Description
Market orientation research has accumulated a variety of findingsover the past two decades, during which researchers have emphasized the importance of information flow within an organization. However, even though market information isvery important for the organizationʼsadaptation to itsenvironment, the vertical flow of strategic information has not been the main focus of market orientation researchers.
VERTICAL STRATEGIC INFORMATION FLOW AND
MARKET ORIENTATION
TSUYOSHI NUMAGAMI,
?
MASARU KARUBE,
?
TOSHIHIKO KATO,
?
AND MASATO SASAKI
?
Abstract
Market orientation research has accumulated a variety of ?ndings over the past two
decades, during which researchers have emphasized the importance of information ?ow within
an organization. However, even though market information is very important for the
organization?s adaptation to its environment, the vertical ?ow of strategic information has not
been the main focus of market orientation researchers. In contrast, vertical strategic
information ?ow has been the main theme from the middle management perspective of strategy
process and knowledge creation theory. Although these research streams share an interest in
information ?ow within an organization, they have remained separate traditions up until now.
This paper tries to bridge the gap between these two research traditions by using a database of
Japanese business organizations. The authors contend that the downward information ?ow of
formal strategy and the lateral ?ow of inter-functional information are much more important in
improving market orientation than the upward information ?ow of emergent strategy. And,
contrary to the widely shared belief, informal information ?ows do not contribute to
organizational market adaptation.
I. Introduction
Market-oriented organizations have various strategic advantages in adapting themselves to
their markets. Even though there have emerged in recent years a growing number of
stakeholders for an organization to take into consideration, customers remain the most
important source of threats and opportunities for business organizations. This is the major
reason why many researchers have spent much e?ort in conducting empirical studies on market
orientation since the 1990s (Kohli & Jaworski, 1990; Narver & Slater, 1990).
Although there have been several somewhat di?erent de?nitions of market orientation, all
share common tenets of the marketing concept and emphasize market-related information
processing (Deshpandé & Farley, 1998; Jaworski & Kohli, 1993, 1996; Sinkula, 1994; Slater &
Narver, 1995). For example, Kohli and Jaworski (1990) de?ned the concept as “organization-
wide generation of market intelligence pertaining to current and future customer needs,
dissemination of intelligence across departments, and organization-wide responsiveness to it.”
Hitotsubashi Journal of Commerce and Management 46 (2012), pp.17-40. ? Hitotsubashi University
?
Graduate School of Commerce and Management, Hitotsubashi University, Naka 2-1, Kunitachi, Tokyo 186-8601,
Japan.
(Kohli & Jaworski, 1990, p. 6) Other researchers, such as Sinkula (1994) and Baker and
Sinkula (1999), are more inclined to focus upon information and the learning aspects of the
market orientation concept. All these researchers have conceptualized market orientation in
terms of organizational communication and organizational learning. In other words, market
orientation is intrinsically an issue of information ?ow that is strategically important for an
organization.
However, researchers in market orientation have not paid much attention to the
organizational information ?ow of corporate and/or business strategy. Many papers in this
tradition chose the following factors as organizational antecedents of market orientation: (1)
centralization and formalization, (2) interdepartmental connectedness, (3) leadership of top
management that emphasizes market orientation, (4) incentive systems that support market
orientation, and (5) organizational culture and climate (Cano, Carrillat, & Jaramillo, 2004;
Deshpandé & Farley, 1998; Jaworski and Kohli, 1993; Lascu, Manrai, Manrai, & Kleczek,
2006; Menguc & Auh, 2008; Narver & Slater, 1995; Slater & Narver, 1995). Even though
there must be very important relationships between market information and strategic
information, these researchers do not seem to have paid much attention to the relationships
between market orientation and strategic information ?ows. For example, questions such as the
following have not been much explored in this tradition:
(1) Is a market-oriented organization full of a downward information ?ow of formal
strategy?
(2) Does an upward information ?ow of emergent strategy encourage the market
orientation of an organization?
These questions have not found an important position in the market orientation literature,
but they are one of the main themes in the middle management perspective on strategy process
and knowledge creation theory (Floyd & Wooldridge, 1997, 2000; Nonaka, 1988; Pappas &
Wooldridge, 2007; Watson & Wooldridge, 2005; Wooldridge & Floyd, 1990; Wooldridge,
Schmid, & Floyd, 2008). The middle management perspective and knowledge creation theory
emphasize middle managers? role in creating and implementing the organization?s strategy, and
thus their role in mediating upward and downward strategic information ?ow within an
organization.
For example, based on empirical studies, Wooldridge and Floyd (1990) suggest that the
reason middle management involvement improves organizational performance may not be the
heightened commitment of middle managers, but an improved decision making through the
utilization of their information. In a similar vein, Floyd and Wooldridge (1997) emphasize the
importance of some mixture of upward in?uence and downward in?uence in achieving high
organizational performance.
Knowledge creation theory is resonant with the middle management perspective. In the
process of constructing knowledge creation theory, Nonaka (1988; 1994) and Nonaka, Toyama,
& Konno (2000) focus upon the strategically important role of middle managers, and argue that
the active role played by middle managers in creating new product concepts and new business
strategies is the key to organizational self-renewal and long-term growth of the company.
Nonaka and his colleagues also emphasize the role of the cross-functional team in exchanging
inter-functional information and generating a new synthesis of product concepts (Imai, Nonaka,
& Takeuchi, 1985; Nonaka, 1994). Nonaka?s theory of knowledge creation can be interpreted
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 18
in terms of organizational communication for strategic change, i.e., strategic self-renewal
through encouraging vertical and horizontal information ?ows.
The middle management perspective of Floyd and Wooldridge and the knowledge creation
theory of Nonaka both emphasize the importance of vertical and lateral organizational
communication of strategic information in creating a strategy of high adaptability to the market
environment. Their research results point to the idea that vertical and horizontal ?ows of
strategic information within an organization increase its adaptability to the market environment
via increased market orientation. Even though market orientation research, on the one hand,
and the middle management perspective and knowledge creation theory, on the other, have been
separate research traditions, they must intrinsically share interests in communication and
information ?ow within an organization.
There seems to be two reasons for us to combine these two research streams. First, while
middle management perspective and knowledge creation theory emphasize vertical information
?ows and lateral information ?ows, it remains unclear whether these information ?ows are by
themselves important for the organization?s performance, or they are conductive to high
performance via enhanced market orientation of the organization. From the view point of
middle management perspective and knowledge creation theory, whether market orientation
plays an intermediary role to increased organizational performance or not is one of the
important research questions to address.
In addition to this, bridging these two separate traditions are very important in order for us
to consider how to develop a market-oriented organization through the means of organizational
rearrangements. On one hand, empowered lower and middle managers would seem to advance
their organization?s adaptability to the market environment (Hurley & Hult, 1998). But, on the
other, strong leadership may enhance the market orientation of the organization (Kirca,
Jayachandran, & Bearden, 2005). This paper tries to bridge this lack of dialogue between these
two important research streams by examining the in?uence of organizational strategic
information ?ows on market orientation.
II. Market Orientation and Intra-organizational Strategic Information Flow
1. Market Orientation and Organizational Performance
Researchers in market orientation have made many ?ndings based on a few standardized
measurements of market orientation. One of the most important measurements, usually called
MARKOR, was developed by Jaworski and Kohli (1993). Through carefully reviewing market
orientation concepts that appeared in various literatures, they speci?ed three dimensions of
market orientation as follows:
(1) Intelligence Generation: Market information gathering activities from outside the
organization;
(2) Intelligence Dissemination: Market information sharing activities within the organiza-
tion;
(3) Responsiveness: Changes or realization of organizational action based upon the market
information.
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 19
The ?rst two dimensions are mainly related to organizational processing of market
information, while the third is related to the actions of organizations based on the processed
market information. In essence, Jaworski and Kohli operationally de?ned market orientation
from the viewpoint of market information and changes in action based upon it.
Much empirical research, including meta-analytic research, has found that market
orientation measurements consistently have positive correlation with organizational perform-
ance, especially when the performance measures are subjective rather than objective (Cano et
al., 2004; Deshpandé & Farley, 1998; Jaworski & Kohli, 1996; Kirca, Jayachandran, &
Bearden, 2005). Thus, we would like to ?rst con?rm this positive relation between
measurements of market orientation and performance.
Hypothesis 1 (H1): The greater the market orientation (intelligence generation, intelli-
gence dissemination, and responsiveness), the higher the organizational performance.
2. The Middle Management Perspective and Market Orientation
Research in the middle management perspective suggests that middle managers? involve-
ment in strategy formulation leads to superior strategy because this involvement improves
strategic decisions of the organization, and at the same time, improves the organizational
implementation of the strategy. This dual focus on information utilization and implementation
would lead to an emphasis on both upward in?uence and downward in?uence within the
organizations (Wooldridge & Floyd, 1990; Floyd & Wooldridge, 1997).
Upward and downward information ?ow is also emphasized in knowledge creation theory.
Nonaka (1988; 1994) conceived of organizational self-renewal as a process of knowledge
creation through the interaction of top and middle management, which he called “middle-up-
down management.” In order for organizational self-renewal to take place in the face of a
turbulent environment, top management must propose an energizing strategic vision of the
organization?s future, and middle managers must generate a new product (business) concept that
mediates between the reality at the front lines and the higher-order strategic vision of top
management (Nonaka et al., 2000). In this process of self-renewal through knowledge creation,
Nonaka argues that both the downward information ?ow of strategic vision and the upward
?ow of real-life strategic information are very important, and that the middle managers play a
critical role in mediating between these upward and downward information ?ows (Nonaka,
1988, 1994).
Both of these research streams pay attention to the upward and downward information
?ow of strategic importance because this information ?ow is thought to be crucial in order for
an organization to adapt itself to its turbulent environment (Wooldridge & Floyd, 1990;
Nonaka, 1988). Even though these research streams do not refer to market orientation
concepts, the concepts seem to capture the most important aspects of ?rms? environments, and
the vertical information ?ows must increase organizations? performance through encouraging the
market orientation of these organizations. In addition, even though market orientation
researchers do not clearly take the vertical information ?ows into consideration, their search for
antecedents of the market orientation includes many organizational variables such as
centralization, formalization, etc., and they place the former concepts as intervening variables
that connect organizational variables and organizational performance (Kirca, Jayachandran, &
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 20
Bearden, 2005; Kohli & Jaworski, 1990). Following the preceding research, we would like to
posit that vertical information ?ows advance an organization?s market orientation, and this in
turn increases its performance. The argument that the vertical strategic information ?ow
improves an organization?s adaptation to its environment suggests the idea that these ?ows
improve organizational orientation toward the market environment. Thus we hypothesize as
follows:
Hypothesis 2 (H2): The greater the downward strategic information ?ow in an
organization, the greater its market orientation.
Hypothesis 3 (H3): The greater the upward strategic information ?ow in an organization,
the greater its market orientation.
3. Other Types of Information Flow and Market Orientation
The knowledge creation theory and organizational communication research pay attention
not only to vertical information ?ows within an organization, but also to horizontal or lateral
information ?ows across di?erent functional departments (Nonaka, 1988, 1994; Tompkins &
Wanca-Thibault, 2001). Nonaka emphasizes the cross-functional team as a key device for an
organization to develop autonomy within a large established and bureaucratic ?rm. This device
would improve the sensitivity of the team to the market environment and encourage creation of
new knowledge that would lead to market success. Also in the research area of market
orientation, Homburg, Workman, Jr., and Jensen (2000) contend that US and German
companies are in the process of reorganization for ?ne-tuning themselves to each customer
account, and that it is becoming more and more important for a company to facilitate cross-
functional coordination among functional departments toward speci?c customer demands.
Following this research that emphasizes the importance of lateral communications, we
hypothesize a positive relationship between market orientation and lateral information ?ow
within an organization:
Hypothesis 4 (H4): The greater the lateral information ?ow in an organization, the greater
its market orientation.
Information ?ows not only through formal channels but also through informal networks
within an organization (Tompkins & Wanca-Thibault, 2001). Informal communication is
usually thought to be a desirable process for an organization to generate new knowledge and
facilitate internal coordination (Kraut, Fish, Root, & Shalfonte, 1993; Nonaka et al., 2000;
Whittaker, Frohlich, & Daly-Jones, 1994). If an organization can disseminate much
information through informal channels, it would bene?t from this because its formal channel
can be protected from information overload (Galbraith, 1977). This exemption would enable
the organization to further develop its market orientation. Thus we hypothesize as follows:
Hypothesis 5 (H5): The greater the percentage of necessary information ?ows that occur
through informal channels, the greater an organization’s market orientation.
As a summary of the hypotheses described above, we drew a simple path diagram in
Figure 1. As shown in the ?gure, our path analysis model basically has two-step causal
relationships. The relationships among market orientation dimensions are assumed as drawn in
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 21
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 22
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intelligence generation is a prerequisite for intelligence dissemination, while the latter in turn is
a prerequisite for responsiveness (Maltz & Kohli, 1996; Sinkula, Baker, & Noordewier, 1997).
III. Methods
1. Data
In order to test these hypotheses, we conduct a path analysis based on a questionnaire
survey of Japanese business organizations. The data we use in our analysis were collected by
the Organizational Deadweight Project, which has conducted questionnaire survey research
every two years since 2005.
1
We will use data from the third Organizational Deadweight
Project survey that collected data from January to March of 2009 because it is the only survey
in the series that contained market orientation measurements.
We selected a business unit (BU) as the unit of analysis and adopted a multi-level survey
research design. That is, we measured the BU?s characteristics by averaging the responses of at
least six middle-level managers responding to the same questionnaire. We sent a set of
questionnaires to a company, asking the coordinator of the company to select three middle
managers (average age = 46.37 years, as of Jan. 1, 2009) and three lower middle managers
(average age = 39.15 years, as of Jan. 1, 2009): a total of six middle managers from three
major functional departments. We also asked the companies to select the most promising, top-
notch middle-level managers as the respondents, because observation of the BU?s characteristics
would be a?ected by how the respondents are rated in their organization, as well as by the real
di?erences among the BUs.
Because this kind of survey design assigns heavy responsibilities to the collaborating
companies, we ?rst formed a research consortium and promised the companies involved that
they would be given a detailed research report for each BU. Twenty-one companies joined the
third Project, all of them are large established ?rms, and listed in the First Section of the Tokyo
Stock Exchange. The total number of BUs represented is 139, with questionnaires collected
from middle managers numbering 882.
2
The average number of BUs per company is 6.6,
ranging from a minimum of 1 to a maximum of 22.
Our sample BUs are mainly from manufacturing (electronics, chemicals and pharmaceut-
icals, foods and beverages, etc.), with several BUs from retailing and transportation services.
The sizes of BUs are also wide-ranging, with the smallest having 10 full-time employees and
the largest, 6, 281. The average BU has 489 employees. The BU?s annual sales (?scal 2007)
range from 1 billion yen (about $11 million if $1 =¥90) to 2.89 trillion yen (about $32.1
billion), with an average of 137.9 billion yen ($1.53 billion).
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 23
1
The Organizational Deadweight Project ?rst started as an exploratory research project focusing on questions like
identifying the kind of internal coordination problems facing Japanese companies and the antecedent conditions for such
internal coordination problems.
2
In addition to this number, we also collected an almost-identical questionnaire from each BU?s general manager.
There were 139 general managers, making the grand total of questionnaires 1,021.
2. Variables and Dimensions at the Individual Level
Because our questionnaires are answered by individuals but we take the BU as the unit of
analysis, we average the answers of the six middle-level managers by BU and treat these
variables and dimensions as BU characteristics. Before conducting path analyses at the level of
BU, we would ?rst like to explicate our measurements at the individual level and then check
some indices of inter-rater reliability when constructing BU level variables.
Market Orientation. We adopted Jaworski and Kohli?s MARKOR as a measurement of
market orientation (Jaworski & Kohli, 1993). Table 1 shows the three dimensions of market
orientation, the corresponding three to ?ve questions, the results of a con?rmatory factor
analysis, and the coe?cient alpha on the individual questionnaire data. As discussed in the
previous section, MARKOR has three dimensions: (1) intelligence generation, (2) intelligence
dissemination, and (3) responsiveness. Items concerning these three dimensions have relatively
high path coe?cients, and Cronbach?s alphas are over .70 except for intelligence dissemination.
We average these items by respondent and get three dimensions of market orientation at the
individual level. We adopt the same procedures even for the dissemination dimension, because
we would like to give priority to the theoretical construct, and the goodness of ?t indices in the
con?rmatory factor analysis are acceptable.
As shown in Table 1, the con?rmatory factor analysis shows a relatively good level of ?t,
with AGFI (Adjusted Goodness of Fit) over .955 and RMSEA less than .05. Even though the
con?rmatory factor analysis could not achieve the desirable level of chi-square (p=.000), it is
widely known that chi-square is sensitive to the number of cases and not a useful index when N
is large (say, around 1, 000) (Toyoda, 1992). Because our database contains 869 cases, after
deleting cases missing data on market orientation, we would like to adopt this model
considering relatively good indices of ?t other than chi-square.
Information Flow. We developed original measurements of information ?ow within an
organization. Table 2 contains the four dimensions of intra-organizational information ?ow, the
corresponding two to three questions, the results of a con?rmatory factor analysis, and the
coe?cient alpha with the individual questionnaire data. As discussed in the previous section,
we selected four dimensions of intra-organizational information ?ow: (i) downward strategic
information ?ow, (ii) upward strategic information ?ow, (iii) lateral information ?ow of inter-
functional information, and (iv) informal information ?ow ratio.
All the question items on these dimensions are operationalized in a similar format. For
example, as regards the downward strategic information ?ow of BU strategy, we asked the
respondents, “Please assume that the total amount of information on the BU strategy that would
be necessary for you to do your task properly is equal to 100 percent. What percentage of it
do you believe you receive?” Wordings for the other items are shown in Table 2. These
questions present a ten-point scale, which starts from 1 (= less than 10 percent) and 2 (= ten
and more than 10 to less than 20), with a 10 percent interval for every 1 point, through to 10
(= 90 and more than 90 percent). Downward information ?ow of strategy is operationalized by
two items related to corporate and BU strategy. Because both corporate strategy and BU
strategy are intrinsically formal rather than informal or emergent, we designate this dimension
as downward information ?ow of formal strategy in the following pages.
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 24
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 25
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Upward information ?ow is operationalized with two items. One item asks how much
one?s boss receives one?s strategic proposals, and the other item asks how much one receives
one?s subordinates? proposals. Because strategic proposals from below in a hierarchy usually
lead to emergent strategies, we call this dimension the upward information ?ow of emergent
strategy.
Lateral information ?ow of inter-functional information is measured with two items, one of
which concerns reception and the other issuance. The informal information ?ow ratio is
operationalized with three items, related to the ratio of information about corporate strategy, BU
strategy, and inter-functional information, respectively, as received through informal channels.
As shown in Table 2, Cronbach?s alphas for all the dimensions are from fair to good, and
the con?rmatory factor analysis shows a relatively high goodness of ?t. Again, chi-square
(p=.000) of this model is large because of the large sample size (N=874), but AGFI is equal to
.966 and RMSEA .051, suggesting that the ?tness of the model is relatively good. The
arithmetic means of two or three items by respondent are treated as the four dimensions at the
individual level.
Organizational Performance. We operationalized organizational performance with
subjective measures. Even though subjective measures would be inclined to su?er from
common method variance (Miller, 2001), it is easy to control for industry di?erences. We
measured BU sales growth rate and BU pro?tability by asking the respondents, “When
compared with the major three competitors of your BU, which is the most appropriate
evaluation of your BU?” We used a seven point scale, ranging from 1 (substantially inferior
to the major three competitors) to 7 (substantially superior to the major three competitors).
3. Variables and Dimensions at the BU Level
We then calculate the arithmetic mean of individual-level dimensions and variables of six
middle managers by BU, and use these as BU level dimensions and variables. Before
averaging these individual variables by BU, we attempt to con?rm whether the responses of the
middle-level managers in the same BUs are related. There are several inter-rater reliability
scales, among which we selected within-group inter-rater reliability (Rwg) and intra-class
correlation (2) (ICC(2)) (Suzuki & Kitai, 2007). Rwg is de?ned as Rwg=(s
2
E ,S
2
x )/s
2
E , where
s
2
E is the theoretical variance under uniform distribution and S
2
x is the observed variance within
a BU. Rwg is ?rst calculated by BU, and then the BUs? Rwg?s are averaged into Rwg of the scale
as a whole. ICC(2) is de?ned as ICC(2) =(MSB,MSW) / MSB, where MSB is the mean
square between BUs and MSW is the mean square within the BU. As could be easily
understood by reading these de?nitions, Rwg is a measurement of an agreement against
theoretical randomness, whereas ICC(2) is comparative measurement against other observations.
Thus, ICC(2) is more sensitive to other common sources of variance in the dataset than is Rwg.
Table 3 shows the descriptive statistics and inter-rater reliability of the dimensions
discussed so far. The table shows that, even though some ICC(2)?s are low, almost all of the
Rwg are around an acceptable level (.70). One of them (the upward information ?ow) barely
exceeds .50, but we use this because we would like to give priority to theoretical constructs.
Table 4 depicts correlations between the variables and dimensions we use in the hypothesis
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 27
testing. It would be important to note that the downward and upward strategic information
?ows are highly correlated (.610), suggesting that these dimensions may have an underlying
common causal factor, e.g., good interpersonal relationships between boss and subordinates.
But we prefer to use these two dimensions because of the traditional caveats that emphasize
that information upward and downward are quite di?erent in quality (Dansereau & Markham,
1987).
We also use company dummy variables in the path analyses, because our data contains, on
average, several BUs from the same companies. In addition, BU sales (?scal 2007, logarithm)
may in?uence the growth rate because BUs with large enough sales may not enjoy high growth
rates compared with their smaller competitors. But it turns out that BU sales are not selected
in all four stepwise regression analyses below.
In order to simplify the models of path analysis, we would like to reduce the number of
company dummy variables included in the model. We ?rst conduct a stepwise regression
analysis (Pin =0.05, Pout =0.10), and select company dummy variables necessary to control
possible company biases in the path analyses.
We would like to start our path analyses with these independent variables selected in the
stepwise regression models. First, we would like to test the model of one-step causal
relationships between the three dimensions of market orientation as independent variables, and
two variants of organizational performance, i.e., relative growth rate (model 1) and relative
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 28
Min.
(%)
Max.
(%)
Average
(%)
Rwg
(within-group
inter-rater
reliability)
ICC(2)
(intra-class
correlation(2))
Growth Rate of BU Sales relative to
3 Largest Competitors
Informal Information Flow Ratio
*2
Pro?tability of BU relative to 3
Largest Competitors
Market Orientation (1)
Intelligence Generation
*1
Market Orientation (2)
Intelligence Dissemination
*1
Market Orientation (3)
Responsiveness
*1
Downward Information Flow of
Formal Strategy
*2
Upward Information Flow of
Emergent Strategy
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Lateral Information Flow
of Inter-functional Information
*2
Variables
1,040 2,886,200 137,877.3 381492.594
N Min. Max.
BU Sales
(?scal 2007, Million Yen)
Average SD
0.714 0.802
139 1.50 6.17 3.89 0.797 0.747 0.746
128
4.25 0.696 0.731 0.659
139 1.50 6.00 3.83 0.953
TABLE 3. DESCRIPTIVE STATISTICS AND INTER-RATER RELIABILITY
0.550
139 2.83 5.94 4.28 0.486 0.784 0.408
139 2.58 6.17
45.83 90.00 65.53 0.676 0.438
*1
: When calculating R
wg
, N=877 (missing data are deleted)
*2
: When calculating R
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, N=874 (missing data are deleted)
otherwise N=882
139 3.07 6.00 4.54 0.557 0.778
139 3.33 8.88 5.81 1.039 28.33 83.75 53.11 0.501 0.392
139 5.08 9.50 7.05 0.868
60.83 34.57 0.630 0.267
139 4.00 8.00 6.38 0.672 35.00 75.00 58.76 0.672 0.013
139 2.00 6.58 3.96 0.839 15.00
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 29
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pro?tability (model 2) as the dependent variable. Then we will go on to the model of two-step
causal relationships among the organizational information ?ows, the market orientations, and
the organizational performance (model 3 for relative growth rate, model 4 for relative
pro?tability).
IV. Results
1. Model 1 and 2: One-step Causal Relationships
Figure 2 (a) shows a saturated model of path analysis between relative growth rate and the
three dimensions of market orientation. Because this is a saturated model, the adjusted R
2
(.317) is the only index of its goodness of ?t to data. It is important to note that only the path
coe?cient from responsiveness to relative growth rate (.429) is statistically signi?cant, whereas
the other two path coe?cients (.104 and .113) do not achieve statistical signi?cance even at the
10 percent level.
Strong direct impact of responsiveness on a performance variable can also be observed in
model 2 of relative pro?tability (Figure 2 (b)). The path coe?cient is .334, statistically
signi?cant at the 0.1 percent level. The path from intelligence dissemination to relative
pro?tability is barely signi?cant at the 10 percent level in this model, and the path from
intelligence generation to relative pro?tability is almost nil. Because this model is not a
saturated model, ordinary indices of goodness of ?t are available. Chi-square is small enough
(p=.958) thanks to the small number of BUs (139), and AGFI (.903), RMSEA (.000), etc., are
all at a good-to-acceptable level.
Although the three dimensions of market orientation are highly correlated with one
another, only responsiveness has a consistently strong direct relationship with performance
variables when considering these three dimensions in the same causal model simultaneously.
This result may be obtained partly because only responsiveness (i.e., the dimension of action) is
directly connected to organizational performance, and the other two dimensions can lead to
these performances only via the intermediary variable of responsiveness. Thus, H1 is partially
supported by the path analyses.
2. Model 3 and 4: Two-step Causal Relationships
Figures 3 and 4 depict the results of model 3 and model 4 respectively.
3
For simplicity,
company dummy variables are not drawn in the ?gures. The path coe?cients and correlations
between company dummy variables and other variables in the models are shown in Table A1
for model 3 and Table A2 for model 4 in the appendix.
Both of these models have favorable indices of goodness of ?t. For example, the chi-
square of model 3 (72.779) is low enough to be statistically insigni?cant ( p=.781), its AGFI is
.904, and RMSEA is .000. Also, the chi-square of model 4 (114.201) is low enough ( p=.
958), AGFI is .903, and RMSEA is .000. All of these models? indices mean that they are
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 30
3
Company dummy variable 09 is deleted from model 4 because it does not have statistically signi?cant relationships
in model 2 (path coe?cient=.018).
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 31
F
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acceptable.
We would like to add that we can con?rm the mediating role of market orientation
between intra-organizational information ?ows and organizational performance. If we
simultaneously add four direct paths from the dimensions of information ?ow to the
performance variables in models 3 and 4 (model A), as shown in Table 5, no paths reached the
strength of statistical signi?cance at the 10 percent level, while the original path coe?cients
from the downward information ?ow to responsiveness and the lateral information ?ow to
dissemination and responsiveness remain as before. The exception is the upward information
?ow in model B (one path at a time) of growth rate. In this case, the path coe?cient is .143
and signi?cant at the 10 percent level, suggesting upward information ?ow?s potential
contribution to growth. Otherwise, no direct paths have signi?cant relationships. This is one
of the important pieces of evidence that support the fertility of bridging the lack of interactions
between market orientation research and the middle management perspective (and/or knowledge
creation theory).
There are several points to be emphasized with regard to the results of these models.
First, the path from the downward information ?ow of formal strategy to responsiveness is
statistically signi?cant at the 5 percent level (.168 in model 3 and .166 in model 4). Because
the responsiveness dimension is the most important one in determining performance measures,
this signi?cant relation is worthy of attention, and we would like to contend that H2 is partially
supported.
In contrast to this statistical signi?cant relationship, upward information ?ow of emergent
strategy does not have any statistically signi?cant relationship with any of the market
orientation dimensions. H3 is not supported by the results of this study. Contrary to our
predictions based on the middle management perspective and Nonaka?s knowledge creation
theory, upward information ?ow of emergent strategy does not improve market orientation of
any kind (Nonaka, 1988; Wooldridge & Floyd, 1990). However, because this lack of statistical
signi?cance may be due to the high correlation existing between downward and upward
information ?ows, or due to the existence of other mechanisms linking this information ?ow to
the organizations? performance, we must remain conservative in discarding any belief in the
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 32
Growth Rate Pro?tability Growth Rate Pro?tability
Model A
(All Four Paths Included)
Model B
(One Path at a Time)
Upward Information Flow of Emergent Strategy
Lateral Information Flow of Inter-functional Information
Informal Information Flow Ratio
(.992) (.185) (.230) (.145)
-.001 .123 .092 .103
Dimensions of Information Flow
-.023
(.130) (.965) (.057) (.467)
.134
Downward Information Flow of Formal Strategy
.004 .143
†
.051
-.013 -.103 -.037 -.105
(.701) (.178) (.370) (.771)
.033
TABLE 5. STANDARDIZED PATH COEFFICIENTS FROM INFORMATION
FLOW TO PERFORMANCE VARIABLES
-.120 .070
(.856) (.133) (.608) (.102)
Standardized path coe?cients are in the upper line and the corresponding p’s are in the parentheses.
†:
signi?cant at the 10 percent level.
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 33
M
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importance of upward information ?ow of emergent strategy.
The lateral information ?ow of inter-functional information is recon?rmed as one of the
most important factors that explain the organizations? adaptability to their market (Homburg et
al., 2000; Nonaka, 1988, 1994). Even though it does not determine intelligence generation
(.097 in model 3 and .134 in model 4), its paths to intelligence dissemination and
responsiveness are statistically signi?cant, with the former being much stronger (.256, .270)
than the latter (.141, .145). Thus, we may be able to argue that H4 is supported by the results.
Because intelligence dissemination has a strong e?ect on responsiveness, the standardized total
e?ect of lateral information ?ow on responsiveness is greater than that of downward
information ?ow (.249 vs. .183 for growth rate and .273 vs. .164 for pro?tability). These
results suggest that an organization with rich lateral information ?ow of inter-functional
information in general is not only good at disseminating market information but also good at
generating actions based on it.
Contrary to the belief in the importance of informal information ?ow, its ratio has
statistically signi?cant negative relations with other dimensions of information ?ows, and has
almost no relationship to any of the market orientation dimensions. This result does not
support H5. The negative correlations between the informal information ?ow ratio and the
other three information ?ows would point to the idea that development of informal
communication networks within an organization is not only a cause of information sharing, but
also the result of insu?cient formal information sharing through hierarchy, formal coordinating
devices (e.g., integrators and formal meetings), and so on. It may be that organizational
members who are not given enough information through formal channels devote extra e?orts to
build an informal network to collect necessary information. In this case, a high informal
information ?ow ratio would be detrimental to fostering market orientation.
Finally, it is important to note that intelligence generation is not determined by these
models. Intelligence generation, which is closely related to the information in?ow from the
environment, seems to be determined by factors other than intra-organizational information
?ows (Allen, Tushman, & Lee, 1979; Floyd & Wooldridge, 1997).
In sum, we are able to contend that H1, H2, and H4 are more or less supported by the
results, though H3 and H5 are not supported. We con?rmed that there exist statistical
relationships between the variables of middle management perspective (or knowledge creation
theory) and market orientation research, to be explored more deeply in the future.
V. Conclusion and Discussion
This paper empirically con?rmed that fertile research opportunities exist in investigating
the relationship between the market orientation of organizations and their organizational
information ?ow. Intra-organizational information ?ow does not directly a?ect the organiza-
tion?s performance. Those relationships are mediated by the organization?s market orientation.
Also, we could con?rm that there exist some robust relationships between intra-organizational
information ?ow and market orientation, suggesting that the market orientation research
tradition and middle management perspective (and knowledge creation theory) should be
bridged and integrated (Deshpandé & Farley, 1998; Floyd & Wooldridge, 1997, 2000;
Homburg et al., 2000; Jaworski & Kohli, 1993; Nonaka, 1988, 1994; Nonaka et al., 2000).
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 35
We also found that the most important aspect of market orientation is responsiveness, and
the most important information ?ow that in turn determines that responsiveness is downward
strategic information ?ow and the lateral information ?ow of other functional departments. Our
analyses did not support a positive contribution of upward information ?ow and informal
information ?ow. The results of this study suggest that a highly market-oriented organization is
rich both in downward information ?ow of formal strategy and in lateral information ?ow of
inter-functional information through formal channels.
As suggested in the previous section, informal information ?ow may have both functional
and dysfunctional aspects. When we interpret it as a causal factor, our belief tells us that the
development of an informal information network would create much information ?ow within an
organization, and contribute to organizational adaptation to its environment. But, looking at it
from the other way around, the development of an informal information network can be
interpreted as being caused by a lack of information ?ow through formal channels of the
organization. This ambivalence of informal information ?ow would suggest that there must be
some variables that determine whether it operates as a functional factor or a dysfunctional one.
In addition to the informal information ?ow, we could not ?nd any positive relationship
between the upward information ?ow and market orientation. As suggested in the previous
section, this lack of statistical signi?cance may stem from the high correlation between the
downward information ?ow of formal strategy and the upward information ?ow. Or it may be
that there exist some other mechanisms that link the upward information ?ow and market
orientation.
Even though there are many challenges still to be met, we are ever more convinced that
the market orientation research and middle management perspective (and knowledge creation
theory) should be bridged. There remains a huge, fertile area of research between them.
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 36
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 37
Market orientation research has accumulated a variety of findingsover the past two decades, during which researchers have emphasized the importance of information flow within an organization. However, even though market information isvery important for the organizationʼsadaptation to itsenvironment, the vertical flow of strategic information has not been the main focus of market orientation researchers.
VERTICAL STRATEGIC INFORMATION FLOW AND
MARKET ORIENTATION
TSUYOSHI NUMAGAMI,
?
MASARU KARUBE,
?
TOSHIHIKO KATO,
?
AND MASATO SASAKI
?
Abstract
Market orientation research has accumulated a variety of ?ndings over the past two
decades, during which researchers have emphasized the importance of information ?ow within
an organization. However, even though market information is very important for the
organization?s adaptation to its environment, the vertical ?ow of strategic information has not
been the main focus of market orientation researchers. In contrast, vertical strategic
information ?ow has been the main theme from the middle management perspective of strategy
process and knowledge creation theory. Although these research streams share an interest in
information ?ow within an organization, they have remained separate traditions up until now.
This paper tries to bridge the gap between these two research traditions by using a database of
Japanese business organizations. The authors contend that the downward information ?ow of
formal strategy and the lateral ?ow of inter-functional information are much more important in
improving market orientation than the upward information ?ow of emergent strategy. And,
contrary to the widely shared belief, informal information ?ows do not contribute to
organizational market adaptation.
I. Introduction
Market-oriented organizations have various strategic advantages in adapting themselves to
their markets. Even though there have emerged in recent years a growing number of
stakeholders for an organization to take into consideration, customers remain the most
important source of threats and opportunities for business organizations. This is the major
reason why many researchers have spent much e?ort in conducting empirical studies on market
orientation since the 1990s (Kohli & Jaworski, 1990; Narver & Slater, 1990).
Although there have been several somewhat di?erent de?nitions of market orientation, all
share common tenets of the marketing concept and emphasize market-related information
processing (Deshpandé & Farley, 1998; Jaworski & Kohli, 1993, 1996; Sinkula, 1994; Slater &
Narver, 1995). For example, Kohli and Jaworski (1990) de?ned the concept as “organization-
wide generation of market intelligence pertaining to current and future customer needs,
dissemination of intelligence across departments, and organization-wide responsiveness to it.”
Hitotsubashi Journal of Commerce and Management 46 (2012), pp.17-40. ? Hitotsubashi University
?
Graduate School of Commerce and Management, Hitotsubashi University, Naka 2-1, Kunitachi, Tokyo 186-8601,
Japan.
(Kohli & Jaworski, 1990, p. 6) Other researchers, such as Sinkula (1994) and Baker and
Sinkula (1999), are more inclined to focus upon information and the learning aspects of the
market orientation concept. All these researchers have conceptualized market orientation in
terms of organizational communication and organizational learning. In other words, market
orientation is intrinsically an issue of information ?ow that is strategically important for an
organization.
However, researchers in market orientation have not paid much attention to the
organizational information ?ow of corporate and/or business strategy. Many papers in this
tradition chose the following factors as organizational antecedents of market orientation: (1)
centralization and formalization, (2) interdepartmental connectedness, (3) leadership of top
management that emphasizes market orientation, (4) incentive systems that support market
orientation, and (5) organizational culture and climate (Cano, Carrillat, & Jaramillo, 2004;
Deshpandé & Farley, 1998; Jaworski and Kohli, 1993; Lascu, Manrai, Manrai, & Kleczek,
2006; Menguc & Auh, 2008; Narver & Slater, 1995; Slater & Narver, 1995). Even though
there must be very important relationships between market information and strategic
information, these researchers do not seem to have paid much attention to the relationships
between market orientation and strategic information ?ows. For example, questions such as the
following have not been much explored in this tradition:
(1) Is a market-oriented organization full of a downward information ?ow of formal
strategy?
(2) Does an upward information ?ow of emergent strategy encourage the market
orientation of an organization?
These questions have not found an important position in the market orientation literature,
but they are one of the main themes in the middle management perspective on strategy process
and knowledge creation theory (Floyd & Wooldridge, 1997, 2000; Nonaka, 1988; Pappas &
Wooldridge, 2007; Watson & Wooldridge, 2005; Wooldridge & Floyd, 1990; Wooldridge,
Schmid, & Floyd, 2008). The middle management perspective and knowledge creation theory
emphasize middle managers? role in creating and implementing the organization?s strategy, and
thus their role in mediating upward and downward strategic information ?ow within an
organization.
For example, based on empirical studies, Wooldridge and Floyd (1990) suggest that the
reason middle management involvement improves organizational performance may not be the
heightened commitment of middle managers, but an improved decision making through the
utilization of their information. In a similar vein, Floyd and Wooldridge (1997) emphasize the
importance of some mixture of upward in?uence and downward in?uence in achieving high
organizational performance.
Knowledge creation theory is resonant with the middle management perspective. In the
process of constructing knowledge creation theory, Nonaka (1988; 1994) and Nonaka, Toyama,
& Konno (2000) focus upon the strategically important role of middle managers, and argue that
the active role played by middle managers in creating new product concepts and new business
strategies is the key to organizational self-renewal and long-term growth of the company.
Nonaka and his colleagues also emphasize the role of the cross-functional team in exchanging
inter-functional information and generating a new synthesis of product concepts (Imai, Nonaka,
& Takeuchi, 1985; Nonaka, 1994). Nonaka?s theory of knowledge creation can be interpreted
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 18
in terms of organizational communication for strategic change, i.e., strategic self-renewal
through encouraging vertical and horizontal information ?ows.
The middle management perspective of Floyd and Wooldridge and the knowledge creation
theory of Nonaka both emphasize the importance of vertical and lateral organizational
communication of strategic information in creating a strategy of high adaptability to the market
environment. Their research results point to the idea that vertical and horizontal ?ows of
strategic information within an organization increase its adaptability to the market environment
via increased market orientation. Even though market orientation research, on the one hand,
and the middle management perspective and knowledge creation theory, on the other, have been
separate research traditions, they must intrinsically share interests in communication and
information ?ow within an organization.
There seems to be two reasons for us to combine these two research streams. First, while
middle management perspective and knowledge creation theory emphasize vertical information
?ows and lateral information ?ows, it remains unclear whether these information ?ows are by
themselves important for the organization?s performance, or they are conductive to high
performance via enhanced market orientation of the organization. From the view point of
middle management perspective and knowledge creation theory, whether market orientation
plays an intermediary role to increased organizational performance or not is one of the
important research questions to address.
In addition to this, bridging these two separate traditions are very important in order for us
to consider how to develop a market-oriented organization through the means of organizational
rearrangements. On one hand, empowered lower and middle managers would seem to advance
their organization?s adaptability to the market environment (Hurley & Hult, 1998). But, on the
other, strong leadership may enhance the market orientation of the organization (Kirca,
Jayachandran, & Bearden, 2005). This paper tries to bridge this lack of dialogue between these
two important research streams by examining the in?uence of organizational strategic
information ?ows on market orientation.
II. Market Orientation and Intra-organizational Strategic Information Flow
1. Market Orientation and Organizational Performance
Researchers in market orientation have made many ?ndings based on a few standardized
measurements of market orientation. One of the most important measurements, usually called
MARKOR, was developed by Jaworski and Kohli (1993). Through carefully reviewing market
orientation concepts that appeared in various literatures, they speci?ed three dimensions of
market orientation as follows:
(1) Intelligence Generation: Market information gathering activities from outside the
organization;
(2) Intelligence Dissemination: Market information sharing activities within the organiza-
tion;
(3) Responsiveness: Changes or realization of organizational action based upon the market
information.
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 19
The ?rst two dimensions are mainly related to organizational processing of market
information, while the third is related to the actions of organizations based on the processed
market information. In essence, Jaworski and Kohli operationally de?ned market orientation
from the viewpoint of market information and changes in action based upon it.
Much empirical research, including meta-analytic research, has found that market
orientation measurements consistently have positive correlation with organizational perform-
ance, especially when the performance measures are subjective rather than objective (Cano et
al., 2004; Deshpandé & Farley, 1998; Jaworski & Kohli, 1996; Kirca, Jayachandran, &
Bearden, 2005). Thus, we would like to ?rst con?rm this positive relation between
measurements of market orientation and performance.
Hypothesis 1 (H1): The greater the market orientation (intelligence generation, intelli-
gence dissemination, and responsiveness), the higher the organizational performance.
2. The Middle Management Perspective and Market Orientation
Research in the middle management perspective suggests that middle managers? involve-
ment in strategy formulation leads to superior strategy because this involvement improves
strategic decisions of the organization, and at the same time, improves the organizational
implementation of the strategy. This dual focus on information utilization and implementation
would lead to an emphasis on both upward in?uence and downward in?uence within the
organizations (Wooldridge & Floyd, 1990; Floyd & Wooldridge, 1997).
Upward and downward information ?ow is also emphasized in knowledge creation theory.
Nonaka (1988; 1994) conceived of organizational self-renewal as a process of knowledge
creation through the interaction of top and middle management, which he called “middle-up-
down management.” In order for organizational self-renewal to take place in the face of a
turbulent environment, top management must propose an energizing strategic vision of the
organization?s future, and middle managers must generate a new product (business) concept that
mediates between the reality at the front lines and the higher-order strategic vision of top
management (Nonaka et al., 2000). In this process of self-renewal through knowledge creation,
Nonaka argues that both the downward information ?ow of strategic vision and the upward
?ow of real-life strategic information are very important, and that the middle managers play a
critical role in mediating between these upward and downward information ?ows (Nonaka,
1988, 1994).
Both of these research streams pay attention to the upward and downward information
?ow of strategic importance because this information ?ow is thought to be crucial in order for
an organization to adapt itself to its turbulent environment (Wooldridge & Floyd, 1990;
Nonaka, 1988). Even though these research streams do not refer to market orientation
concepts, the concepts seem to capture the most important aspects of ?rms? environments, and
the vertical information ?ows must increase organizations? performance through encouraging the
market orientation of these organizations. In addition, even though market orientation
researchers do not clearly take the vertical information ?ows into consideration, their search for
antecedents of the market orientation includes many organizational variables such as
centralization, formalization, etc., and they place the former concepts as intervening variables
that connect organizational variables and organizational performance (Kirca, Jayachandran, &
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 20
Bearden, 2005; Kohli & Jaworski, 1990). Following the preceding research, we would like to
posit that vertical information ?ows advance an organization?s market orientation, and this in
turn increases its performance. The argument that the vertical strategic information ?ow
improves an organization?s adaptation to its environment suggests the idea that these ?ows
improve organizational orientation toward the market environment. Thus we hypothesize as
follows:
Hypothesis 2 (H2): The greater the downward strategic information ?ow in an
organization, the greater its market orientation.
Hypothesis 3 (H3): The greater the upward strategic information ?ow in an organization,
the greater its market orientation.
3. Other Types of Information Flow and Market Orientation
The knowledge creation theory and organizational communication research pay attention
not only to vertical information ?ows within an organization, but also to horizontal or lateral
information ?ows across di?erent functional departments (Nonaka, 1988, 1994; Tompkins &
Wanca-Thibault, 2001). Nonaka emphasizes the cross-functional team as a key device for an
organization to develop autonomy within a large established and bureaucratic ?rm. This device
would improve the sensitivity of the team to the market environment and encourage creation of
new knowledge that would lead to market success. Also in the research area of market
orientation, Homburg, Workman, Jr., and Jensen (2000) contend that US and German
companies are in the process of reorganization for ?ne-tuning themselves to each customer
account, and that it is becoming more and more important for a company to facilitate cross-
functional coordination among functional departments toward speci?c customer demands.
Following this research that emphasizes the importance of lateral communications, we
hypothesize a positive relationship between market orientation and lateral information ?ow
within an organization:
Hypothesis 4 (H4): The greater the lateral information ?ow in an organization, the greater
its market orientation.
Information ?ows not only through formal channels but also through informal networks
within an organization (Tompkins & Wanca-Thibault, 2001). Informal communication is
usually thought to be a desirable process for an organization to generate new knowledge and
facilitate internal coordination (Kraut, Fish, Root, & Shalfonte, 1993; Nonaka et al., 2000;
Whittaker, Frohlich, & Daly-Jones, 1994). If an organization can disseminate much
information through informal channels, it would bene?t from this because its formal channel
can be protected from information overload (Galbraith, 1977). This exemption would enable
the organization to further develop its market orientation. Thus we hypothesize as follows:
Hypothesis 5 (H5): The greater the percentage of necessary information ?ows that occur
through informal channels, the greater an organization’s market orientation.
As a summary of the hypotheses described above, we drew a simple path diagram in
Figure 1. As shown in the ?gure, our path analysis model basically has two-step causal
relationships. The relationships among market orientation dimensions are assumed as drawn in
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 21
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 22
F
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the ?gure because the previous studies contend that they are highly correlated, and that
intelligence generation is a prerequisite for intelligence dissemination, while the latter in turn is
a prerequisite for responsiveness (Maltz & Kohli, 1996; Sinkula, Baker, & Noordewier, 1997).
III. Methods
1. Data
In order to test these hypotheses, we conduct a path analysis based on a questionnaire
survey of Japanese business organizations. The data we use in our analysis were collected by
the Organizational Deadweight Project, which has conducted questionnaire survey research
every two years since 2005.
1
We will use data from the third Organizational Deadweight
Project survey that collected data from January to March of 2009 because it is the only survey
in the series that contained market orientation measurements.
We selected a business unit (BU) as the unit of analysis and adopted a multi-level survey
research design. That is, we measured the BU?s characteristics by averaging the responses of at
least six middle-level managers responding to the same questionnaire. We sent a set of
questionnaires to a company, asking the coordinator of the company to select three middle
managers (average age = 46.37 years, as of Jan. 1, 2009) and three lower middle managers
(average age = 39.15 years, as of Jan. 1, 2009): a total of six middle managers from three
major functional departments. We also asked the companies to select the most promising, top-
notch middle-level managers as the respondents, because observation of the BU?s characteristics
would be a?ected by how the respondents are rated in their organization, as well as by the real
di?erences among the BUs.
Because this kind of survey design assigns heavy responsibilities to the collaborating
companies, we ?rst formed a research consortium and promised the companies involved that
they would be given a detailed research report for each BU. Twenty-one companies joined the
third Project, all of them are large established ?rms, and listed in the First Section of the Tokyo
Stock Exchange. The total number of BUs represented is 139, with questionnaires collected
from middle managers numbering 882.
2
The average number of BUs per company is 6.6,
ranging from a minimum of 1 to a maximum of 22.
Our sample BUs are mainly from manufacturing (electronics, chemicals and pharmaceut-
icals, foods and beverages, etc.), with several BUs from retailing and transportation services.
The sizes of BUs are also wide-ranging, with the smallest having 10 full-time employees and
the largest, 6, 281. The average BU has 489 employees. The BU?s annual sales (?scal 2007)
range from 1 billion yen (about $11 million if $1 =¥90) to 2.89 trillion yen (about $32.1
billion), with an average of 137.9 billion yen ($1.53 billion).
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 23
1
The Organizational Deadweight Project ?rst started as an exploratory research project focusing on questions like
identifying the kind of internal coordination problems facing Japanese companies and the antecedent conditions for such
internal coordination problems.
2
In addition to this number, we also collected an almost-identical questionnaire from each BU?s general manager.
There were 139 general managers, making the grand total of questionnaires 1,021.
2. Variables and Dimensions at the Individual Level
Because our questionnaires are answered by individuals but we take the BU as the unit of
analysis, we average the answers of the six middle-level managers by BU and treat these
variables and dimensions as BU characteristics. Before conducting path analyses at the level of
BU, we would ?rst like to explicate our measurements at the individual level and then check
some indices of inter-rater reliability when constructing BU level variables.
Market Orientation. We adopted Jaworski and Kohli?s MARKOR as a measurement of
market orientation (Jaworski & Kohli, 1993). Table 1 shows the three dimensions of market
orientation, the corresponding three to ?ve questions, the results of a con?rmatory factor
analysis, and the coe?cient alpha on the individual questionnaire data. As discussed in the
previous section, MARKOR has three dimensions: (1) intelligence generation, (2) intelligence
dissemination, and (3) responsiveness. Items concerning these three dimensions have relatively
high path coe?cients, and Cronbach?s alphas are over .70 except for intelligence dissemination.
We average these items by respondent and get three dimensions of market orientation at the
individual level. We adopt the same procedures even for the dissemination dimension, because
we would like to give priority to the theoretical construct, and the goodness of ?t indices in the
con?rmatory factor analysis are acceptable.
As shown in Table 1, the con?rmatory factor analysis shows a relatively good level of ?t,
with AGFI (Adjusted Goodness of Fit) over .955 and RMSEA less than .05. Even though the
con?rmatory factor analysis could not achieve the desirable level of chi-square (p=.000), it is
widely known that chi-square is sensitive to the number of cases and not a useful index when N
is large (say, around 1, 000) (Toyoda, 1992). Because our database contains 869 cases, after
deleting cases missing data on market orientation, we would like to adopt this model
considering relatively good indices of ?t other than chi-square.
Information Flow. We developed original measurements of information ?ow within an
organization. Table 2 contains the four dimensions of intra-organizational information ?ow, the
corresponding two to three questions, the results of a con?rmatory factor analysis, and the
coe?cient alpha with the individual questionnaire data. As discussed in the previous section,
we selected four dimensions of intra-organizational information ?ow: (i) downward strategic
information ?ow, (ii) upward strategic information ?ow, (iii) lateral information ?ow of inter-
functional information, and (iv) informal information ?ow ratio.
All the question items on these dimensions are operationalized in a similar format. For
example, as regards the downward strategic information ?ow of BU strategy, we asked the
respondents, “Please assume that the total amount of information on the BU strategy that would
be necessary for you to do your task properly is equal to 100 percent. What percentage of it
do you believe you receive?” Wordings for the other items are shown in Table 2. These
questions present a ten-point scale, which starts from 1 (= less than 10 percent) and 2 (= ten
and more than 10 to less than 20), with a 10 percent interval for every 1 point, through to 10
(= 90 and more than 90 percent). Downward information ?ow of strategy is operationalized by
two items related to corporate and BU strategy. Because both corporate strategy and BU
strategy are intrinsically formal rather than informal or emergent, we designate this dimension
as downward information ?ow of formal strategy in the following pages.
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 24
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 25
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Upward information ?ow is operationalized with two items. One item asks how much
one?s boss receives one?s strategic proposals, and the other item asks how much one receives
one?s subordinates? proposals. Because strategic proposals from below in a hierarchy usually
lead to emergent strategies, we call this dimension the upward information ?ow of emergent
strategy.
Lateral information ?ow of inter-functional information is measured with two items, one of
which concerns reception and the other issuance. The informal information ?ow ratio is
operationalized with three items, related to the ratio of information about corporate strategy, BU
strategy, and inter-functional information, respectively, as received through informal channels.
As shown in Table 2, Cronbach?s alphas for all the dimensions are from fair to good, and
the con?rmatory factor analysis shows a relatively high goodness of ?t. Again, chi-square
(p=.000) of this model is large because of the large sample size (N=874), but AGFI is equal to
.966 and RMSEA .051, suggesting that the ?tness of the model is relatively good. The
arithmetic means of two or three items by respondent are treated as the four dimensions at the
individual level.
Organizational Performance. We operationalized organizational performance with
subjective measures. Even though subjective measures would be inclined to su?er from
common method variance (Miller, 2001), it is easy to control for industry di?erences. We
measured BU sales growth rate and BU pro?tability by asking the respondents, “When
compared with the major three competitors of your BU, which is the most appropriate
evaluation of your BU?” We used a seven point scale, ranging from 1 (substantially inferior
to the major three competitors) to 7 (substantially superior to the major three competitors).
3. Variables and Dimensions at the BU Level
We then calculate the arithmetic mean of individual-level dimensions and variables of six
middle managers by BU, and use these as BU level dimensions and variables. Before
averaging these individual variables by BU, we attempt to con?rm whether the responses of the
middle-level managers in the same BUs are related. There are several inter-rater reliability
scales, among which we selected within-group inter-rater reliability (Rwg) and intra-class
correlation (2) (ICC(2)) (Suzuki & Kitai, 2007). Rwg is de?ned as Rwg=(s
2
E ,S
2
x )/s
2
E , where
s
2
E is the theoretical variance under uniform distribution and S
2
x is the observed variance within
a BU. Rwg is ?rst calculated by BU, and then the BUs? Rwg?s are averaged into Rwg of the scale
as a whole. ICC(2) is de?ned as ICC(2) =(MSB,MSW) / MSB, where MSB is the mean
square between BUs and MSW is the mean square within the BU. As could be easily
understood by reading these de?nitions, Rwg is a measurement of an agreement against
theoretical randomness, whereas ICC(2) is comparative measurement against other observations.
Thus, ICC(2) is more sensitive to other common sources of variance in the dataset than is Rwg.
Table 3 shows the descriptive statistics and inter-rater reliability of the dimensions
discussed so far. The table shows that, even though some ICC(2)?s are low, almost all of the
Rwg are around an acceptable level (.70). One of them (the upward information ?ow) barely
exceeds .50, but we use this because we would like to give priority to theoretical constructs.
Table 4 depicts correlations between the variables and dimensions we use in the hypothesis
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 27
testing. It would be important to note that the downward and upward strategic information
?ows are highly correlated (.610), suggesting that these dimensions may have an underlying
common causal factor, e.g., good interpersonal relationships between boss and subordinates.
But we prefer to use these two dimensions because of the traditional caveats that emphasize
that information upward and downward are quite di?erent in quality (Dansereau & Markham,
1987).
We also use company dummy variables in the path analyses, because our data contains, on
average, several BUs from the same companies. In addition, BU sales (?scal 2007, logarithm)
may in?uence the growth rate because BUs with large enough sales may not enjoy high growth
rates compared with their smaller competitors. But it turns out that BU sales are not selected
in all four stepwise regression analyses below.
In order to simplify the models of path analysis, we would like to reduce the number of
company dummy variables included in the model. We ?rst conduct a stepwise regression
analysis (Pin =0.05, Pout =0.10), and select company dummy variables necessary to control
possible company biases in the path analyses.
We would like to start our path analyses with these independent variables selected in the
stepwise regression models. First, we would like to test the model of one-step causal
relationships between the three dimensions of market orientation as independent variables, and
two variants of organizational performance, i.e., relative growth rate (model 1) and relative
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 28
Min.
(%)
Max.
(%)
Average
(%)
Rwg
(within-group
inter-rater
reliability)
ICC(2)
(intra-class
correlation(2))
Growth Rate of BU Sales relative to
3 Largest Competitors
Informal Information Flow Ratio
*2
Pro?tability of BU relative to 3
Largest Competitors
Market Orientation (1)
Intelligence Generation
*1
Market Orientation (2)
Intelligence Dissemination
*1
Market Orientation (3)
Responsiveness
*1
Downward Information Flow of
Formal Strategy
*2
Upward Information Flow of
Emergent Strategy
*2
Lateral Information Flow
of Inter-functional Information
*2
Variables
1,040 2,886,200 137,877.3 381492.594
N Min. Max.
BU Sales
(?scal 2007, Million Yen)
Average SD
0.714 0.802
139 1.50 6.17 3.89 0.797 0.747 0.746
128
4.25 0.696 0.731 0.659
139 1.50 6.00 3.83 0.953
TABLE 3. DESCRIPTIVE STATISTICS AND INTER-RATER RELIABILITY
0.550
139 2.83 5.94 4.28 0.486 0.784 0.408
139 2.58 6.17
45.83 90.00 65.53 0.676 0.438
*1
: When calculating R
wg
, N=877 (missing data are deleted)
*2
: When calculating R
wg
, N=874 (missing data are deleted)
otherwise N=882
139 3.07 6.00 4.54 0.557 0.778
139 3.33 8.88 5.81 1.039 28.33 83.75 53.11 0.501 0.392
139 5.08 9.50 7.05 0.868
60.83 34.57 0.630 0.267
139 4.00 8.00 6.38 0.672 35.00 75.00 58.76 0.672 0.013
139 2.00 6.58 3.96 0.839 15.00
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 29
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causal relationships among the organizational information ?ows, the market orientations, and
the organizational performance (model 3 for relative growth rate, model 4 for relative
pro?tability).
IV. Results
1. Model 1 and 2: One-step Causal Relationships
Figure 2 (a) shows a saturated model of path analysis between relative growth rate and the
three dimensions of market orientation. Because this is a saturated model, the adjusted R
2
(.317) is the only index of its goodness of ?t to data. It is important to note that only the path
coe?cient from responsiveness to relative growth rate (.429) is statistically signi?cant, whereas
the other two path coe?cients (.104 and .113) do not achieve statistical signi?cance even at the
10 percent level.
Strong direct impact of responsiveness on a performance variable can also be observed in
model 2 of relative pro?tability (Figure 2 (b)). The path coe?cient is .334, statistically
signi?cant at the 0.1 percent level. The path from intelligence dissemination to relative
pro?tability is barely signi?cant at the 10 percent level in this model, and the path from
intelligence generation to relative pro?tability is almost nil. Because this model is not a
saturated model, ordinary indices of goodness of ?t are available. Chi-square is small enough
(p=.958) thanks to the small number of BUs (139), and AGFI (.903), RMSEA (.000), etc., are
all at a good-to-acceptable level.
Although the three dimensions of market orientation are highly correlated with one
another, only responsiveness has a consistently strong direct relationship with performance
variables when considering these three dimensions in the same causal model simultaneously.
This result may be obtained partly because only responsiveness (i.e., the dimension of action) is
directly connected to organizational performance, and the other two dimensions can lead to
these performances only via the intermediary variable of responsiveness. Thus, H1 is partially
supported by the path analyses.
2. Model 3 and 4: Two-step Causal Relationships
Figures 3 and 4 depict the results of model 3 and model 4 respectively.
3
For simplicity,
company dummy variables are not drawn in the ?gures. The path coe?cients and correlations
between company dummy variables and other variables in the models are shown in Table A1
for model 3 and Table A2 for model 4 in the appendix.
Both of these models have favorable indices of goodness of ?t. For example, the chi-
square of model 3 (72.779) is low enough to be statistically insigni?cant ( p=.781), its AGFI is
.904, and RMSEA is .000. Also, the chi-square of model 4 (114.201) is low enough ( p=.
958), AGFI is .903, and RMSEA is .000. All of these models? indices mean that they are
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 30
3
Company dummy variable 09 is deleted from model 4 because it does not have statistically signi?cant relationships
in model 2 (path coe?cient=.018).
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 31
F
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We would like to add that we can con?rm the mediating role of market orientation
between intra-organizational information ?ows and organizational performance. If we
simultaneously add four direct paths from the dimensions of information ?ow to the
performance variables in models 3 and 4 (model A), as shown in Table 5, no paths reached the
strength of statistical signi?cance at the 10 percent level, while the original path coe?cients
from the downward information ?ow to responsiveness and the lateral information ?ow to
dissemination and responsiveness remain as before. The exception is the upward information
?ow in model B (one path at a time) of growth rate. In this case, the path coe?cient is .143
and signi?cant at the 10 percent level, suggesting upward information ?ow?s potential
contribution to growth. Otherwise, no direct paths have signi?cant relationships. This is one
of the important pieces of evidence that support the fertility of bridging the lack of interactions
between market orientation research and the middle management perspective (and/or knowledge
creation theory).
There are several points to be emphasized with regard to the results of these models.
First, the path from the downward information ?ow of formal strategy to responsiveness is
statistically signi?cant at the 5 percent level (.168 in model 3 and .166 in model 4). Because
the responsiveness dimension is the most important one in determining performance measures,
this signi?cant relation is worthy of attention, and we would like to contend that H2 is partially
supported.
In contrast to this statistical signi?cant relationship, upward information ?ow of emergent
strategy does not have any statistically signi?cant relationship with any of the market
orientation dimensions. H3 is not supported by the results of this study. Contrary to our
predictions based on the middle management perspective and Nonaka?s knowledge creation
theory, upward information ?ow of emergent strategy does not improve market orientation of
any kind (Nonaka, 1988; Wooldridge & Floyd, 1990). However, because this lack of statistical
signi?cance may be due to the high correlation existing between downward and upward
information ?ows, or due to the existence of other mechanisms linking this information ?ow to
the organizations? performance, we must remain conservative in discarding any belief in the
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 32
Growth Rate Pro?tability Growth Rate Pro?tability
Model A
(All Four Paths Included)
Model B
(One Path at a Time)
Upward Information Flow of Emergent Strategy
Lateral Information Flow of Inter-functional Information
Informal Information Flow Ratio
(.992) (.185) (.230) (.145)
-.001 .123 .092 .103
Dimensions of Information Flow
-.023
(.130) (.965) (.057) (.467)
.134
Downward Information Flow of Formal Strategy
.004 .143
†
.051
-.013 -.103 -.037 -.105
(.701) (.178) (.370) (.771)
.033
TABLE 5. STANDARDIZED PATH COEFFICIENTS FROM INFORMATION
FLOW TO PERFORMANCE VARIABLES
-.120 .070
(.856) (.133) (.608) (.102)
Standardized path coe?cients are in the upper line and the corresponding p’s are in the parentheses.
†:
signi?cant at the 10 percent level.
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 33
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importance of upward information ?ow of emergent strategy.
The lateral information ?ow of inter-functional information is recon?rmed as one of the
most important factors that explain the organizations? adaptability to their market (Homburg et
al., 2000; Nonaka, 1988, 1994). Even though it does not determine intelligence generation
(.097 in model 3 and .134 in model 4), its paths to intelligence dissemination and
responsiveness are statistically signi?cant, with the former being much stronger (.256, .270)
than the latter (.141, .145). Thus, we may be able to argue that H4 is supported by the results.
Because intelligence dissemination has a strong e?ect on responsiveness, the standardized total
e?ect of lateral information ?ow on responsiveness is greater than that of downward
information ?ow (.249 vs. .183 for growth rate and .273 vs. .164 for pro?tability). These
results suggest that an organization with rich lateral information ?ow of inter-functional
information in general is not only good at disseminating market information but also good at
generating actions based on it.
Contrary to the belief in the importance of informal information ?ow, its ratio has
statistically signi?cant negative relations with other dimensions of information ?ows, and has
almost no relationship to any of the market orientation dimensions. This result does not
support H5. The negative correlations between the informal information ?ow ratio and the
other three information ?ows would point to the idea that development of informal
communication networks within an organization is not only a cause of information sharing, but
also the result of insu?cient formal information sharing through hierarchy, formal coordinating
devices (e.g., integrators and formal meetings), and so on. It may be that organizational
members who are not given enough information through formal channels devote extra e?orts to
build an informal network to collect necessary information. In this case, a high informal
information ?ow ratio would be detrimental to fostering market orientation.
Finally, it is important to note that intelligence generation is not determined by these
models. Intelligence generation, which is closely related to the information in?ow from the
environment, seems to be determined by factors other than intra-organizational information
?ows (Allen, Tushman, & Lee, 1979; Floyd & Wooldridge, 1997).
In sum, we are able to contend that H1, H2, and H4 are more or less supported by the
results, though H3 and H5 are not supported. We con?rmed that there exist statistical
relationships between the variables of middle management perspective (or knowledge creation
theory) and market orientation research, to be explored more deeply in the future.
V. Conclusion and Discussion
This paper empirically con?rmed that fertile research opportunities exist in investigating
the relationship between the market orientation of organizations and their organizational
information ?ow. Intra-organizational information ?ow does not directly a?ect the organiza-
tion?s performance. Those relationships are mediated by the organization?s market orientation.
Also, we could con?rm that there exist some robust relationships between intra-organizational
information ?ow and market orientation, suggesting that the market orientation research
tradition and middle management perspective (and knowledge creation theory) should be
bridged and integrated (Deshpandé & Farley, 1998; Floyd & Wooldridge, 1997, 2000;
Homburg et al., 2000; Jaworski & Kohli, 1993; Nonaka, 1988, 1994; Nonaka et al., 2000).
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 35
We also found that the most important aspect of market orientation is responsiveness, and
the most important information ?ow that in turn determines that responsiveness is downward
strategic information ?ow and the lateral information ?ow of other functional departments. Our
analyses did not support a positive contribution of upward information ?ow and informal
information ?ow. The results of this study suggest that a highly market-oriented organization is
rich both in downward information ?ow of formal strategy and in lateral information ?ow of
inter-functional information through formal channels.
As suggested in the previous section, informal information ?ow may have both functional
and dysfunctional aspects. When we interpret it as a causal factor, our belief tells us that the
development of an informal information network would create much information ?ow within an
organization, and contribute to organizational adaptation to its environment. But, looking at it
from the other way around, the development of an informal information network can be
interpreted as being caused by a lack of information ?ow through formal channels of the
organization. This ambivalence of informal information ?ow would suggest that there must be
some variables that determine whether it operates as a functional factor or a dysfunctional one.
In addition to the informal information ?ow, we could not ?nd any positive relationship
between the upward information ?ow and market orientation. As suggested in the previous
section, this lack of statistical signi?cance may stem from the high correlation between the
downward information ?ow of formal strategy and the upward information ?ow. Or it may be
that there exist some other mechanisms that link the upward information ?ow and market
orientation.
Even though there are many challenges still to be met, we are ever more convinced that
the market orientation research and middle management perspective (and knowledge creation
theory) should be bridged. There remains a huge, fertile area of research between them.
HITOTSUBASHI JOURNAL OF COMMERCE AND MANAGEMENT [October 36
VERTICAl STRATEGIC INFORMATION FLOW AND MARKET ORIENTATION 2012] 37