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The Capabilities of Market-Driven Organizations
Author(s): George S. Day

Source: Journal of Marketing, Vol. 58, No. 4 (Oct., 1994), pp. 37-52
Published by: American Marketing Association
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GeorgeS. Day
The of Market-Drive
Capabilities
Organizations
Considerable progress has been made in identifying market-driven businesses, understanding what they do, and
measuring the bottom-line consequences of their orientation to their markets. The next challenge is to understand
how this organizational orientation can be achieved and sustained. The emerging capabilities approach to strate-
gic management, when coupled with total quality management, offers a rich array of ways to design change pro-
grams that will enhance a market orientation. The most distinctive features of market-driven organizations are their
mastery of the market sensing and customer linking capabilities. A comprehensive change program aimed at en-
hancing these capabilities includes: (1) the diagnosis of current capabilities, (2) anticipation of future needs for ca-
pabilities, (3) bottom-up redesign of underlying processes, (4) top-down direction and commitment, (5) creative use
of information technology, and (6) continuous monitoring of progress.
The marketingconcept has been a paradoxin the field of Fortunately,this situation is changing following a "re-
management.For over 40 years managershave been ex- discovery"in the late 1980s (Dickson 1992; Webster1988).
hortedto "stay close to the customer,""putthe customerat In the last five years, a numberof conceptual and empirical
the top of the organizationalchart,"and define the purpose studies have appeared that more clearly describe what a
of a business as the creation and retentionof satisfied cus- marketorientationis and what it consists of. According to
tomers.1Companies that are better equipped to respond to this emerging literature,marketorientationrepresentssupe-
marketrequirementsand anticipatechanging conditions are rior skills in understandingand satisfying customers (Day
expected to enjoy long-runcompetitiveadvantageand supe- 1990). Its principalfeaturesare the following:
rior profitability.
*A set of beliefs that puts the customer'sinterestfirst
Throughoutmuch of its history,however,the marketing
(Deshpand6, Farley,andWebster1993),
concept has been more an article of faith than a practical
basis for managinga business.2Little was known about the *Theabilityof the organization to generate,disseminate,
anduse superiorinformation aboutcustomersandcom-
defining featuresor attributesof this organizationalorienta-
petitors (Kohli and Jaworski 1990), and
tion, and evidence as to the antecedents and performance
*Thecoordinated applicationof interfunctional
resources
consequences was mainly anecdotal. Consequently, man- to the creationof superiorcustomervalue(Narverand
agers had little guidanceon how to improveor redirecttheir Slater1990;Shapiro1988b).
organizations'externalorientationtowardtheir markets.
In addition, a modest but growing body of empirical evi-
lThe earliest proponent of the marketing concept was Peter Drucker dence supportsthe proposition that a marketorientationis
(1954), who argued that creating a satisfied customer was the only valid
definition of business purpose. Subsequentauthorsdescribed the concept positively associated with superior performance (Desh-
and its benefits, e.g., McKittrick(1957), Felton (1959), Barksdaleand Dar- pande, Farley,and Webster 1993; Jaworskiand Kohli 1992;
den (1971), Kotler (1977), Peters and Waterman(1982), Shapiro (1988b) Narverand Slater 1990; Ruekert 1992).
and Webster(1992). These authorsdo not make careful distinctionsamong
customer oriented, marketoriented, and marketdriven; they lean toward Despite the recent progress in understandingwhat a
marketdrivento describethe orientationof a firm thatstays close to its cus- market-drivenorganizationdoes and identifying who they
tomers and ahead of its competitors-thus making competitive superiority are, troubling gaps and shortcomings remain. Little is
an explicit element of the concept.
2This state of affairsmay explain why the marketingconcept has had lit- known, for example, about the characteristicsof successful
tle influence on other managementfields. Thus, a review of "all variables programsfor building marketorientation.How should these
that have been proposed seriously as indices of organizationaleffective- programsbe designed? Should managementemphasize fun-
ness" (Campbell 1977) failed to mention customer satisfaction. Similarly,
the notion of a marketorientationis nowhereto be found in a discussion of
damentalculturechange, revised work processes, organiza-
competingprinciplesof managementpresumedto be causally relatedto the tional restructuring,new systems, redirectedincentives, or
effectiveness of organizations(Lewin and Minton 1986). During this peri- some other set of plausible initiatives? Interestingly,many
od, however, discussions of organizational culture gave considerable of these implementationissues have been addressedby par-
weight to an "externalversus internalemphasis"as an influentialaspect of
a culture(Reynolds 1986). allel work on total quality management (TQM). Like the
marketing concept, TQM promises superior performance
through an external focus on customer satisfaction and an
GeorgeS. Dayis theGeoffreyT.BoisiProfessor
of Marketing
andDirec- internal focus on operationalexcellence. The difference is
torof theHuntsman CenterforGlobalCompetition
andInnovation,
The
Wharton of Pennsylvania.
School,University thatTQM offers managersa host of organizationalprescrip-
tions and supportingtools.
Journal of Marketing
Vol. 58 (October 1994), 37-52 Market-Driven
Organizations/ 37

I addressthese issues by examining the role of capabili- sources, which are made up of integratedcombinationsof
ties in creating a market-orientedorganization.Capabilities assets and capabilities, are cultivatedslowly over time and
are complex bundles of skills and collective learning,exer- limit the ability of the firm to adapt to change. Manage-
cised throughorganizationalprocesses, that ensure superior ment's task is to determinehow best to improveand exploit
coordinationof functional activities. I propose that organi- these firm-specificresources (Mahoney and Pandian 1992),
zations can become more marketorientedby identifyingand althoughin times of turbulencethe challenge of developing
building the special capabilitiesthat set market-drivenorga- new capabilitiescomes to the fore (Barney 1991;Wererfelt
nizations apart.The discussion is divided into three parts. 1984).
First, I define capabilitiesin more detail and explore the re-
Defining and Identifying Capabilities
lationship between a firm's capabilities and its strategy.
Next, I argue that market-drivenorganizationsare superior The concept of capabilities is not new. An emphasis on
in their market-sensing and customer-linkingcapabilities. building distinctive capabilities or competencies can be
When these two capabilitiesare deeply embeddedwithin the found in Selznick (1957) and Penrose (1959) and is featured
organization,all functionalactivities and organizationalpro- in the strengths and weaknesses component of the early
cesses will be better directed toward anticipating and re- business policy frameworks(Learnedet al. 1969). Although
sponding to changing market requirementsahead of com- these early frameworksprovideuseful insights, the lack of a
petitors. Finally, I derive some lessons on how to apply the thorough theoretical understandingof capabilities meant
capabilities approachto the design of programsto enhance that in practice firms did little more than compile lengthy
a marketorientation. and indiscriminatelists of strengthsand weaknesses.
As noted previously,capabilitiesare complex bundlesof
skills and accumulatedknowledge, exercised throughorga-
The Capabilities Approach nizationalprocesses, that enable firms to coordinateactivi-
to Strategy ties and make use of their assets.3Capabilitiesare manifest-
ed in such typical business activities as order fulfillment,
Two Perspectives on Competitiveness new product development, and service delivery. One well-
How does a business achieve and maintaina superiorcom- known capabilityis Wal-Mart'scross-dockinglogistics sys-
tem (Stalk, Evans, and Shulman 1992). It is partof a broad-
petitive position? This question is at the heartof the strate-
er "customerpull" system that startswith individual stores
gy development process and largely defines the field of
strategic management.One answer given by the emerging placing their orders on the basis of store-movementdata.
These orders are gathered and filled by suppliers in full
capabilities or resource-based theories cites two related
sources of advantage:Assets are the resource endowments truckloads. The loads are delivered to Wal-Mart's ware-
the business has accumulated(e.g., investmentsin the scale, houses, where they are sorted, repacked,and dispatchedto
stores. The transferfrom one loading dock to anothertakes
scope, and efficiency of facilities and systems, brandequity,
and the consequences of the location of activities for factor less than 48 hours, sharplycutting the usual inventoryand
costs and governmentsupport);and capabilities are the glue handlingcosts.
that brings these assets together and enables them to be de- Capabilitiesand organizationalprocesses are closely en-
twined, because it is the capabilitythatenables the activities
ployed advantageously.Capabilities differ from assets in
that they cannot be given a monetaryvalue, as can tangible in a business process to be carried out. The business will
have as manyprocesses as are necessaryto carryout the nat-
plant and equipment,and are so deeply embeddedin the or- ural business activities defined by the stage in the value
ganizationalroutines and practicesthat they cannot be trad- chain and the key success factors in the market.Thus, the
ed or imitated(Dierkx and Cool 1989).
The competitive forces approach(Porter 1980) and the necessary business processes of a life insurance company
will be differentfrom the processes found in a microproces-
related entry deterrenceapproach(Ghemawat1990), which
sor fabricator.Each of the processes has a beginningand end
have been the dominant paradigms in the strategy field
state that facilitates identificationand implies all the work
(Teece, Pisano, and Shuen 1991), have a differentanswer to that gets done in between. Thus, new productdevelopment
the questionof how superiorperformanceis achieved.These
proceeds from concept screening to marketlaunch, and the
approachesput the emphasis on the intensityof competition order fulfillment process extends from the receipt of the
in the industryand marketsegment thatdeterminesthe prof-
orderto payment.
it potential.The firm seeks a position in an attractivemarket
Because capabilities are deeply embedded within the
that it can defend against competitors. Although manage-
fabric of the organization,they can be hardfor the manage-
ment's task is then to identify and develop the requisiteca-
ment to identify. One way to overcome this problem is to
pabilities, what really mattersis achieving a defensible cost createdetailedmaps of the sets of process activitiesin which
or differentiationposition in an attractivemarketand keep-
ing their rivals off balance through strategic investments, 3Distinctionsare frequently made between competencies, well-defined
pricing strategies,and signals. routines that are combined with firm-specific assets to enable distinctive
The capabilities approach, by contrast, locates the functions to be carriedout, and capabilities, the mechanismsand process-
sources of a defensible competitive position in the distinc- es by which new competencies are developed (Teece, Pisano, and Shuen
1991). This implies that competencies are largely static, which seems a re-
tive, hard-to-duplicateresources the firm has developed strictiveandunnecessarycondition.Thus, for our purposesthe termsarees-
(Itami 1987; Rumelt, Schendel, and Teece 1991). These re- sentially interchangeable.
38 1Journalof Marketing,October1994

the capabilitiesare employed (Hammerand Champy 1993). how they choose to compete. Considerhow MarriottHotels
These maps usually show thatcapabilitiesand theirdefining is able to consistently receive the best ratingsfrom business
processes span several functions and several organizational travelers and meeting planners for high-quality service.
levels and involve extensive communications. They are certainlyas capable as Hyatt, Hilton, and others at
Capabilitiesare furtherobscuredbecause much of their selecting good sites, opening new hotels smoothly,and mar-
knowledge component is tacit and dispersed. This knowl- keting them well (Irvin and Michaels 1989). What consis-
edge is distributed along four separate dimensions tently sets them apartand reveals a distinctiveservice capa-
(Leonard-Barton1992): First are the accumulatedemployee bility (actually a set of linked capabilities each performed
knowledge and skills that come from technical knowledge, outstandinglywell) is a "fanaticaleye for detail."This be-
training,and long experience with the process. The second gins with a hiring process that systematically recruits,
dimension is the knowledge embeddedin technical systems, screens, and selects from as many as 40 applicantsfor each
comprising the informationin linked databases,the formal position andcontinuesthroughevery hotel operation;for ex-
proceduresand established"routines"for dealing with given ample, maids follow a 66-point guide to making up bed-
problems or transactions(Nelson and Winter 1982), and the rooms. The effective managementof these linked processes,
computersystems themselves. Thirdand fourthare the man- within an organizationalculture that values thoroughness
agement systems and the values and norms that define the and customerresponsiveness,creates a distinctive capabili-
content and interpretationof the knowledge, transcendindi- ty that gives Marriottemployees clear guidance on how to
vidual capabilities, and unify these capabilitiesinto a cohe- take the initiativeto provide excellent customerservice.
sive whole. The managementsystems representthe formal Another test asks whetherthe capability can be readily
and informal ways of creating and controlling knowledge. matchedby rivals. Because distinctivecapabilitiesare diffi-
The values and norms that dictate what informationis to be cult to develop, they resist imitation.KMartknows full well
collected, what types are most important,who gets access to what Wal-Marthas accomplished with its logistics system
the information,how it is to be used, and so forth are a part and can readily buy the hardwareand software, but it has
of the overall culture.4 been unable to match the underlyingcapability.First, Wal-
Mart'scapabilityis embeddedin a complex process thathar-
Distinctive Capabilities monizes an arrayof skills and knowledge and involves con-
siderable learning over many years. Second, Wal-Mart's
Every business acquires many capabilities that enable it to
carry out the activities necessary to move its products or processes are not readilyvisible because they cut across dif-
services through the value chain. Some will be done ade- ferent organizationalunits. Third,because much of the col-
lective knowledge that makes up the coordinationskills is
quately,otherspoorly,but a few must be superiorif the busi- tacit and dispersed among many individuals, a competitor
ness is to outperformthe competition.These are the distinc-
could not acquirethe requisiteknowledge simply by staffing
tive capabilities that supporta marketposition that is valu-
with the best availablepeople (Bartmessand Cery 1993).
able and difficult to match.They must be managedwith spe-
Another attributeof distinctive capabilities is that they
cial care throughthe focused commitmentof resources, as-
are robust and can be used in different ways to speed the
signmentof dedicatedpeople, and continuedefforts to learn, firm's adaptionto environmentalchange (Boynton and Vic-
supportedby dramaticgoals for improvement. tor 1991; Prahaladand Hamel 1990). Honda, for example,
The most defensible test of the distinctivenessof a capa-
has been able to apply its companywide mastery of engine
bility is whether it makes a disproportionatecontributionto and drive train technology developmentand manufacturing
the provision of superiorcustomer value-as defined from
the customer's perspective-or permits the business to de- processes to create distinctivecapabilitiesin a varietyof re-
lated marketslike generators,outboardmarineengines, and
liver value to customers in an appreciablymore cost-effec-
lawn mowers.It is less clear whetherHonda'sdistinctiveca-
tive way. In this respect a distinctive capability functions
like a key success factor. Clearly, for example, Honda's pability in dealer management(Stalk, Evans, and Shulman
1992), which was used to develop a networkof betterman-
prowess with fuel-efficient, reliable, and responsive small aged and financed motorcycle dealers than the part-time
displacement engines and drive trains adds a great deal of dealersof competitors,also aided its entryinto new markets.
value and sets their cars apartfrom the competition. Other On the one hand,Honda'sskill at managingdealershas been
examples are Motorola's masteryof continuousquality im- of value in the auto market, where Honda dealers consis-
provementand rapid productdevelopmentand Federal Ex- tently receive high ratings for customer satisfaction. It is
press's ability to manage integratedtransactionprocessing harderto say whether the logic of Honda's diversification
systems. into relatedmarketswas really guided by a desire to exploit
Customers are unlikely to be aware of or interestedin this dealer managementcapability. More likely it was the
the underlyingprocesses that yield the superiorvalue they ability to gain a multipliereffect by integratingboth distinc-
receive. Thus, one of the critical managementtasks is to de- tive capabilitiesthat shaped the moves into new markets.
cide which capabilities to emphasize, which is dictated by The capabilities of a corporationthat span and support
multiple lines of business, such as those that Honda has de-
4This role of culture is consistent with the organizational cognition
ployed, arecommonly called core competencies.Each of the
paradigm from which the competing values model of culture is derived
(Quinn 1988; Quinn and McGrath;Smircich 1983). This model has been separate business units draws on these corporatewidere-
successfully adaptedto the study of culturesof market-drivenorganizations sources to quickly and effectively develop some or all of the
by Deshpande,Farley,and Webster(1988). distinctivecapabilitiesit needs to attaina superiorcompeti-
Market-Driven
Organizations/ 39

FIGURE 1
Sources of Competitive Advantage and Superior Performance
9 I
I PerformanceOutcomes A~~
I? I
I
PositionsofAdvantage|
j
DISTINCTIVE CAPABILITIES
* Based on superiority
in process
x
management integration of
knowledge x of
diffusion learning C??
??r
I ???
????,
-
I
Capabilities of the - Core Competencies of

BusinessAssetBusiness Bu- the Corporation
* Scale, scope, and * Skillsandaccumulated * Spanandsupport
efficiency knowledge multiplelinesof business
* Financialcondition * Enablethe activitiesin a
* Brandequity businessprocessto be
* Location carriedout
tive position in its served markets.These core competencies Thus, a directconnectionexists between the masteryof dis-
are also different from both business and corporateassets tinctive capabilitiesand superiorprofitability.
(see Figure 1).
Capabilities and Performance Capabilities in Market-Driven

The strategicimportanceof capabilitieslies in theirdemon- Organizations
strable contributionto sustainable competitive advantages
and superiorprofitability.A sizeable literaturehas recently Classifying Capabilities
emerged to explain how capabilities serve as a source of It is not possible to enumerateall possible capabilities,be-
competitive advantageand also accounts for the durability cause every business develops its own configurationof ca-
of these advantages (Amit and Schoemaker 1993; Peteraf pabilities that is rooted in the realities of its competitive
1993). The durabilityof capabilities-basedadvantagesstems market, past commitments, and anticipated requirements.
from (1) their scarcity, (2) their relative immobility, either Nonetheless, certaintypes of capabilitiescan be recognized
because they cannot be traded or are much more valuable in all businesses, correspondingto the core processes for
where they are currentlyemployed than they would be else- creatingeconomic value.
where, and (3) the difficulty that competitorsface in under- Some capabilitiesare easier to identify than others,usu-
standingand imitatingthem (Reed and De Fillippi 1990). ally because their activities are containedwithin the organi-
What if a business has no distinctive capabilities? In zation. Thus, Pitney-Bowes's ability to solve customers'
other words, it is no more proficientwith any of its essential mail-handling problems and McDonald's Corporation's
processes than the average of its rivals and is unable to dis- achievementof unparalleledconsistency of service delivery
tinguish itself favorablyalong any dimensions that are im- in dispersedoutlets are pointed to as distinctivecapabilities
portantto its target customers. If the industryis at a stale- that explain their durable advantages. The visibility and
mate and none of its rivalshas a meaningfuladvantage,then prevalenceof these examples of capabilitiesthat have been
the profits of the business will settle at the level of the in- successfully deployed from the inside out have led some ob-
dustry average (Porter 1980). In the more likely event that servers to argue that firms should be defined by what they
different competitors have mastered different capabilities are capable of doing, ratherthan by the needs they seek to
and can offer higher quality, more responsive service, or satisfy (Grant 1991). This perspective is unbalanced, be-
more innovativeproducts,then a paritybusiness has no re- cause it is the ability of the business to use these inside-out
course but to lower its prices to offset the lack of benefits. capabilities to exploit external possibilities that matters.
40/ Journalof Marketing,October1994

FIGURE2
ClassifyingCapabilities
EXTERNAL INTERNAL
EMPHASIS EMPHASIS
Ii -1o
0
I I
Outside-In Inside-Out
imp- _q*
Processes Processes
-4* Spanning Processes 01-
* MarketSensing * Customer Order Fulfilment * Financial Management

* Customer Linking * Pricing * Cost Control
* Channel Bonding * Purchasing * Technology Development
* Technology Monitoring * Customer Service Delivery * Integrated Logistics
* New Product/Service * Manufacturing/Transformation
Development Processes
* Strategy Development * Human Resources Management
* EnvironmentHealth and Safety
Thus, there has to be a matching "outside-in"capability to competitors and creating durable relationships with cus-
sense these possibilities and decide how best to serve them. tomers, channel members, and suppliers.Finally, spanning
Consider the Coming, Inc. division that manufactures capabilities are needed to integrate the inside-out and out-
fiber optic products. Its challenge was to balance demands side-in capabilities.Strategydevelopment,new product/ser-
for increased product customization and faster delivery
vice development, price setting, purchasing,and customer
while reducing costs to stay ahead of aggressive competi-
orderfulfillmentare criticalactivities that must be informed
tion. Originally, its objective was to be the most efficient
mass producer of standardfiber optics. As the fiber optic by both external (outside-in) and internal (inside-out)
marketevolved and customers began to demand more spe- analyses.
cialized products,it was necessary to convert the manufac- Market-drivenorganizationshave superiormarketsens-
turing capabilities from a rigid, standard-production system ing, customerlinking, and channelbondingcapabilities.The
to a flexible manufacturingplatform capable of building processes underlyingtheir superiorcapabilitiesare well un-
customized fiber productsto order.This transitionrequired derstood and effectively managed and deliver superior in-
both an inside-out capability to produce the low-cost, cus-
sights that inform and guide both spanning and inside-out
tom productson a timely basis and an outside-in capability
for understandingthe evolving requirementsof customers capabilities.The effect is to shift the span of all processes
and energizing the organizationto respondto them. furthertowardthe externalend of the orientationdimension.
Considerwhat happenswhen humanresourcesare managed
Capabilitiescan be usefully sorted into three categories,
depending on the orientationand focus of the defining pro- by the belief thatcustomersatisfactionis both a cause and a
cesses (see Figure 2). At one end of the spectrumare those consequence of employee satisfaction.Key policies become
that are deployed from the inside out and activatedby mar- market oriented: Rewards are based on measurable im-
ket requirements,competitive challenges, and external op- provementsin customer satisfactionand retention,employ-
portunities.Examples are manufacturingand other transfor- ees are empowered to resolve customer problems without
mation activities, logistics, and human resource manage-
approvals,recruitingis based on customerproblem-solving
ment, includingrecruiting,training,and motivatingemploy-
ees. At the other end of the spectrumare those capabilities skills, and so forth. By contrast,the spanningand inside-out
whose focal point is almost exclusively outside the organi- capabilitiesof internallyorientedfirms will be poorly guid-
zation. The purposeof these outside-in capabilitiesis to con- ed by marketconsiderations,which confines them to a nar-
nect the processes that define the other organizationalcapa- row band towardthe internalend of the orientationdimen-
bilities to the external environmentand enable the business sion. One reason is that the necessary outside-in processes
to compete by anticipating market requirementsahead of that comprise the market sensing, customer linking, and
Market-Driven
Organizations/ 41

FIGURE 3
Order Fulfillment Process: Basis of a Critical Spanning Capability
>*MarketSensing
Outside-InProcesses * CustomerLinking
a \ * ChannelBonding
4
v II
IL IL lb
Order >rder Entry\ O Billing Post

Order Or
Gen- X And
y e Order and Sales
Planning/ eration /rioritization/Schedulin/ Fulfilment Payment Service
I
,,
ffs
0~~~~~~~~~~~~~
Cost Estimation
and Pricing
I% ILI * Manufacturing/
Transformation
Inside-OutProcesses
* FinancialManagement
_____________/~~~~
* IntegratedLogistics
channel bonding capabilities are likely to be poorly under- Second, in coordinatingthe activities of a complex pro-
stood, badly managed,or deficient.5 cess, severaljurisdictionalboundariesmust be crossed and
horizontalconnections made. These interactionsrequirean
The Role of Spanning Capabilities identifiableowner of the process who can isolate sources of
Spanning capabilities are exercised through the sequences delay and take action to eliminate them. When no one un-
of activities that comprise the processes used to satisfy the derstandsthe total flow of activities in an order-entrypro-
anticipatedneeds of customers identified by the outside-in cess, for example, critical time-consuming steps such as
capabilitiesand meet the commitmentsthathave been made credit checks may be undertakenseparately in sequence
to enhance relationships.Orderfulfillment,new productde- when they could have been done in parallelto save time.
velopment, and service delivery processes all play this role. Third,informationis readily availableto all team mem-
Managing these horizontal processes so they become dis- bers, unfilteredby a hierarchy.If a question arises concern-
tinctive capabilitiesthatcompetitorscannotreadilymatchis ing orderrequirements,delivery status,or partsavailability,
very different from managing a vertical function in a tradi- everyone who is affected by the answer can get the infor-
tional hierarchicalorganization. mation directly without having to go through an
First, process management emphasizes external objec-
intermediary.
tives. These objectives may involve customers' satisfaction The orderfulfillmentprocess in Figure 3 illustratesboth
with the outcome of the process, whether quality, delivery the problems and benefits of managing a process so it be-
time, or installationassistance, or may be based on compet- comes a distinctive capabilityratherthan simply a sequen-
itive performancebenchmarks(e.g., cycle time, order pro-
tial series of necessary activities. Often this process is ob-
cessing time). This helps ensure that all those involved with scuredfrom top managementview because it links activities
the process are focused on providing superiorvalue to ex-
that take place routinelyas sales forecasts are made, orders
ternal or internal customers. These objectives become the
are received and scheduled, productsare shipped, and ser-
basis for a measurementand control system that monitors
vices are provided (Shapiro, Rangan, and Sviokla 1992).
progress towardthe objective.
Things can go awry if unrealisticpromises are made to cus-
5Thedifferencebetween market-drivenand internallyorientedorganiza-
tomers,these promises are not kept, blame is passed around,
tions that we describe here is similar to the notion of organizationalintru- and inventoriesexpand as each function seeks to protectit-
siveness proposed by Daft and Weick (1984). They contrastorganizations self from the shortcomingsof another (in part because no
that actively searchthe environmentfor answerswith passive organizations one incurs a cost for holding excess inventories).
that accept whatever informationthe environmentgives them, do not en-
gage in trial and error learning, and interpretthe environmentwithin ac- Furthermore,the order fulfillment process has a wealth
cepted terms. of connections to other processes. It brings together infor-
42 / Journalof Marketing,October1994

FIGURE4
MarketSensing: Processes for Learning About Markets
V_____________
Inquiry
Initiated 'Information Information Inter- ntr\ \ Evaluation Further
I)nformation) of )
or /Acquisition/ Distribution pretation/ Utilization/Outcomes Inquiry
/ Continued/
I a a
A
*
t %
I II ---
OrganizationMemory Augmentationof Memory
mation from the outside-in processes and depends on their (1989, p. 3), following Davis (1984), define cultureas "the
ability to forecast and generatea flow of orders.It depends patternof sharedvalues and beliefs that gives the members
even more on the inside-out manufacturingand logistics of an organization meaning, and provides them with the
processes to fulfill the scheduled ordersor have capacity in rules for behavior."A market-drivenculture supports the
place to service requests and transactions.Finally, there is value of thoroughmarketintelligence and the necessity of
the allied process of cost estimation and pricing of orders. functionallycoordinatedactions directedat gaining a com-
The managementof this activity will significantly improve petitive advantage.An absence of these shared beliefs and
profitability,if the customer value of each order is clearly values would surely compromisethe activity patternsadvo-
recognized and the costs of filling each orderare known. cated by the behavioralperspective.
The process of market sensing follows the usual se-
MarketSensing as a DistinctiveCapability
quence of informationprocessing activities that organiza-
Every discussion of marketorientationemphasizes the abil- tions use to learn (Day 1994; Fioles and Lyles 1985; Huber
ity of the firm to learn about customers, competitors, and 1991; Levitt and March 1988; Sinkula 1994). The stylized
channel members in orderto continuously sense and act on sequence in Figure4 can be initiatedby a forthcomingdeci-
events and trends in present and prospective markets. In sion or an emerging problem, such as explaining why per-
market-drivenfirms the processes for gathering, interpret- formance is declining. In addition, established procedures
ing, and using market information are more systematic, for collecting secondary information may prompt further
thoughtful,and anticipatorythan in other firms. They readi- market-sensingactivity.This step leads to the active acqui-
ly surpassthe ad hoc, reactive,constrained,and diffused ef- sition and distributionof informationaboutthe needs andre-
forts of their internallyfocused rivals.
sponses of the market,how it is segmented, how relation-
A behavioral definition of a marketorientationas "the
ships are sustained,the intentions and capabilities of com-
organization-wide generation of market intelligence, dis- petitors, and the evolving role of channel partners.Before
seminationof its intelligence across departments,and orga- this informationcan be acted on, it has to be interpreted
nization-wide responsiveness to it" (Kohli and Jaworski
througha process of sorting, classification, and simplifica-
1990, p. 6), capturesthe essence of a marketsensing capa- tion to reveal coherentpatterns.This interpretationis facili-
bility. Each element of this definitiondescribesa distinctac- tatedby the mental models of managers,6which contain de-
tivity having to do with collecting and acting on information cision rules for filtering informationand useful heuristics
aboutcustomerneeds and the influence of technology,com-
for deciding how to act on the informationin light of antic-
petition, and other environmentalforces. Narver and Slater
ipated outcomes. Furtherlearning comes from observing
(1990) offer anotherdefinition in the same spirit.They dis- and evaluatingthe resultsof the decisions takenon the basis
tinguish three behavioral components: customer orienta- of the priorinformation.Did the marketrespondas expect-
tion-the firm's understandingof the target market;com-
ed, and if not, why not? Organizationalmemory plays sev-
petitor orientation-the firm's understandingof the long-
run capabilitiesof present and prospectivecompetitors;and
6A growing body of literaturesuggests persuasivelythat it is the struc-
interfunctionalcoordination-the coordinatedutilizationof ture and content of these simplified cognitive portrayalsof environments
company resourcesto create superiorcustomervalue. (mental models) that actually drives strategic decisions (see, e.g., Pfeffer
An alternativeto this behavioralperspectiveholds that a and Salancik 1978; Porac and Thomas 1990; Weick 1979). Day and Ne-
marketorientationis part of a more deeply rooted and per- dungadi(1994) show thatthe mentalmodels used by managersto represent
their competitive advantageare a sensible adaptationto their environment
vasive culture. For this purpose, Deshpande and Webster and stronglyinfluence the patternof informationusage.
Market-Driven / 43
Organizations

eral roles in this process: It serves as a repositoryfor collec- This is especially true of competitorinformation,in which,
tive insights containedwithin policies, procedures,routines, for example, manufacturingmay be awareof certainactivi-
and rules that can be retrievedwhen needed; a source of an- ties throughcommon equipment suppliers, sales may hear
swers to ongoing inquiries;and a major determinantof the about initiatives from distributorsand collect rumors from
ability to ask appropriatequestions. customers, and the engineering departmentmay have hired
Market-drivenfirms are distinguished by an ability to recently from a competitor.
sense events and trendsin their marketsaheadof their com- Market-drivenfirms do not sufferundulyfrom organiza-
petitors. They can anticipatemore accuratelythe responses tional chimneys, silos, or smokestacks,which restrictinfor-
to actions designed to retain or attractcustomers, improve mation flows to vertical movements within functions. In-
channel relations,or thwartcompetitors.They can act on instead, informationis widely distributed,its value is mutual-
formationin a timely, coherentmannerbecause the assump- ly appreciated,and those functions with potentially syner-
tions about the marketare broadly shared.This anticipatory gistic information know where else it could be used
capabilityis based on superiorityin each step of the process. beneficially.
It is achieved through opened-minded inquiry, synergistic
informationdistribution,mutually informedinterpretations, Mutually informed interpretations. The simplifications
inherent in the mental models used by managersfacilitate
and accessible memories.
learning when they are based on undistortedinformation
Open-mindedinquiry. All organizations acquire infor- about important relationships and are widely shared
mation about trends, events, opportunities, and threats in throughout the organization (Senge 1990). These mental
their market environment through scanning, direct experi- models can impede learningwhen they are incomplete, un-
ence, imitation,or problem-solvinginquiries.Market-driven founded, or seriously distorted-by functioning below the
organizationsapproachthese activities in a more thoughtful level of awareness,they are never examined.A market-driv-
and systematic fashion, in the belief that all decisions start en organizationavoids these pitfalls by using scenariosand
with the market.The most distinctive features of their ap- other devices (DeGeus 1988) to force managersto articu-
proach to inquiryare the following: late, examine, and eventuallymodify theirmentalmodels of
*Activescanning-All organizations trackkeymarketcon- how theirmarketswork, how competitorsand supplierswill
ditionsandactivitiesandtryto learnfromthedepartures react,and the parametersof the responsecoefficients in their
fromwhatis normalandexpected.However,thislearning
is usuallya top-downeffortbecauseinformationfromthe marketingprograms.
frontlineemployeesis blocked.In market-driven organi- Accessible memory.Market-driveninquiry,distribution,
zations,thesefrontlinecontacts,who hearcomplaintsor and interpretationwill not have a lasting effect unless what
requestsfor new servicesand see the consequencesof is learnedis lodged in the collective memory.Organizations
competitiveactivity,aremotivatedto informmanagement without practical mechanisms to remember what has
systematically. workedand why will have to repeattheir failuresand redis-
*Self-criticalbenchmarking-Most firms do regulartear- cover their success formulasover and over again. Collective
downanalysesof competitors' productsandoccasionally
studyfirmsforinsightsintohowto performdiscretefunc- recall capabilities are most quickly eroded by turnover
tionsandactivitiesbetter.Market-driven
firmsstudyatti- throughtransfersand rapiddisbandingof teams. Data banks
tudes,values,andmanagement processesof nonpareils. that are inaccessible to the entire organizationcan also con-
*Continuousexperimentationand improvement-All orga- tribute to amnesia. Here is where informationtechnology
nizationstinkerwith theirproceduresandpracticesand can play an especially useful role.
take actionsaimedat improvingproductivityand cus-
tomersatisfaction.However,most are not very serious Customer Linking as a Distinctive Capability
about systematicallyplanningand observingthe out-
comes of theseongoingchanges,so thosethatimprove As buyer-sellerrelationshipscontinue their transformation,
performance areadoptedandothersaredropped. a customer-linkingcapability-creating and managingclose
*Informed imitation-Market-driven firmsstudytheirdi- customer relationships-is becoming increasingly impor-
rect competitorsso they can emulatesuccessfulmoves tant.At one time, standardpurchasingpracticeemphasized
beforethecompetitiongets too farahead.Thisinvestiga- arm's length adversarialbargainingwith suppliers,aimed at
tion requiresthoughtfuleffortsto understandwhy the
achieving the lowest price for each transactionor contract.
competitorsucceeded,as well as furtherprobesforprob- Not surprisingly,suppliers focused on individual transac-
lems and shortcomingsto identifyimprovements that
wouldbe welcomedby customers.Herethe emphasisis tions and gave little attentionto the quality of the interface
moreon whatthecompetitor wasableto achievein terms with the customer.They had little incentive to be open with
of superiorperformance, features,andso forth,andless buyersor develop superioror dedicatedcapabilitiesbecause
on understanding the capabilitiesof the competitorthat they could easily lose the business to a competitor.The
resultedin theoutcome. buyer,in turn,was unlikely to be awareof a supplier'scosts
and capabilities.
Synergistic informationdistribution.Firms often do not
know what they know. They may have good systems for Now customers, as well as major channel members7
such as Ikea and Wal-Mart,are seeking closer, more collab-
storing and locating "hard"routine accounting and sales
data, but otherwise managers have problems figuring out
where in the organizationa certain piece of informationis 7Thecustomer-linkingcapabilityhas many featuresin common with the
channel bonding capability.Thus we expect the same skills, mechanisms,
known or assembling all the needed pieces in one place. and processes could be readily transferredbetween those relateddomains.

orative relationshipswith suppliersbased on a high level of manufacturerslike Procter & Gamble and retailers like
coordination, participation in joint programs, and close KMartare assigning multifunctionalteams to deal with each
communication links. They want to replace the adversarial other at many levels, including harmonizingsystems, shar-
model, which assumes that advantages are gained through ing logistics and productmovement information,and joint-
cutting input costs, with a cooperative model that seeks ad- ly planning for promotionalactivity and product changes.
vantagethroughtotal quality improvementand reducedtime The objectives of this collaborativeactivity are to cut total
to market.This way of doing business suits their bettersup-
system costs while helping retailersimprove sales.
pliers, who confront intense competition that quickly nulli- Firms that have developed a distinctive capability for
fies their product advantages and powerful channels that
control access to the market. managing collaborative relationships find they have more
Despite recent emphasis on the establishment,mainte- integratedstrategies. The integrationbegins with a broad-
nance, and enhancementof collaborativerelationships,few based agreementon which customers serve collaboratively
firms have mastered this capability and made it a competi- (Andersonand Narus 1991). No longer is this choice left to
tive advantage. Successful collaboration requires a high the sales function, without regardto the impacton the man-
level of purposefulcooperationaimed at maintaininga trad- ufacturingand service functions.The cross-functionalcoor-
ing relationship over time (Frazier, Spekman, and O'Neal dination and informationsharingrequiredto work collabo-
1988; Spekman 1988). The activities to be managed start ratively with customers enhances shared understandingof
with the coordination of inside-out and spanning capabili- the strategyand role of the differentfunctions.
ties, althoughthese are not the means by which the relation-
Although collaborative relationships are becoming in-
ship is managed.Instead,new skills, abilities, and processes
must be masteredto achieve mutually satisfactorycollabo- creasinglyimportant,they are not appropriatefor every mar-
ket or customer. Some customers want nothing more than
ration.These include the following.
the timely exchange of the productor service with minimum
Close communicationandjoint problemsolving. Suppli- hassle and a competitiveprice.And because of the effortand
ers must be preparedto develop team-basedmechanismsfor resourcesrequiredto supporta tightly linked relationship,it
continuously exchanging information about needs, prob- may not be possible to do this with more than a few critical
lems, and emerging requirementsand then taking action. In customers (Shapiro 1988a). Yet even when most relation-
a successful collaborativerelationship,joint problem solv-
ships are purely transactional,there are still possibilities for
ing displaces negotiations. Suppliers must also be prepared
to participatein the customer'sdevelopmentprocesses, even gaining advantagesby nurturingsome elements of a linking
before the productspecifications are established. capability within the organization.This process begins by
Communicationsoccur at many levels and across many analyzingwhich customersare more loyal or easier to retain
functions of the customer and supplier organizations, re- and proceeds by seeking ways to maintaincontinuity with
quiring a high level of internalcoordinationand a new role these customersthroughcustomized services or incentives.
for the sales function.When the focus is on transactions,the
salesperson is pivotal and the emphasis is on persuadingthe
customer through features, price, terms, and the mainte- Developing the Capabilities of
nance of a presence. The sales function adopts a very differ- Market-DrivenOrganizations
ent-and possibly subordinate-role in a collaborativerela- Initiativesto enhance marketsensing and customer linking
tionship. It is responsible for coordinatingother functions, capabilitiesare integralto broaderefforts to build a market-
anticipating needs, demonstrating responsiveness, and driven organization.The overall objective is to demonstrate
building credibility and trust. a pervasive commitmentto a set of processes, beliefs, and
Coordinatingactivities. In addition to the scheduling of values, reflectingthe philosophythat all decisions startwith
deliveries, new management processes are needed for (1) the customer and are guided by a deep and shared under-
joint productionplanning and scheduling, (2) management standingof the customer'sneeds and behaviorand competi-
of information system links so each knows the other's re- tors' capabilitiesand intentions,for the purposeof realizing
quirementsand statusand orderscan be communicatedelec-
superior performanceby satisfying customers better than
tronically,and (3) mutualcommitmentsto the improvement
of quality and reliability. competitors.
Manufacturer-reseller relationshas become a fertile area Many firms have aspired to become marketdriven but
for the development of collaborativemanagementcapabili- have failed to instill and sustainthis orientation.Often these
ties, with the major grocery product firms taking the lead. aspirantsunderestimatehow difficult a task it is to shift an
The objective of each partyused to be to transferas much of organization's focus from internal to external concerns.
their cost to the other as possible. This approachled to dys- They apparentlyassume that marginalchanges, a few man-
functional practices such as forwardbuying to take advan- agementworkshops,and proclamationsof intentwill do the
tage of manufacturer'spromotional offers, resulting in ex- job, when in fact a wide-rangingculturalshift is necessary.
cessive warehousingexpenses and costly spikes in produc- To have any chance for success, change programswill have
tion levels. Traditionally,contacts between partieswere lim- to match the magnitudeof the culturalshift.
ited to lower-level sales representativescalling on buyers
Preliminary insights into how to design change pro-
who emphasized prices, quantities, and deals. Increasingly,
grams come from empirical researchon why some organi-
Market-Driven
Organizations/ 45

zations are more marketorientedthan others.8For example, Many explanationshave been advanced for the uneven
Jaworskiand Kohli (1993) confirm the long-standingbelief results of TQM programs:lack of sustained top manage-
that top managementcommitmentis essential. Strong affir- ment commitment, impatience, and poor understandingof
mation of the notion that market-drivenorganizationshave the principles(Jacob 1993). Thereis a persistenttendencyto
superior capabilities comes from three of their findings. believe thatmerely implementingtechniquessuch as bench-
First, they found that formal and informalconnectednessof marking will produce bottom-line results. Despite the
functions facilitates the exchange of information whereas avowed interest in satisfying customers, the reality is that
interdepartmentalconflicts inhibit the communicationsthat most of the TQM effort is directedinternally(Kordupleski,
are necessary to effective marketsensing. This confirmsthe Rust, and Zahorick1993). Too often firms use standardver-
desirabilityof managingthis capabilityas a set of organiza- sions of TQM without adaptingit to theircircumstances.In-
tion-spanning activities. Second, there was solid evidence deed, TQM does not seem to work in all circumstances.It
that centralization was antithetical to market orientation. appearsto be best suited to relatively small, flat organiza-
This mind-setappearsto flourishwhen thereis delegationof tions with CEOs who are strong supportersand are actively
decision making authorityand extensive participationin de- involved in adaptingit to their firm's culture.Total Quality
cision making. Finally, the use of market-basedfactors such Managementalso suffers from having a strong functional
as customer satisfactionfor evaluatingand rewardingman- home. Originating in manufacturingand operations man-
agers was the single most influentialdeterminantof market agement,qualitypracticeshave evolved from statisticalpro-
orientation. cess control to quality assuranceto aspire to be organiza-
Furtherguidance into how to develop outside-in capa- tionwide. In realityTQM is usually appliedwithin functions
bilities in the context of a broaderchange programcomes or departments,but the problemstend to be much broaderin
from parallelefforts to introduceTQM and applies method- scope (Kaplanand Murdock 1991).
ologies such as business process reengineering(Davenport At the heartof TQM is the concept of an organizationas
1993). Although this backgroundis helpful, the key is to tai- an interrelatedcollection of processes ratherthan an inter-
lor programsto the culture, environment,and competitive acting set of functional units. Although processes such as
position of the business. This requires the following steps: orderfulfillmentor service delivery may reside in one func-
(1) diagnosing current capabilities, (2) anticipatingfuture tion, the sequence of activities necessary to complete the
needs for capabilities, (3) bottom-upredesign of the under- process usually crosses functional lines several times. The
lying process, (4) top-down direction, and (5) continuous objective of TQM is to optimize the flow of activities to re-
monitoringof progress.First,however,let us see what TQM duce cycle time, prevent defects, and enable continuous
can teach us about change management.
improvement.
Lessons from TQM Customeror competitiveorientation.All definitions of
Like market orientation, TQM explicitly focuses on cus- TQM are anchoredin the concept of customer satisfaction;
tomer satisfaction.A distillationof qualitystatementswould the customeris the ultimatearbiterof quality(Garvin 1987).
yield a definitionof TQM as "a set of concepts and tools for Although marketerswelcome this perspective, because it
avoids the pitfalls of internally based definitions such as
getting all employees focused on continuous improvement,
in the eyes of the customer-the next process as well as the conformance to specifications, the resulting metric can be
final consumer"(Schonberger 1990, 1992, p. 52). Surpris- ambiguous.TQM commentatorsarejustly concernedabout
whether it means satisfying currentrequirementsor antici-
ingly, there have been few efforts in marketing9to take ad-
vantageof the tools, frameworks,and implementationmeth- pating future expectations, which customers' expectations
ods associated with TQM. This is not to imply thatTQM in- are to be met, whether expectations should be met or ex-
variablyprevails.Regrettably,TQM faces many of the same ceeded, and the consequences of relying on customer per-
acceptance and implementationproblems as the marketing ceptions ratherthan objective facts.
The only explicit role of competitionis found in the em-
concept. Recent studies have found that lack of results has
lead to the demise of as many as two-thirdsof TQM pro- phasis on benchmarking.However,the message from TQM
grams that are less than two years old. ArthurD. Little sur- advocatesis to look past direct competitorsand concentrate
veyed 500 companies using TQM and found that only 36% on emulating the so-called best practices of organizations
believed it was significantly boosting their competitiveness that excel at a given business process or activity.Managers
(Business Week1992). are advised to go to Walt Disney Company for facilities
management,L.L. Bean for orderfulfillmentprocesses, and
Hewlett-Packardfor hints on how to improve new product
8Thereis mountingevidence showing thatthe importanceof a marketing
orientationvaries with the environmentalcontext (Doyle and Hooley 1992; development processes. Furthermore,it appears that only
Jaworskiand Kohli 1993). The degree of introversion,the sources of un- after a company has masteredother quality principles and
certainty in the market,and especially whether the dominantcoalition is has an infrastructurein place is it worth trying to adoptbest
marketing,finance, or technology (Workman1993) will dictate what ac-
tions are needed, desirable,and feasible. practices. Otherwise the effort is disruptive and
9Marketerswho have explored TQM have largely focused on the useful- counterproductive.
ness of TQM techniques for managing marketing activities (Locander Implementingchange. Here it is useful to compare and
1989) or the role the marketingplays in supportingorganizationwidequal- contrastthe capabilities approachto strategy and TQM on
ity programs (Morgan and Piercy 1992). Of course, marketershave long
contributedto the measurementof quality from the customer'sperspective the matterof how to achieve change. Under the capabilities
(Parasuraman,Zeithaml, and Berry 1985). approach,change is broadly conceived and flows from the
461 Journalof Marketing,October1994

top down. TQM, by contrast,seeks incrementalchange from However, the reach of market-drivenprocesses and their
the bottom up. embedded skills must extend beyond the bounds of the
Two themes infuse the discussion of capabilities-based organization.
change: the power of a coherent and shared vision and the
need for fundamentalrethinkingand radicalredesignof core Diagnosing the Current Capabilities
processes. A vision or strategicintent (Hamel and Prahalad The assessment of the outside-in capabilities takes place in
1989) is a sharedunderstandingof how the environmentwill a broadercontext of the adequacy of all capabilities. The
unfold and what the business intends to become in the fu- unit of analysis is the relevantprocess, and performanceis
ture. Its purposeis to focus the attentionof the organization gauged in terms of the desired outcome or result from the
on a desiredleadershipposition-to ensurethatall functions process.
are contributingto the distinctivecapabilitiesneeded to win. Each process must be mappedto reveal where and how
Effective visions, of course, are not solely top down. They each of the activities is located. Mapping will also identify
are best formed through collaborationbetween a business disconnects at hand-off points (where information, ques-
team and a leader who is both an articulatorand a sponsor. tions, and decisions are transferredwithin and between pro-
Nonetheless, strong leadershipis essential to mobilizing the cesses), delays and unnecessarywork, and sequences of ac-
cross-functionalcapabilities to carry out the vision. Similar tivities thatcan be done in parallel.An importantconsidera-
top-down guidance is needed to restructurethe organization tion is the locus of responsibilityfor each of the activities in
aroundcapabilities. This means designing the organization the process, with a view to revealing dispersed ownership
around the flow of value-adding activities rather than by and lack of focus.
distinct functions.
Mapping is difficult, because the relevant process sel-
TQM change programsemphasize individualempower- dom appearsas a neat packageof distinctand sequentialac-
ment and "managementby fact" to achieve continuous im-
tivities. For example, market-sensingprocesses are likely to
provementof existing processes. The reason for implement- be fragmented,obscured by the dispersal of critical activi-
ing change throughthe empowermentof employees is that ties throughoutthe organization,and woven into other pro-
frontline sales, operations,and service personnelare poten-
cesses. It may be necessary to have differentclasses of mar-
tially in the best position to make better and faster opera-
tional decisions because of their direct involvement with ket-sensing processes that vary in complexity and frequen-
customers and activities. For empowermentto work, em- cy. Processes will differ depending on whether the focus is
on using routinetrackinginformation,undertakingcontinu-
ployees need (1) cross-training in their own and related
functions, (2) extensive skill-buildingto enable them to per- ing inquiries to support other ongoing processes such as
form more broadly defined jobs, (3) informationthat helps productideation,or makingnonrecurringinquiriesinto new
them monitor,improve, and control their performance,and opportunitiesor threats.
A useful next step is to benchmarkthe capabilitiesof di-
(4) recognition and rewards for improved performance
rect competitors, anticipatedcompetitors, and the best-of-
(Schoenberger1992). Above all, they need greaterauthority,
which means supervisorsand middle managersmust yield breed industriesfacing comparablechallenges. This should
some of their authority. provide realistic targetsfor improvementand yield sugges-
TQM also offers a rich libraryof tools that enable man- tions for how to proceed. More important,the widespread
agementby fact. Some of these tools are designed to support recognition of a competitive gap in these capabilities that
the day-to-day activities of workers, managers,and teams. can hurt long-run performancewill help mobilize support
Companies use them to run meetings, reach consensus, and and ensure that motivationdoes not flag.
display the results of quality initiatives. Extensive use of
wall charts,for example, is characteristicof successful TQM Anticipating Future Needs for Capabilities
practitionerssuch as Milliken and Company, Xerox, and The diagnostic stage will reveal a portfolio of capabilities;
Coming, Inc. Another set of tools is used to isolate the some will be distinctive sources of competitive advantage,
causes of problems and solve problems:flow charts,scatter others will be done poorly,but most will be done at a parity
diagrams, Pareto and fishbone charts, and statistical level that neitherhindersnor enhances the competitiveposi-
progress charts. Finally, TQM has spawned tools such as tion. Some will urgently demand dramatic action, others
quality function deployment to aid the integrationof cus- will be candidatesfor continuous improvementefforts, and
tomer requirementsinto the design process and measurethe manycan safely be sustainedat paritywith competition.The
cost of quality. choice of where to allocate resourceswill be dictatedby the
Although TQM has a strong bottom-upemphasis, those market,the centrality of the capability to the strategy,and
organizationsthat use the tools effectively and show a sus- the opportunitycost of not taking remedialaction.
tained commitmentto empowermentalso have a strong top The structure,texture, and dynamism of the expected
management team willing to lead by example. Yet, even marketwill strongly influence whetherthe business should
when the strengths of TQM and the capabilities approach invest in building distinctive marketsensing and customer
are combined, they will not suffice to build a market-driven linking capabilities. Fragmentaryevidence suggests that
organization.The associated concepts, methods, and frame- when competition is limited, marketpreferencesare stable,
works of both the TQM and capabilities approacheswork technology is changingfast, and the exchange relationshipis
best with repetitive and internally contained processes. purely transactional, heavy investments in improvement
Market-Driven
Organizations/ 47

might not be justified (Kohli and Jaworski 1990).10 and the decentralizationof decision making to a point as
A compelling argumentcan be made for investing in the close to the customer as possible. Achieving these ends re-
market-driven capabilities even when the environment quires a combinationof bottom-upredesign and top-down
seems inauspicious.It is precisely these seemingly staticcir- direction.
cumstances,in which new or establishedrivalscan upset the
Bottom-upredesign.The redesigneffort usually requires
competitive balance, customers can begin to wield their la- forming teams that are responsiblefor the process outcome
tent power, and mobility barriersmay be lowered, that war-
and appointingan ownerof the process.At the same time the
rant new capabilities. Ironically, the failure to anticipate a
team is given more accountability,senior managers must
change in competitive forces or customer requirementsre- loosen their control by eliminating tight specifications of
sults from a deficient market-sensingcapability or inade-
proceduresand forgoing detailed reports.This action makes
quate links to key customers. As customers narrow down
their roster of suppliers,it may be too late for many suppli- it clear that the team is responsiblefor continuousimprove-
ers to shift from an adversarialto a partnershipstancebefore ment in satisfying external and internal clients. These
the account is lost. changes must be supportedwith investmentsin distributed
informationsystems, incentives for improvement,training
Strategiesthatemphasizecreatingcustomervalue all de-
pend on building distinctive market-sensingand customer- so that membersof the team know each other's role and can
linking capabilitiesand using these capabilitiesto guide the understandand use the informationthat is available,and fo-
internal processes. Treacy and Wiersema (1993) make the rums for discussing progress. These bottom-up initiatives
case that superior strategies are based on delivering cus- will not succeed on their own, because there still must be
tomer value in one of three distinct ways: links between processes (e.g., who is going to be responsi-
1. Operationalexcellence, throughprice and convenience ble for pricingof orders)and boundariesplaced on behavior
leadership,requiresbusinessprocessesthatminimize so that energy is not diffused. Furthermore,not every pro-
overheadand internaltransactioncosts and manage cess requiresa dedicatedteam-that would spreadkey per-
close linksto customersandchannelpartners; sonnel too thinly.Thus, some processes mustbe managedby
2. Customerintimacystrategiesemphasizethe abilityto task forces that are formed to solve particularperformance
continuously tailorproductsandservicesto increasing-
problems and then disbanded.The result is that the organi-
ly finecustomerdefinitions;a highlydevelopedmarket zation structurebecomes flatter and more flexible, but a
sensingcapabilityis essentialso thatshiftingrequire-
mentscanbe identifiedas earlyas possible;and clear hierarchyremains.What, then, must happenat the top
3. Productleadershipis attainedwitha continuous stream of the hierarchyto guide the bottom-upchanges?
of innovativeproductsandservices.Hereagain,a mar-
Top-downdirection. For an organizationto enhance its
ket-sensingcapability-recognizingemergingneeds, marketorientationand thus to develop superiormarketsens-
rapidlyassessingcustomerresponse,and designing
rapidmarketentrystrategies-is a key contributor to ing and customerlinking capabilities,top managementmust
the successof thisstrategy. make an unequivocalcommitmentto puttingcustomersfirst.
This commitment is mainly signaled by deeds and time
Designing the Change Program spent.Wordshave theirplace, but withoutthe deeds to back
Once a candidateprocess has been designated as the basis them up, the rest of the organizationwould soon learn the
for a potentialdistinctive capability,because of its strategic real prioritiesand behave accordingly.
centrality,the presence of a committedcapable sponsor,and Senior managementleadershipis needed to reshapethe
a favorablehistoryof change, the first questionis whetherto culture,throughsuch actions as proposinga challenging vi-
adopt a radicalreengineeringapproachto change (Hammer sion of the future or setting a major performanceimprove-
and Champy 1993) or a more gradualcontinuousimprove- ment target like cutting time to marketin half. Furtherin-
ment approachbased on TQM. The choice depends on the fluence can be exercised throughthe strategydevelopment
magnitudeof the needed change, the feasibility of it, and the process-to ensure broad participation,understanding,and
resources requiredto accomplish it (Davenport 1993). Be-
acceptance of the chosen direction.A rigorous strategyre-
cause most firms are capital constrained,this may limit the view focusing on pivotal issues and critical assumptions
scope of reengineering. However, because the capabilities aboutthe ability of the business to compete can furthersup-
and TQM approachesshare certain principles and adopt a
port the process.
process perspective, it is possible to offer some general
propositions on managing change. These propositions are The enabling role of informationtechnology.A process
consistent with recent evidence (Jaworskiand Kohli 1993) perspectiveon managementproblems,leading to the decen-
that market-drivenbehaviors require steadfasttop manage- tralizationof decisions, is not new. Skeptics contend that it
ment commitmentand are fostered throughcross-functional tends to prevail during economic downturns.What is new,
activities, shared objectives, externally oriented incentives, however, is the potential of informationtechnology (IT) to
enable organizationsto do things they could not do before
and thus develop new capabilitiesand skills.
l'This interpretationmust be made cautiously, however, because it is An integratedIT approachhas many elements: shared
based on the moderatingeffect of the environmenton the relationshipof
market orientation to business profitability,which finds that coefficients databases, high-speed communication networks, decision-
may be smallerin some settings, althoughalways positive (Slaterand Narv- supportsystems, automaticproductidentificationand track-
er 1992). ing, and large-scalecomputing.These elements can be com-

bined to fundamentallytransformboth the market sensing All we see is the results of the organizationaltransforma-
and customer linking capabilities: tion. Now managersseek guidance on how to enhance the
*Large-scale marketresearchdatabasesfacilitatethe inte- marketorientationof their organization.
grationand coordinationof dispersedmarketing,sales, The emerging capabilities approachto strategyoffers a
andservicegroupsandenhancelearningby disseminat- valuable new perspective on how to achieve and sustain a
ing informationrapidlyand holdingit readyin central marketorientation.This approachseeks the sources of de-
memoriesforeasy access(Cespedes1993). fensible competitivepositions in the distinctive,difficult-to-
?Closercustomerandchannellinksarenow possiblebe- imitatecapabilitiesthe organizationhas developed.The shift
cause informationnetworkshave dramatically reduced
the cost of handlingwhatwere formerlypapertransac- in emphasis to capabilitiesdoes not mean that strategicpo-
tionsbetweenparties.Thispermitsmuchcloseranderror- sitioning is any less important(Porter 1991). On the con-
freeintegration of customerandsupplierfunctions. trary,the choice of which capabilitiesto nurtureand which
*Groceryproductfirmsarenow ableto integratescanner investment commitments to make must be guided by a
dataon consumerbuyingbehaviorwiththepurchasepat- sharedunderstandingof the industrystructure,the needs of
ternsandlifestyleprofilesof shoppersin eachof 30,000 the target customer segments, the positional advantages
stores.Withthisdatatheycantailormarketing programs
for nationalaccountsto clustersof storesor individual being sought, and the trendsin the environment.
storescateringto theneedsof customersandthedifferent Two capabilities are especially important in bringing
merchandising philosophiesof theretailers. these external realities to the attentionof the organization.
?Marketing andsales productivity One is the marketsensing capability,which determineshow
systemspermitlinking
togethermarketing databaseswiththedistributionsystem well the organization is equipped to continuously sense
as well as directmarketing,
telemarketing,andothersales changes in its marketand to anticipatethe responses to mar-
systems.These integratedsystemspermitcarefulmoni- keting actions. The second is a customer-linkingcapability,
toringof all sales anddistribution processes,plus track which comprises the skills, abilities, and processes needed
the lifetimevalueof customersto guideresourcealloca-
tiondecisions. to achieve collaborativecustomerrelationshipsso individu-
al customer needs are quickly apparentto all functions and
These examples demonstratewhat leading firmsare doing to well-definedproceduresare in place for respondingto them.
reconfiguretheir marketingprocesses and hint at the possi- Guidanceon the design of effective programsto enhance
bilities for the.future.Theircompetitorswill eventuallyhave these capabilities comes from the capabilities approachto
to match or exceed these capabilities to meet their cus- strategy and TQM. Both these approachesshare a concep-
tomers' expectations of minimum acceptable performance. tion of an organizationas an interrelatedcollection of pro-
In the meantime the innovatorhas gained a first-moverad- cesses, and each has an associated set of methods and pro-
vantage and a platformfrom which to apply the latest in IT grams for seeking improvement.By combining the two ap-
advances to offer new services. proacheswith priorempiricalwork on why some organiza-
tions are more market-orientedthanothers,a comprehensive
Monitoring progress. Within TQM circles there is an
adage, "If you don't measureit, you can't improve it." The change programwas proposedwith the following elements:
final step in the improvementprogramis to decide which *Diagnosisof currentcapabilities,using mappingand
key performanceindicators(KPIs) to monitor.For each KPI benchmarking methodologies,
there are periodic measurementsand a series of time-based *Anticipation of futureneedsforcapabilities
in lightof the
targets to reach, so problems and shortfalls can be quickly strategyforcreatingcustomervalue,
recognized and corrective action taken. For example, Col- *Bottom-up redesign,basedon the formationof teamsre-
gate-Palmolive has developed a series of measures to align sponsibleforcontinuous improvement orradicalredesign
the entire company to tradesatisfaction.In additionto rela- of underlying processes,
tive tradesatisfaction,they routinelymeasurethe numberof *Top-down directionfromseniormanagers,who demon-
orders delivered on time, numberof orders delivered com- stratea clear, continuingcommitmentto puttingcus-
tomersfirst,
plete, accuracy of matching of invoices and deliveries, and *Useof information
shelf movement.They believe these reflect what the grocery technologyto enabletheorganization
to do thingsit couldnotdo before,and
trade is looking for and will reveal to the organization
*Monitoring of progresstowardimprovement targets.
whether sufficient progressis being made.
This change programmust be undertakenin conjunction
Summary and Conclusions with other actions aimed at enhancinga marketorientation.
It is almost an article of faith within marketingthat superior Indeed, the market sensing, customer linking, and channel
business performanceis the result of superiorskills in un- bonding capabilitiescannot be nurturedor productivelyuti-
derstandingand satisfying customers. This propositionhas lized withoutconcurrentattentionto the values, beliefs, and
been partially validated by a growing body of research on behaviorsof the membersof the organizationand being sup-
the impact of a marketorientationon business performance. ported by changes in the organization structure, system,
This work has helped give a fuller pictureof the attributesof control, incentives, and decision processes.
market-drivenorganizations,highlighting the roles of cul-
ture, information utilization, and interfunctionalcoordina- An Agenda for Research
tion. These insights are not sufficient for managers,because Many researchtopics are suggested by the need to improve
they do not reveal how the superiorskills were developed. understandingof the implications of the process versus
Market-Driven
Organizations/ 49

functionalperspectiveson marketingdecisions suggestedby representsa series of activities raises several questions that
the capabilities approach. There also remains a pressing are not readilyaddressedby the availableresearch.What are
need for researchersto examine the attributesof change pro- the most importantattributesof a distinctive linking capa-
grams that have been and could be effective in enhancing a bility? When are close collaborative relationships most
marketorientation.
prevalent,and when are they likely to be a strong source of
Identifying distinctive capabilities. We have proposed competitive advantage?How do firms choose which cus-
that most businesses have only a few superiorcapabilities tomers to link with? What is the effect of demandvolatility
thatenable them to outperformthe competition.As yet little and marketfragmentationon the closeness of relationships?
is known abouthow to identify these distinctivecapabilities. How does this capabilitymesh with the inside-outand span-
One useful avenue for researchwould be to study the links
between positional advantages(such as superiororder pro- ning capabilities?
cessing speed and cost as judged by customers)and a corre- Indicators of market-drivenbehavior. Underlying the
sponding capability embedded in the order fulfillment pro- change programoutlined here are several propositionssug-
cess, for example. gesting that market-drivenbehaviors are more likely when
The sustainabilityof distinctive capabilities. One of the (1) thereis a committedand involvedtop managementteam,
defining features of distinctive capabilities is that competi- (2) the cultureis supportive,(3) objectives and rewardsare
tors find them difficult to understandand imitate. Theory aligned with externalmarketperformance,and (4) the locus
would suggest that is especially true with complex, multi- of decision making is as close to the customer as possible.
stage processes, in which there is a large amount of tacit These propositionshave alreadyreceived researchattention.
knowledge widely dispersedthroughoutthe organization. What has not been studied is the underlyingpropositionof
Diagnosing the market-sensingcapability. Several mar- this article, that such behaviors are more likely when core
ket-sensing capability issues demand research attention: activities are organized around processes with identifiable
Can replicable maps of the marketlearningprocess be cre- owners and a focus on customervalue creation.
ated, and what areas for improvementwould be revealed?
What is the role of the organizationalculture in supporting Managing the change program.The largest payoff will
the capability? Do market-drivenorganizationsscan more surely come from thoughtfulclinical investigationsof best
widely and tap more diverse sources of information?How practicesand failed transformationefforts, supplementedby
do the mental models that managers hold about the struc- broad-scale research into the determinants of effective
tures and behaviorof their marketsdiffer?Do stronglyheld change programs.What actions are most productive?What
mental models increase the risk of myopia and insensitivity triggers seem to impel organizationsto seriously pursue an
to weak signals from unexpectedsources?Whatis the effect improvementin their orientationto the market?How long
of advancesin informationtechnology on the dissemination does it take to realize meaningful change? Are benefits
of marketinformationand the enhancementof organization- worth the costs? Which tools and techniquesfrom business
al memory?
reengineeringand TQM could be most effectively adapted?
Diagnosing the market-linkingcapability. The notion We believe this entire line of enquiry can be effectively
that close relationships are the outcome of a process that guided by the capabilitiesperspectiveadoptedhere.
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The Capabilities of Market-Driven Organizations

Author(s): George S. Day

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Capabilities of the - Core Competencies of

Capabilities and Performance Capabilities in Market-Driven

40/ Journalof Marketing,October1994

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-4* Spanning Processes 01-

* MarketSensing * Customer Order Fulfilment * Financial Management

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Order >rder Entry\ O Billing Post

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461 Journalof Marketing,October1994

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