
(Kogut and Zander 1993) has focused attention on the nature of firm-specific resources and in particular on the feasibility of their transfer across national
boundaries. Evolutionary theorists view
firms as social communities, in which
knowledge is shared or transferred and
used to generate economically useful
products through the application of
higher-order principles such as cultures,
languages and codes (Kogut and Zander
1992). Where firms differ in their codes
by which knowledge is transferred, they
also differ in their capacities to understand and apply this knowledge. This
implies that the transfer of knowledge is
more effective when it is conducted internally rather than through the market
mechanism and that the multinational
enterprise represents the vehicle through
which knowledge is transferred across
national boundaries.
This study is set in the context of the
transition economies of Central Europe
(CE). The CE region has undergone unprecedented economic, political and social transformation since the fall of Communism in 1989. Economic reform,
deregulation, privatization and foreign
direct investment have proceeded at
varying rates throughout the region, dramatically altering the nature of the competitive environment. There is evidence
of increased levels of competition and of
major changes in the nature of customer
demand. For example, recent research in
Hungary, Poland and Bulgaria reveals
significant advances in the sophistication of customer demand and in the intensity of competition in these countries
(Cox and Hooley 1995). In this new competitive milieu, the question of resource
development and deployment is likely to
be a crucial one. Firms with a tradition
66
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
FONFARA,AND BoRis SNOJ
JOHNFAHY, GRAHAMHOOLEY,ToNY Cox, JOZSEFBERACS,KRZYSZTOF
and heritage of operating in a command
economy are faced with the challenge of
acquiring the skills necessary to compete
in a market-driven environment. In contrast, foreign investors originating from
regions like Western Europe and the
United States have a history of operating
in a market environment and are likely
to have well developed skills in the area.
Industrial organization theorists predict
that such marketing knowledge will help
to overcome the costs of doing business
in CE and will give foreign investors a
potential source of competitive advantage in their host markets. However, evolutionary theorists caution that the transfer of such complex resources may be
difficult and necessitate the presence
of particular structural arrangements.
Given their likely importance in the
changing environment of Central Europe, this study focuses on marketing
capabilities and assesses their level of
development and impact on the performance of firms in the region.
Efforts to understand the nature of
marketing capabilities have been increasing in recent years given the prevailing influence of resource-based perspectives on competitive advantage.
However, Day (1994) notes that it is impossible to enumerate all possible marketing capabilities as they are likely to
vary from business to business due to the
nature of competitive markets, past commitments and anticipated future needs.
Rather he suggests that they can be
thought of in terms of three broad
groups. First, capabilities that are outside-in, such as market sensing and
channel bonding. Second, those that are
inside-out, such as integrated logistics
and technology development, and third,
those which span both such as new
product development capabilities and
customer order fulfillment processes
VOL. 31, No. 1, FIRSTQUARTER,2000
(Day 1994). Furthermore, he suggests
that capabilities such as market sensing
and customer linking are likely to be particularly important features of marketdriven organisations. This view resonates with the emerging literature on
market orientation. For example, Hunt
and Morgan (1995) propose that market
orientation (broadly, the ability to diagnose and respond to customer needs)
meets the conditions of an advantagegenerating resource. They argue that empirical research shows it to be rare, to be
likely to dissipate without adequate reinvestment and to be sufficiently tacit
and complex to be difficult for competitors to duplicate (Hunt and Morgan
1995). Recent empirical studies have
verified the presence of a link between
market orientation and corporate performance (Greenley 1995; Jaworski and
Kohli 1993; Narver and Slater 1990;
Slater and Narver 1994)1. In summary,
marketing capabilities generally are an
important source of competitive advantage and are likely to be particularly
valuable in Central Europe where economies are in the process of transition to a
more market-led environment.
Propositions
As noted earlier, the development of
capabilities is related to the economic,
cultural and institutional environments
in which firms operate. Until the fall of
Communism, firms in the CE region operated in a very unique environment as
the nature of the command economy
meant that there was little necessity for
the development of marketing capabilities. It could also be suggested that firms
operating in the region did not anticipate
such a dramatic alteration in the status
quo, with the result that on-going
resource development decisions were
likely to be concentrated on internal op67
MARKETINGCAPABILITIESIN CENTRALEUROPE
erational and efficiency considerations
rather than on external market responsiveness. This pattern of decisions
equates to a negative resource trajectory
given the way the competitive environment subsequently changed (Dickson
1992). The challenge for firms in the region has since become one of developing
and acquiring these much needed marketing capabilities and the likelihood is
that their success in doing so is influenced by the nature of their ownership.
For example, it is likely that firms that
are still State-owned have had the most
difficulty acquiring the necessary capabilities. Given the extent to which an
organisation's administrative heritage
(Bartlett and Ghoshal 1989) can hinder
its ability to change, it is likely that the
established routines and practices in
State-owned enterprises have impeded
the development of marketing skills. In
contrast, firms that have been formed
since the liberalization of the economies
do not have to carry the same historical
baggage. These firms commenced operations in an environment that was becoming increasingly market-led and resource
development decisions were likely to
have placed greater emphasis on the development of marketing capabilities.
Similarly, the opening up of these economies presented firms with the opportunity to acquire the necessary capabilities
through co-operative ventures with foreign partners. Marketingcapabilities are
the type of advanced management practices that vary from country to country
because they diffuse slowly across national borders (Kogut 1991). Stocks of
marketing capabilities can be expected
to be much higher in Western countries
due to generations of operating in a market-led environment. Partnering with
foreign firms is likely to have been an
attractive mechanism for gaining access
to such capabilities that could only be
built up otherwise through repeated
practice and codification. Therefore,
68
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
Pla: Firms with foreign participation
will have greater marketing capabilities than other types of firms in the CE
region.
Plb: Firms which are still State-owned
will have lower levels of marketing
capabilities than other types of firms
in the CEregion.
The deployment of valuable resources
such as marketing capabilities enables
firms to gain competitive advantages
with positive implications for financial
and market performance. It is expected
that in the transition economies of Central Europe, firms with foreign participation will have access to more sophisticated marketing capabilities enabling
them to outperformtheir domestic counterparts. Furthermore,this advantage is
not likely to be easily eroded as firms
accepting inward FDI from Western investors potentially gain access to resources that cannot be easily duplicated
by their domestic competitors who do
not have similar exposure to Western
marketing practices. This means that capabilities acquired are both scare and
inimitable, two key requirements for the
creation of a sustainable competitive advantage (Barney1991). Previous research
in the area has shown that firms with
foreign participation have been able to
achieve positions of domestic dominance and report superior levels of performance (Hooley et al 1996), therefore,
P2: Firms with foreign participation
will outperform firms without foreign
participation.
Evolutionary perspectives on the
multinational enterprise have proposed
JOHNFAHY, GRAHAMHOOLEY,ToNY COX, JOZSEFBERACS,KRZYSZTOF
FONFARA,AND BoRis SNOJ
that organizational knowledge is more
efficiently transferred internally than
through the market mechanism (Kogut
and Zander 1993). Marketing capabilities represent the organization's stock of
knowledge about the conduct of its marketing activities. Such knowledge is tacit
as in the ability of the firm's management
or marketing personnel to sense and react to customer needs and changes in
patterns of demand. Similarly, the processes by which knowledge is acquired
to build market-driven organizations
(Day 1990) is complex and highly firmspecific. Firms in different countries are
likely to have differential capabilities in
the application of marketingknowledge.
This differential is likely to be particularly pronounced in the context of domestic firms in the transition economies
of CE versus western firms with the result that, in Kogut and Zander's (1993)
terms, wholly-owned subsidiaries will
be a more efficient vehicle through
which to transfer marketing knowledge
than other organisational arrangements.
Therefore,
P3: Marketing capabilities will be
more effectively transferred through
wholly-owned
subsidiaries than
through international joint ventures.
METHODOLOGY AND CONSTRUCT
DEVELOPMENT
Fieldwork to test these propositions
was conducted as part of a comprehensive study of firms in Hungary, Poland
and Slovenia. Data were collected in two
phases in each country. First, a series of
in-depth case studies were conducted by
local academics examining the issues of
foreign investment, marketing capabilities and firm performance. Twelve cases
were completed in Hungary while
eleven took place in both Poland and
VOL. 31, No. 1, FIRSTQUARTER,2000
Slovenia. The cases were used to explore
local manager's understanding of marketing terminology, concepts and tools.
The results presented here derive from
the second phase, quantitative study.
Questionnaires were first developed in
English for use in the three countries
under investigation. They were translated into local languages by local academics and then tested on independent
executive directors of local firms. Following testing, a number of minor modifications were made to the questionnaires to correct misinterpretation.
The study focuses on enterprises employing 20 people or more. In Hungary,a
mailing sample of 3,000 firms was constructed, while in Poland, the sample
comprised 2,000 firms. In Slovenia, the
population of firms employing over 20
people was 1,581 and all were surveyed.
In the cases of Hungary and Poland, the
sampling frames were constructed from
official mailing lists and designed to be
broadly representative of industry categories, firm sizes and ownership types.
By the end of December 1996 - the cut-off
point for returns, 1,619 usable replies
had been received giving an overall response rate of 25 percent and providing a
large database for testing the propositions. Responses varied by country with
a 20 percent response rate in both Hungary and Poland and a more substantial
40 percent in Slovenia which may reflect
the fact that the latter has been relatively
under-researched.Analyses of responses
in each country showed the samples to
be broadly representative in terms of industry classifications and ownership
structure. There were, however, marginally more responses from large firms
than from their smaller counterparts.Because of their more significant contribution to wealth and employment creation,
this slight bias is not considered detri69
MARKETINGCAPABILITIESIN CENTRALEUROPE
mental to the overall findings but
should, in any event, be borne in mind
when interpreting the results.
The key constructs under study include the nature of ownership of the
firm, its marketing capabilities and its
performance in the marketplace. The operationalization of these constructs is described in the following paragraphs.
latter sub-group were wholly-owned
start-up operations by foreign firms that
did not involve any merger, acquisition
or alliance activity with domestic entities.
Marketing Capabilities
The processes of privatization and FDI
have proceeded at very different rates in
the three countries under study. For example, Hungary has been leader in attracting inward direct investment (Cook
and Fitzpatrick 1996) due mainly to the
stability of the macro-economic environment and favorable government support
for FDI. In contrast, though Slovenia is
one of the better developed economies in
CE, it has not attracted a great deal of
foreign investment even measured in per
capita terms (Economist 1997). Similarly, Poland has also attracted a relatively low level of FDI despite the attractiveness of its domestic market in terms
of size. Furthermore, the privatization of
former State-run companies has taken
many forms with differing levels of effectiveness in each of the three countries. Consequently, a variety of ownership types can be found in this region.
Four main categories of firm were developed for this study, namely, SOEs (firms
that have remained State-owned), Privatized SOEs (firms which have been
privatized through domestic investment), FDI firms (firms in full or part
foreign ownership) and Organic firms
(private firms which have never been
state-owned). The FDI group was subdivided into three further sub-groups,
namely, joint ventures with former
SOEs, joint ventures with private firms
and finally Greenfield investments. This
Firms potentially possess or have access to a diverse pool of marketing capabilities (Day 1994). This study concentrates solely on three key marketing capabilities identified in the literature,
namely, market orientation (MO), the
time horizon of the firm's strategic decisions and its positioning capabilities.
Webster (1992) classes the first two types
as corporate-level or overall capabilities
and the latter as a business unit-level
capability, all three of which guide and
influence the firm's marketing actions.
Market orientation has been the subject
of renewed attention in recent years due
to significant advances in its measurement (Kohli and Jaworski 1990; Narver
and Slater 1990). Under the dominant
of the construct
operationalization
(Narver and Slater 1990), MO is represented through three underlying components: customer orientation, competitor
orientation and inter-functional co-ordination and this scale has been refined in
the US (Slater and Narver 1994) and Europe (Greenley 1995). A set of 14 key
indicators, representing each of the three
components was presented to respondents as seven point scales, where 1
equated to 'strongly agree' and 7 to
'strongly disagree'. Overall market orientation was then computed following the
procedure adopted by Greenley (1995),
as the average score across the 14 scales.
Once the average had been taken, scores
were reversed with high scores equating
to a high market orientation. The alpha
for the scale was good at .86 (Nunally
1967) and item-to-total correlations were
70
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
Nature of Ownership
JOHNFAHY,GRAHAM
ToNy Cox, JOZSEF
HOOLEY,
KRZYSZTOF
BERACS,
FONFARA,
ANDBoRis SNOJ
all in the expected direction and statistically significant demonstrating the internal consistency of the scale.
The time horizon of a firm's strategic
decision making is an essential aspect
of its marketing management culture
(Deshpande and Webster 1989) reflecting
its values and beliefs and impacting on
the marketing decisions that it makes.
Numerous studies have chided the shortterm focus of Western management compared, for example, with their counterparts in countries like Japan(Doyle 1994;
Hamel and Prahalad 1989). The in-depth
case studies conducted as part of this
study also revealed that many firms in
the CE region were simply setting their
sights on survival in the difficult trading
conditions of the mid-1990s. The capability to adopt a longer term strategic
horizon was operationalized using a
three point construct which identified
the major priority of the organization as
either survival, short-term profit gain or
the longer term building of market position. Finally, the capability to build a
defensible market position is seen as a
key element of a firm's marketing activity (Hooley and Saunders 1993; Porter
1996; Ries and Trout 1982). Firms may
seek to defend a variety of positions in
the marketplace, but the most popular
relate to the ability to differentiate on
the basis of quality or price of products and services (Porter 1985). Three
positions were selected, namely, product
quality relative to competitors, service
quality relative to competitors and price
levels relative to competitors. Following earlier work on positioning in the
region (Hooley, Beracs and Kolos 1993)
and the exploratory case studies, each
was operationalized as a three point
scale from 'below' to 'above' competitor
levels.
VOL.
31, No. 1,
FIRST QUARTER, 2000
Performance
Performancemeasurement in business
research has always proved to be a troublesome issue. Absolute performance
figures, such as ROI, sales volume and
market share are notoriously difficult to
compare between firms of different sizes,
operating in different markets, using different accounting standards and defining
their markets in different ways. In addition, it has been argued that new strategies and competitive realities mandate a
move away from a sole reliance on financial-based measures to other variables
such as quality, manufacturingeffectiveness, innovation and customer satisfaction (Eccles 1991; Kaplan and Norton
1992). However, it is recognized that all
measures have their specific strengths
and weaknesses (Doyle 1994) and that
measurement efforts should be appropriate given a chosen strategy (Eccles 1991).
The resource-based perspective of strategy advocates the deployment of idiosyncratic capabilities to attain economic
rents. This implies the necessity of measuring profitabilitywhich is generally regarded as a suitable proxy for the attainment of rent. In addition, profitability
measures are popular as they are yardsticks that are familiar to executives both
as an objective to be achieved and as a
mechanism for assessing performance.
However, absolute profitabilitymeasures
have important practical, methodological and conceptual weaknesses (Doyle
1994). Therefore, this study sought to
use relative profitabilitymeasures and to
supplement them with additional market-based performancemeasures. Consequently, four performance criteria were
used, two financial (profit and ROI) and
two market-based (sales volume and
market share). Measures were taken of
performance against original objectives
71
MARKETINGCAPABILITIESIN CENTRALEUROPE
TABLE 1
MARKETINGCAPABILITIESBY FIRMTYPE (ALL FiRMs)
(A)
SOEs
(B)
(D)
Privatised
(C)
Domestic
Former
Firms
Organic
SOEs
with FDI
Firms
F Ratio/
(n' = 299)
(n = 589)
(n = 315)
(n = 371)
4.82
4.98
Survival Priorities
Short Term Financial
Priorities
Long Term Market
Position Priorities
Relative Product Quality
64.6%
52.0%
5.15
>A2
28.4%
5.17
>A, B
49.6%
12.8%
18.7%
16.0%
10.8%
22.6%
2.23
29.4%
2.27
55.6%
2.46
39.6%
2.31
Relative Service Quality
2.27
2.33
Marketing Capability
Market Orientation
Chi
Sig.
9.00
.001
108.7
9.89
.001
.001
8.55
.001
9.20
.001
>A, B, D
Relative Pricing
1.98
1.94
2.46
2.39
>A, B
>A
2.03
1.84
<A, B, C
Information on Ownership Type was unavailable for 45 firms.
2
Between-group differences are measured using the Bonferroni Post-Hoc Test.
set, of performance judged against the
previous financial year and finally of
performance relative to major market
competitors. Respondents were asked to
judge whether results on each were better, the same or worse than budget, the
previous financial year and their main
competitors on a three point scale2.
Scores were averaged over the four criteria for each basis forming three performance scales of four items each. Reliability of each composite scale was good
The results of the study are presented
in Tables 1 to 3. The relationships between the nature of ownership of the
firm and the development of key marketing capabilities are illustrated in Table 1.
As predicted significant differences can
be observed by firm type. State-owned
enterprises have the lowest level of market orientation, have the most survival
oriented strategicpriorities and have relatively undifferentiatedmarketpositions
indicating support for proposition Plb
that they have the lowest levels of marketing capability. By contrast, firms with
foreign direct investment have a significantly higher market orientation than
those firms which are still state-owned,
have significantly longer term strategic
priorities than all other types and also
are able to command high quality/high
price positions in the marketplace, indicating support for the propositions Pla.
It is also interesting to observe the capabilities of firms in the new organic sector. These firms, in fact have the highest
reported level of market orientation,
slightly higher than firms with foreign
participation. They also exhibit position-
72
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
with alphas of .76, .82 and .82 respectively (Nunally 1967).
RESULTS
KRZYSZTOF
ANDBoRis SNOJ
ToNY Cox, JOZSEF
BERACS,
FONFARA,
JOHNFAHY,GRAHAM
HOOLEY,
TABLE 2
BY OWNERSHIPTYPE
PERFORMANCE
Sum of
Squares
d. f.
Performancerelative SOEs2
to Objectives Set
PSOEs
FDI
Organic
Total
1.827
1.901
5.434
2.026 Between Groups
392.794
1.937 Within Groups
1.919 Total
398.228
3
1320
1323
Performancerelative SOEs
to Previous Year
PSOEs
FDI
2.106
2.197
2.403 Between Groups
Relative
Performance
Mean'
Organic
Total
Performancerelative SOEs
PSOEs
to Major
FDI
Competitors
Organic
Total
2.204
2.221
Source
Within Groups
Total
12.213
512.690
524.903
1.916
1.977
6.860
2.180 Between Groups
2.023 Within Groups
290.219
297.079
2.014 Total
F.
Ratio
6.087
Sig.
.0003
3
1312 10.418
1315
3
909
912
7.162
.0004
.0004
'Mean on a Three Point Scale.
Key: SOEs (State-owned enterprises), PSOEs (Former SOEs that have been privatised
through domestic investment), FDI(firmsin full or part foreign ownership), Organic(Private
firms that have never been State-owned).
3 Bonferroni post hoc test reveals that FDI firms are significantly different from SOEs and
PSOEs.
4 Bonferroni post hoc test reveals tha FDI firms are significantly different from each of the
other three types.
2
ing capabilities by clearly seeking to
dominate the low price end of the market. If these firms also possess cost advantages, perhaps due to their knowledge of the local market, to enable them
to sustain these low price positions their
futures may be relatively assured but
combined with their emphasis on short
term strategic priorities, this positioning
strategy may be a cause for concern.
The results of the analysis of performance by ownership type are presented
in Table 2. What is most apparent at the
outset is that firms with foreign participation outperform each of the other firm
types across the different performance
VOL. 31, No.
1, FIRST QUARTER, 2000
criteria offering support for the proposition, P2. The mean results demonstrate
that firms with FDI are more likely to be
performing better than their major competitors, better than the previous year
and better relative to targets which they
had set than all other firm types. Post hoc
tests reveal significant differences between the FDI group and each of the
other firm types on almost all performance dimensions (See Table 2). While
being cognizant of the weaknesses of the
performance measurement criteria available, it is possible to conclude that a very
clear picture is emerging in the CEregion
where firms with FDI are making strong
73
MARKETINGCAPABILITIESIN CENTRALEUROPE
TABLE3
BY Fuumiswrri FDI ONLY
MARKEIMNG
CAPABILITIES
Marketing Capability
MarketOrientation
Survival Priorities
Short Term Financial Priorities
Long Term MarketPosition
Priorities
Relative Product Quality
Relative Service Quality
Relative Pricing
(A) Joint
Ventures
With
Former
SOEs
(B) Joint
Ventures
With
Private
Firms
(n = 101)
(n = 96)
5.03
26.7%
20.8%
52.5%
2.43
2.44
2.09
(C)
Greenfield
Investments
(n
F Ratio/
82)
Chi
Sig.
5.23
29.5%
13.7%
5.27
28.2%
15.4%
1.59
.206
56.8%
2.44
2.48
1.93
56.4%
2.49
2.56
2.12
1.94
.3044
.939
2.70
.748
.738
.392
.069
=
gains over their local rivals. This finding
is also consistent with earlierwork in the
region (See for example, Hooley et al
1996).
When these performance results are
examined in conjunction with the findings on marketing capabilities presented
in Table 1, variations in levels of domestic competitive advantage can be explained in resource-based terms. Firms
with FDI in particular have made significant advances in the development of
marketingcapabilities and this has coincided with this group having a performance lead over the other three groups.
This finding demonstrates that overall
marketing capabilities are proving to be
very valuable as the CE region moves to
a more market-led environment. For example, the time horizon of strategic decision making in SOEs, former SOEs and
organic firms is still very short and their
focus is very much on survival and short
term financial performance. However,
these firms remain unable to match FDI
firms even on this short term performance dimension. This finding is consistent with earlier research carried out in
the UK which demonstrates that firms
with a short term focus were shown to
perform even worse on short term financial criteriathan firms with a longer term
set of strategic priorities (Doyle and
74
BUSINESS STUDIES
JOURNALOF INTERNATIONAL
Hooley 1992). The research presented
here suggests that the development of
the appropriate capabilities to match
changes in the environment has an impact on immediate performancelevels as
well as creating potential for further
gains in the future.
Finally, the results of an analysis of
the FDI sector are presented in Table 3.
Contrary to expectations, mode of foreign investment is not seen to influence
the attainment of marketing capabilities
and therefore P3 is not supported. No
significant differences are observed in
the market orientation, strategic priority
and positioning capabilities of Greenfield investments when compared with
foreign direct investment through the
medium of joint ventures. Furthermoreit
is interesting to note that the success of
transfer efforts through the joint venture
medium is neither a function of whether
the recipient is a former State-owned
JOHNFAHY,GRAHAM
TONYCox, JOZSEF
KRZYSZTOF
BERACS,
FONFARA,
ANDBoRis SNOJ
HOOLEY,
firm nor whether it is privately owned. A
priori, it might be expected that the differences between foreign investors and
State-owned enterprises would be of a
level that significant differences might
exist in the capacity of the latter to
understand and apply the marketing
knowledge being transferred,though this
does not appear to be the case.
DISCUSSION
The research presented above raise a
number of important issues. In the main,
it demonstrates that the acquisition and
development of marketing capabilities is
proceeding at an uneven rate in the Central European region. The most rapid
progress is being made by firms that have
either had some foreign involvement or
that have never been State-owned. This
is particularly evident in the case of the
important capability, market orientation.
Both firms with FDI and domestic organic firms report levels of market orientation that are very comparablewith that
which has been observed in both the US
(Slater and Narver 1994) and the UK
(Greenley 1995). By contrast, firms
which are State-owned or which have
been privatized through domestic investment appear to be lagging behind. Most
likely, these firms are bound by past routines and traditions that are impeding
change and capability development.
Variation in the development of marketing resources is an important issue in
terms of firm-level performance. At a
conceptual level, resources must be
valuable and must possess barriersto duplication to be a source of sustainable
competitive advantage (Barney 1991). In
the emerging market-led environment in
Central Europe marketing capabilities
are valuable as customer needs and preferences develop and become more sophisticated. And marketing capabilities
VOL. 31, No. 1, FIRST QUARTER, 2000
by their nature are also very difficult to
duplicate. They are characterized by
high levels of tacitness and complexity
and are the product of ongoing exchanges that take place both within the
firm and with its external stakeholders
(Morganand Hunt 1994). Many of these
exchanges are highly firm-specific and
path dependent which prevent their duplication by competitors (Reed and DeFillippi 1990). The research presented
here provides evidence that leadership
in marketingcapabilities is positively associated with performance. Both firms
with FDI and domestic organic firms
have high levels of market orientation
while the former have long-term strategic priorities and quality positioning capabilities. On all measures of performance the FDI group had a significant
lead over their local competitors. Despite
having high levels of market orientation,
domestic organic firms, though performing better than enterprises that are or had
been previously been in State ownership, lagged their counterpartswith FDI.
This may be attributableto the fact that
organic firms had placed significant emphasis on developing price positioning
capabilities (See Table 1) which suggests
that they may in fact be developing the
"twrong" capabilities. However, these
conclusions are tempered by the fact that
only a cross-sectional picture of performance is provided in this study. A more
longitudinal view of performanceis necessary to ascertain the sustained nature
of competitive advantages and the likelihood that performance differentials
will endure (Maijoorand van Witteloostuijn 1996). Nevertheless, the clear pat-
terns of capability development and performance variation evident in this study
are worthy of further research attention.
The performance lead established by
firms with FDI reported here supports
75
MARKETINGCAPABILITIESIN CENTRALEUROPE
earlier research conducted in Hungary
on the impact of foreign investment on
domestic competition (Hooley et al
1996). While the motives of foreign investors to invest and of governments to
attractinvestment have been extensively
addressed in the literature, there has
been little research on the reasons why
individual host firms seek to attract investment. The primary motive suggested
by this study and earlier work in the
region (Hooley et al 1996) is that foreign
investment gives the host access to resources which enable it to gain a domestic competitive advantage. As noted
above, barriers to duplication are essential for advantages to endure. Firms that
engage with foreign investors gain access
to resources that their domestic rivals
cannot easily replicate elsewhere and
helps to explain why this group shows
such a significant performance lead.
However, it must also be noted that patterns of FDIare likely to be influenced by
both industry and firm type. Certainsectors in the CE region such as retailing
stand benefit significantly from the application of Western marketingand merchandising techniques. Similarly, it is
frequently argued that foreign investors
are likely to invest in the strongest local
firms and that these firms might be performance leaders with or without this
investment. Some research in the region
has found evidence of "cherry picking"
(Hooley et al 1994) but concluded that
while this was undoubtedly true in the
early years of FDI more recent investments have relied more on what the foreign partner can bring to the strategic
alliance by way of expertise and other
resources. Similarly, research by Fahy et
al (1998) on the motives of British firms
investing in Hungary found that macroeconomic factors and resource issues
rated higher than the desire to gain access to leading companies.
The important role of FDI in the marketing capability development of firms
in the CEregion focuses attention on the
nature of that investment. A particularly
interesting finding of this study is that
stocks of marketing capabilities are not
related to the mode of foreign investment
which raises two further questions. The
first relates to the nature of marketing
capability and knowledge which a priori
would be expected to meet Kogut and
Zander's (1993) criteriaof high complexity, low codifiability and low teachability suggesting advantages in internalizing their transfer across national boundaries. The presence of these criteria
appears to be further supported by the
finding that marketing capabilities are
positively associated with superior performance. However, advances in the
measurement of market orientation, for
example, suggest that though this capability is complex, it may in fact be codifiable and teachable. However, much
more work needs to be done before such
conclusions can be drawn about the nature of marketing knowledge. Second,
the findings suggest that seeking to further understand the processes by which
marketing capabilities have been transferredto partnersin the CEregion would
be a fruitful avenue for furtherwork. The
nature of learning in international alliances has been an important area of
study (See for example, Hamel [1991])
and given that the level of marketing capabilities are equally as well developed
in State-foreign joint ventures as in private joint ventures suggests that much
could be learned from a detailed examination of the transfer mechanisms used.
Finally, the research suggests the need
for alternative approaches to thinking
about the nature of performancein inter-
76
BUSINESS STUDIES
JOURNALOF INTERNATIONAL
JOHNFAHY, GRAHAMHOOLEY,ToNY Cox, JOZSEFBERACS,KRZYSZTOF
FONFARA,AND BoRis SNOJ
national markets. Extant research has
tended to focus on the content and process of marketing activity within a standardization/adaptation framework with
mixed results. This study does not reject
the notion that the optimization of possibilities for pursing standardized strategies or the effectiveness of efforts to respond to market differences can have a
positive impact on financial and market
performance. But rather it suggests that
the sources of sustained superior performance may lie more deeply within the
firm, particularly in its intangible capabilities that are difficult to identify, understand and replicate. Such difficulties
are further accentuated by related cultural and institutional differences that
exist between countries which may be
demonstrated, for example, first by the
unprecedented success of Japanesefirms
in international markets followed by
huge research effort to try to understand
and replicate the sources of this success.
Emerging research which continues to
examine links between national characteristics and sources of firm-level advantage (Porter 1990; Simon 1992) and
which extends the resource-based view
of the firm to international arena (Collis
1991) appears to hold much promise in
furthering our understanding of performance differences.
CONCLUSION
This paper draws on insights from
strategic management, industrial organization and evolutionary economics to
examine the development and impact of
marketing capabilities and presents the
findings of an empirical test of the key
propositions in Central Europe. The
study demonstrates the importance of
marketing capabilities in ensuring a
firm's future prosperity in the region.
Managers in Central Europe can seek to
VOL. 31, No. 1, FIRSTQUARTER,2000
develop and accumulate their own marketing capabilities, as organic firms in
the region appear to have been successful in doing. Alternatively, they can look
to foreign partnersto provide a means for
rapidly improving their capability base
and altering their resource trajectory.As
this environment becomes more marketled, increasingly competitive and more
open to global influences, the building
and deployment of marketing capabilities will be critically important. This
raises important policy issues relating to
the nature and speed of privatisation as
well as openness to foreign direct investment. Some countries like Slovenia have
been very slow to accept inward FDI despite its role in the enhancement of firmlevel capabilities. In encouraging the
transition from State-owned to private
enterprise, this study suggests that privatization through FDI is a much more
effective mechanism for the development of important capabilities than privatization through domestic investment
suggesting that a re-examination of attitudes towards foreign investment might
be in the best long-term interests of the
region.
The research also provides support for
a "resource-based" explanation of performance heterogeneity demonstrating a
strong positive association between marketing capabilities and performance. It
also indicates the potential for the
greater integration of research perspectives at the interface of strategic management and international business (Bartlett
and Ghoshal 1991). In particular, it suggests that the consideration of international dimensions broadens the scope of
strategy models in important ways such
as taking account of the relationship between countries and a firm's resource
endowments. A greaterunderstanding of
how the macro-environments impact on
77
MARKETINGCAPABILITIESIN CENTRALEUROPE
resource configurations and how complex capabilities can be effectively transferredacross national boundaries emerge
as important research directions.
NOTES
1. Initial work by Narver and Slater
(1990) found that market orientation has
a substantial positive effect on the profitability of both commodity and noncommodity businesses. Positive effects
have also been observed in the US by
Jaworskiand Kohli (1993) and Slater and
Narver (1994). Similarly, research in the
UK by Greenley (1995) also observed a
positive relationship though it suggested
that the strength of the relationship may
be moderated by environmental effects
such as the levels of turbulence and technological change. Other studies in economies at different stages of development
such as Canada (Deng and Dart 1994),
New Zealand (Gray,Matear and Matheson 1998) and Ghana(Appiah-Adu 1998)
have also found a positive relationship.
Though more validation is necessary,
initial evidence from a number of different industrial, competitive and geographic settings suggest a strong link between market orientation and performance and that a similar positive
relationship can be expected in the CE
Companies of CE. Some details are also
available in Kompass Eastern Europe
and from the major accounting firms, all
of whom have interests in the region.
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