from market failure to marketing failure: market orientation as the key to deep outreach in...

Journal of International Development

J. Int. Dev. 14, 305–324 (2002)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.883

FROM MARKET FAILURE TO MARKETINGFAILURE: MARKET ORIENTATION AS THE

KEY TO DEEP OUTREACH INMICROFINANCE1

GARY WOLLER*

Romney Institute of Public Management, Marriott School, Brigham Young University

The term ‘revolution’ suggests a radical overturning of established order. By this

definition, the microfinance movement qualifies as a revolution in that it radically

overturned established ideas of the very poor as consumers of financial services. In the

process, it has shattered stereotypes of the very poor as not bankable, spawned a variety of

lending methodologies demonstrating that it is possible to provide cost-effective financial

services to the very poor, mobilized millions of dollars of ‘social investment’ for the

very poor, given birth to thousands of microfinance institutions (MFIs) dedicated to

serving the very poor, and made available formal financial services to millions of the very

poor heretofore excluded from formal financial markets. (Very poor in this article is

defined as the bottom 50th percentile of households below the poverty line within a

country.)

It must be emphasized as well that the animating motivation behind the microfinance

revolution was ‘poverty alleviation’, and in particular among the ‘poorest of the poor’. The

provision of financial services was but a means to this end. Not only that, but microfinance

offered a promise to alleviate poverty while paying for itself and maybe even turning a

profit—‘doing well by doing good’. That too was a revolutionary concept. This promise,

perhaps more than anything, has accounted for the mass appeal of microfinance and its rise

to global prominence.

The microfinance revolution is now into its second decade. The time is appropriate to

step back and assess where the movement is and the extent to which it has achieved its

promise of sustainable global poverty alleviation. First, the good news. Researchers have

now completed enough impact studies across a wide variety of programmes and countries

to allow a reasonably thorough and balanced assessment of the impact of microfinance.

Taken as a whole, the evidence demonstrates a positive impact on enterprise and

household income and asset accumulation, household consumption, and women’s

empowerment, and in helping poor households to manage and cope with risk

Copyright # 2002 John Wiley & Sons, Ltd.

*Correspondence to: G. Woller, Marriott School, Romney Institute of Public Management, 766 TBRB, BrighamYoung University, Provo, Utah 84602, USA.1This article was originally presented at the Marriott School Microfinance Research Symposium ‘The SecondMicrofinance Revolution: Creating Customer-Centered Microfinance Institutions,’ Provo, Utah, USA, 5 April, 2001.

(see Sebstad and Chen, 1996 and Cohen and Sebstad, 2000 for summaries of impact

assessment studies).2

Now, the bad news. Many MFIs do not reach very far down the poverty spectrum, either

in absolute terms or relative to other income categories (Hulme, 1999; Cohen and Sebstad,

2000).3 Instead, customers in these MFIs tend to be clustered around the poverty line,

being predominately ‘moderately poor’ (top 50th percentile of households below the

poverty line) or ‘vulnerable non-poor’ (households above the poverty line but vulnerable

to slipping back into poverty).4 Exclusion of the very poor—whether by self-selection, by

microfinance programmes and loan officers, or by ‘peer’ loan groups—appears to be a

widespread phenomenon. (In this paper, ‘very poor’ refers to all those in the bottom 50

percentile below the poverty line within a country.) Of the very poor who do join

microfinance programmes, a high percentage often drop out after only a few loan cycles,5

while many others eventually drop out in later loan cycles as loan amounts begin to exceed

their repayment capacity.6 The widespread exclusion of the very poor from MFI client

rolls contradicts the image of microfinance as a tool of global poverty alleviation.

Why the widespread exclusion of the very poor from microfinance programmes? There

are several possible explanations. Among these, extant research points to a generalized

problem of ‘marketing failure’, which is defined as the failure to integrate sound marketing

practices into organizational design and strategy. But more broadly, marketing failure

implies the absence of a ‘market orientation’ among MFIs and within the industry in

general. A market orientation connotes an organizational culture and set of functional

activities aimed, first and foremost, at creating customer value.

This is not to say that MFIs have ignored marketing altogether (indeed, all MFIs have at

least a de facto marketing strategy); more that marketing strategy has tended to be implicit

rather than explicit and ad hoc rather than systematic. ‘Best practice’ in microfinance has

become almost synonymous with finance and programme design and administration—

only relatively recently has the industry even begun to pay attention to marketing

(Churchill and Halpern, 2001; Lee, 2000; Brand, 1999; Dunn and Arbuckle, 1999; Grant,

1999). Beyond this, the microfinance industry remains locked into a paradigm that is

proving increasingly out of step with the needs of the very poor. For too long now, MFIs

have focused on the products and services they could produce rather than the products and

services customers want them to produce; on institutional needs rather than on customer

needs.

This article argues that to achieve deep outreach and thus microfinance’s animating

vision of global poverty alleviation among the very poor, a second microfinance revolution

is necessary to overturn the existing paradigm that dominates current thinking and practice.

The first microfinance revolution showed that the very poor are bankable. The challenge of

the second microfinance revolution is to show ‘that it is possible to offer a set of financial

2The specific impact of participation in microfinance programmes, however, varies from study to study,suggesting that impact is contextually specific according to factors such as location; programme design;exogenous economic, social, and political factors; loan utilization; time in programme; and so forth.3This is not to say that no MFI has achieved deep outreach—several have—but far fewer than one might guessjudging by the rhetoric surrounding microfinance.4Researchers have found virtually no destitute (households in the bottom 10th percentile below the poverty line)in microfinance programmes examined (Cohen and Sebstad, 2000).5High dropout rates are not limited to very poor customers. High drop out rates can be found across customerincome categories, genders, and ages, as well as across regions, countries, and programmes.6Hulme (1999) reports that there are now more ex-clients of microfinance programmes in East Africa thanexisting clients.

306 G. Woller

Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 305–324 (2002)

services to the [very] poor that meet their livelihood needs’ (Matin et al., 1999, p. 29). To

accomplish this, the second microfinance revolution must place customers at the center of

the microfinance universe. The culmination of the revolution will be the widespread shift of

MFIs from product-oriented institutions to market-oriented institutions.

The rest of the paper proceeds as follows: The second section describes the phenomenon

of marketing failure in microfinance, and it introduces the concept of market orientation.

The third section describes the marketing revolution in the business sector as an earlier

counterpart for a marketing revolution in the microfinance sector. The fourth section

defines market orientation as developed by marketing researchers, describes its theore-

tical/conceptual development, and summarizes key empirical findings of the market

orientation research stream. The fifth section discusses the implications of the market

orientation research stream and its empirical findings for microfinance. Finally, the

last section discusses directions for future market orientation research in microfinance,

and it offers several hypotheses as potential avenues for research.

MARKETING FAILURE IN MICROFINANCE

Marketing is defined as ‘the process of planning and executing programmes designed to

create, build, and maintain beneficial exchange relationships with target audiences for the

purposes of satisfying individual and organizational objectives’ (Kotler and Andreasen,

1996, p. 37). Marketing connotes both a set of functional activities (product design and

production, promotion, pricing, and distribution) and a mind-set that emphasizes the

creation of customer value, both aimed ultimately at influencing customer behaviour in

specific ways.

If improperly done, however, marketing is unlikely to elicit the desired behavioural

response and can stymie the achievement of an institution’s financial and social objectives.

The paper argues that this is what has occurred in microfinance—marketing failure has led

to the widespread exclusion of the very poor people many microfinance programmes were

created to serve.

Examples of marketing failure that help account for the shallow depth of outreach

achieved by many microfinance programmes are:

* Many MFIs do not explicitly target the very poor.

* MFIs that do target the very poor frequently do not employ specific targeting strategies

to reach them, or they employ ineffective targeting strategies.

* MFIs tend to rely on design characteristics such as low initial loan sizes, stepped

loans, standardized and inflexible loan products and loan terms, high interest rates,

forced savings, group loans with joint liability, and weekly meetings, so as to weed

out better-off clients who are presumed to have better options.

* The same design characteristics designed to weed out better-off borrowers are

frequently unsuited to the needs or wants of the very poor and weed them out as well.

* MFI staff members frequently exhibit a bias against the very poor stemming from

concerns about creditworthiness, relative administrative burdens, and meeting loan

performance targets.

* Peer lending groups frequently exhibit a bias against the very poor resulting from

concerns about creditworthiness and joint liability.

From Market Failure to Marketing Failure 307


* The operational policies, organizational values, and behavioral norms of many MFIs

overwhelmingly focus on credit discipline creating a rigid repayment culture that

emphasizes short-term repayment extraction over long-term relationship building.

Because the very poor are more vulnerable to repayment interruptions caused by

external and personal shocks, they are frequent casualties of this repayment culture.

* The extreme vulnerability of the very poor to external and personal shocks

significantly increases the risks and costs of taking out enterprise loans, both ex-

ante and ex-post, leading to high rates of self-exclusion and voluntary or involuntary

dropout.

* MFIs often tend to locate operations in urban areas where poverty is less intensive so as

to keep costs low and abet rapid programme growth.

* Many MFIs are credit-driven and tend to offer limited, typically forced savings, despite

the immense demand for safe, liquid savings among the very poor.

* The enterprise lending bias of MFIs ignores the large, unfulfilled demand among the

very poor for consumption and emergency loans.

Effective marketing presupposes knowledge about the needs and wants of the target

market—something conspicuously missing in the examples cited above. Absent such

knowledge, all marketing activities incorporate a set of assumptions (whether explicit or

implicit) about the target market. These assumptions, each of which has important

implications for depth of outreach, can be inferred from the design characteristics of

microfinance programmes.

* The market for microfinancial services is an undifferentiated whole with uniform

demand characteristics.

* Enterprise development is the key to poverty alleviation.

* Enterprise loans constitute the most important financial need among the very

poor.

* There little business cyclicity—enterprise cash flows can be tied to standardized loan

repayment.

* Debt is the sole cost of capital for microentrepreneurs—equity financing has no cost.

* Loan pricing should be determined predominantly (if not solely) by financial

imperatives.

* Explicit targeting is not necessary, as appropriate design characteristics will lead to self-

selection among desired market segments.

* Borrowers invest loan proceeds into their enterprises or into other productivity

enhancing assets or activities.

* The very poor must be taught to save.

* Repayment flexibility weakens credit discipline.

* Financial services have ‘intrinsic’ value.

Notwithstanding, empirical research has been changing our image of the very poor in

ways that calls into question each of these underlying assumptions. The new image of the

very poor posits a diverse group of households with complex livelihoods that are risk-

adverse and highly vulnerable to external shocks and life-cycle events (implying a high

cost of equity financing) and willing and able to save. The self-employed (economically

active) very poor operate a wide variety of businesses with a corresponding wide variety of

risk profiles, business cycles, cash flows, and cash needs. At the same time, many of the

very poor do not engage in productive enterprises, yet they are viable customers for types

308 G. Woller


of financial services other than enterprise loans. In fact, there exists among all segments of

the very poor a large, unfulfilled demand for a full set of microfinancial services, including

most particularly savings and consumption and emergency loans (Cohen and Sebstad,

2000; Wright, 1999; Hulme, 1999; Matin et al., 1999; Rutherford, 1999; Montgomery,

1996; Robinson, 1995).

Deep outreach on a global scale will probably never be achieved as long as the industry

ignores these emerging ‘realities’ and remains locked into a paradigm that offers

standardized, inflexible, predominantly enterprise loan products, many of which do not

meet the needs or wants of the very poor. Reaching large masses of the very poor will

require, at a minimum, massive mobilization of small-scale voluntary savings, enterprise

loans that meet actual business needs and match actual business cycles, flexible loan sizes

and policies, and short-term consumption or emergency loans to help very poor house-

holds manage risk and cope with emergencies.

Beyond product innovations, deep global outreach will also require a fundamental

reorientation of MFI operating practice and culture. A common characteristic of MFIs is a

product-oriented culture. Product-orientation holds that ‘success will come to those

organizations that bring to market goods and services they are convinced will be good

for the public’ (Kotler and Andreasen, 1996, p. 39). Underlying product orientation is the

premise that a market offering possesses intrinsic value—the appreciation of an offering

for its own sake, unrelated to the benefits that derive there from. This intrinsic value

derives perhaps from characteristics inherent or unique to the offering, for example, that it

uses certain scarce resources, reflects certain sophisticated technology or benefits, contains

certain production efficiencies or other cost advantages, or is ‘socially desirable’. In other

words, product-orientation asserts that an offering has value because the producer put it

there.

The origins of the product-orientated approach to microfinance are not hard to

comprehend. Initially, the greatest challenges facing microfinance pioneers were how to

deliver small loans in a cost-effective and sustainable manner to a poor and often hard-to-

reach clientele, absent physical collateral, given information asymmetries, and with

relatively high per-units costs. The solutions were a high degree of product standardiza-

tion, full cost plus pricing, joint liability, a heavy emphasis on repayment discipline, and

an overarching emphasis on financial self-sufficiency.7 Common to each of these solutions

was a focus on institutional needs. From an institutional performance standard, the

solutions have worked well in that MFIs worldwide made have made great strides in

reaching masses of low-income borrowers while covering a substantial portion of their

operating costs. From a depth of outreach standard, however, the solutions have worked

less well in that many MFIs have opted to target, or have targeted by default, relatively

well-off and easy-to-each populations offering higher per-unit financial returns.

The problem is that so many years of single-minded focus on institutional needs and

financial returns have created a product-centered microfinance culture, complete with its

own set of values and behavioural norms. (Industry values and behavioural norms fall

generally under the rubric of ‘best practice’.) What began as a highly innovative and risk-

taking movement has since ossified into a highly conservative and risk-adverse industry

operating within a dominant paradigm that places institutional needs and financial returns

7Arguably financial self-sufficiency has become the sine qua non of microfinance. For fuller development ofthis argument, and a critique of the underlying rationales of the ‘self-sufficiency camp’, see Woller et al.,1999 and Morduch, 2000.



ahead of customer needs and customer value. It will require, therefore, nothing short of a

paradigm shift for the industry to break free of its product-centered culture and achieve its

animating vision of deep global outreach.

THE MARKETING REVOLUTION

In his classic work, Thomas Kuhn (1970) argued that paradigm shift occurs when

anomalies to an existing paradigm accumulate sufficiently to invalidate the paradigm’s

underlying premises. Although they have yet to reach critical mass, anomalies to the

reigning microfinance paradigm are accumulating, including the widespread exclusion of

the very poor from microfinance programmes; pervasive dropout, an emerging under-

standing of the financial needs of very poor households that conflict with prevailing

assumptions, and a relatively insignificant number of MFIs reaching financial self-

sufficiency. A logical direction of the paradigm shift will be away from product orientation

and toward its opposite, market orientation. Market orientation holds that ‘success will

come to that organization that best determines the perceptions, needs, and wants of target

markets and satisfies them through the design, communication, pricing, and delivery of

appropriate and competitively viable offerings’ (Kotler and Andreasen, 1996, p. 41). The

concept that organizations exist to serve customers is a widely accepted business principle

that has a long tradition in business and marketing literature (see, for example, Drucker,

1973; Porter, 1980). It forms today the ‘very heart of modern marketing management and

strategy’ (Narver and Slater, 1990).

The transition from product orientation to market orientation in microfinance has its

counterpart if the business world. In a 1960 Journal of Marketing article, Robert Keith

then Executive Vice President and Director of The Pillsbury Company, wrote that business

was ‘in the throes of a marketing revolution’ (p. 35). According to Keith, just as the

Copernican revolution overturned prevailing dogma and placed the sun (instead of

the earth) in the centre of the solar system, the marketing revolution was overturning

the prevailing product-oriented paradigm and placing the customer (instead of the

institution) in the center of the business universe. The result in both cases was ‘a complete

upheaval’ of prevailing thought and practice.

No longer is the company at the center of the business universe. Today the customer

is at the center. Our attention has shifted from problems of production to problems of

marketing, from the product we can make to the product the customer wants us to

make, from the company itself to the market place. . . .Every activity of the corpora-

tion—from finance to sales to production—is aimed at satisfying the needs and

desires of the consumer. (Keith, 1960, pp. 35, 38)

Hyperbole aside, Keith’s description of a marketing revolution was broadly accurate.

Although the revolution remains ongoing (not every business has completed the transition

from product orientation to market orientation), few in the business world today question

the basic principle that the customer should be central to what the organization does. This

is no less true for microfinance.

At the same time, it needs be pointed out that the marketing revolution in the business

sector described by Keith owed its advent to a large extent to increased competition within

industries and business segments that forced businesses to pay greater attention to

customers. It follows, therefore, that increased competition within the microfinance

310 G. Woller


industry likewise will force MFIs to adopt more market-oriented outlooks and practices.

Indeed, one might argue that this is precisely what is beginning to happen in some of the

more competitive microfinance markets. If true, it follows that the lack of a market-

orientation in the microfinance industry reflects to a certain extent the industry’s

immaturity—perhaps even as much if not more than any broad cultural manifestation.

There is no doubt truth to this argument, but not the whole truth. This paper asserts that

the lack of a market-orientation in microfinance does reflect a broad cultural manifestation

within the industry that has arisen for the reasons explained above. Moreover, any

discussion of market-orientation begs the question, ‘Which market?’ MFIs that serve

the needs and wants of moderately poor or non-poor customers may be market-oriented,

but they still have shallow depth of outreach. The issue, therefore, is not

market-orientation, per se, but a market-orientation to the very poor. The crucial point

to be made here is that unless MFIs explicitly target the very poor and adopt market-

oriented outlooks and practices appropriate for them, the very poor will continue to

experience widespread exclusion from microfinance programmes, even assuming a

‘mature’ market-oriented industry.8

DEFINING MARKET ORIENTATION

Whereas a product orientation holds that products have intrinsic value, a market

orientation holds that products have extrinsic value derived from the benefits of consuming

the product. Implied herein is that customer value is not only the key to a market

orientation but constitutes the very basis for purchase decisions (Holbrook, 1994). The

ability to create customer value is key to competitive advantage, and maintaining

competitive advantage is key to long-term institutional performance (Porter, 1980).9

Moreover, the ability to create sustainable competitive advantage requires a ‘learning

organization—a market-oriented culture that supports a process of continual learning and

organizational responsiveness to market intelligence (Day, 1994, Kohli and Jaworski,

1990; Slater and Narver, 1995). The capacity to learn gives the market-oriented

organization a competitive advantage in the speed and effectiveness to which it can

respond to and anticipate the changing needs and wants of customers.

It is argued here that market orientation holds the key to achieving deep global outreach.

The connection between the two is stated simply: success (deep outreach) will come to

that organization that best determines the perceptions, needs, and wants of the very poor

and satisfies them through the design, communication, pricing, and delivery of appropriate

and competitively viable offerings. This statement is unlikely to generate controversy—it

applies a well-known and widely accepted business principle to microfinance. The

problem comes in taking this rather broad, abstract principle and making it work in the

‘real world’ of microfinance. Fortunately, there exists a large body of knowledge about

market orientation; what it is, what its antecedents are, and what is implications are for

institutional performance that can help microfinance bridge the gap between the abstract

and the real.

8This argument should not be interpreted to rule out targeting market segments in addition to the very poor. Infact, targeting multiple market segments can often be a good strategy. Cross-subsidization strategies can oftenmake good sense as well.9Institutions possesses competitive advantage when they possess resources or skills that (i) enable them to delivercustomer value, (ii) are unique, and (iii) are difficult to imitate (Slater, 1997; Day and Wensley, 1988).



MARKET ORIENTATION

In the slightly more than one decade since the publication of the groundbreaking studies

by Kohli and Jaworski (1990) and Narver and Slater (1990), market orientation has

become one of the most thoroughly researched and written-about topics in marketing.10

The resulting research stream has produced a body of knowledge that encompasses

comprehensive theory development, hypothesis generation, and empirical testing. The aim

was to operationalize market orientation and give it ‘real’ meaning for managers.

Defining Market Orientation

Kohli and Jaworski define market orientation as the ‘organizationwide generation of

market intelligence pertaining to current and future customer needs, dissemination of

intelligence across departments, and organizationwide responsiveness to it’ (1990, p. 6).

Narver and Slater define market orientation as ‘[consisting] of three behavioural

components—customer orientation, competitor orientation, and inter-functional co-

ordination—and two decision criteria—long-term focus and profitability’ (p. 21).11

Common to how both sets of authors conceptualize market orientation are (i) customers

and customer value as the core component; (ii) customer value as a function of both

‘expressed’ and ‘latent’ (undiscovered) needs; (iii) inter-departmental coordination and

co-operation in the acquisition and dissemination of market intelligence (a market-

oriented organization is a learning organization); (iv) organizationwide responsiveness

to market intelligence; and (v) a causal link between market orientation and long-term

institutional performance.

It is important to note that neither set of authors view long-term institutional

performance as a component of market orientation, per se, but rather as a consequence

of it. Among the 62 marketing executives Kohli and Jaworksi interviewed to develop their

definition of market orientation, they found that ‘in sharp contrast to the received

view . . . the idea that profitability is a component of market orientation is conspicuously

absent . . .Without exception, interviewees viewed profitability as a consequence of a

market orientation rather than a part of it’ (1990, p. 3). By way of corroboration Collins

and Porras (1994) and Deutschman (1991) similarly found in unrelated studies that

businesses with established reputations for excellence consistently put the customers first

and emphasized core values over profitability.

The two sets of authors disagree, however, about the role played by organizational

culture in adopting and implementing a market orientation. By culture is meant ‘the

pattern of shared values and beliefs that help individuals understand organizational

functioning and thus provide them with norms for behavior in the organization’

(Deshpande and Webster, 1989, p. 4).12 Kohli and Jaworski define market orientation

solely in terms of a set of activities related to continuous assessment and serving of

customer needs (see also Deshpande and Farley, 1998).

10During the 1990s, the Marketing Science Institute made market orientation one of its top research priorities.11Others definitions of market orientation exist as well (Houston, 1986; Day and Wensley, 1988; Shapiro, 1988;Deshpande and Webster, 1989), but those of Kohli and Jaworski and Narver and Slater are the most widely cited.12Deshpande and Webster derived this definition of organizational culture after reviewing over 100 studies inorganizational behaviour, sociology, and anthropology.

312 G. Woller


In contrast, Narver and Slater see a market orientation as nothing less than ‘a business

culture in which all employees are committed to the continuous creation of superior value

for customers’ (Narver et al., 1998, p. 241) through thorough market intelligence and

functionally co-ordinated activities directed at gaining competitive advantage. This author

agrees with Narver and Slater. Although organizational activities and organizational

culture are distinct concepts in some regards, they are ultimately inseparable. One cannot

understand the one without understanding the other (see also Mahajan et al., 1987;

Drucker, 1954).

Measuring Market Orientation

Drawing on earlier theoretical/conceptual research in market orientation, researchers

began in the early 1990s to hypothesize possible antecedents of market orientation and to

develop long lists of hypotheses linking market orientation to higher levels of institutional

performance. Hypothesized antecedents of market orientation fell broadly into the

three areas: (i) senior management attitudes and behaviour, (ii) inter-departmental

dynamics (inter-departmental conflict and inter-departmental connectedness),13 and

(iii) organizational systems (degree of formalization and centralization and reward

systems).14

Researchers next sought to consolidate and generalize extant learning and to investigate

the best ways to create a market orientation. Two approaches to measuring market

orientation gained particular prominence. Following up on Kohli and Jaworski’s seminal

1990 study, Kohli et al. (1993) developed and subsequently refined (Jaworski and Kohli,

1993, 1996) a 20-item scale of market orientation (MARKOR) using non-linear factor

analysis of matched samples of senior marketing and non-marketing executives from 222

strategic businesses units (SBUs). In parallel, Narver and Slater developed a 15-item

factor-weighted scale of market orientation (MKTOR) used to help explain return on

investment (ROI) among 140 strategic business units of commodity and non-commodity

businesses. They later refined their approach (Slater and Narver, 1994, 1995, 1996), and in

a 2000 study (Narver et al., 2000) they extended MKTOR to include measures of

‘reactive’ market orientation (latent needs) along with measures of ‘reactive’ market

orientation (expressed needs).

A third approach of note was Deshpande et al. (1993) who developed a nine-item scale

of customer orientation (DFW) in conjunction with their broader study of the impact of

organizational culture, innovation, and market orientation of institutional performance

among 138 Japanese executives. Deshpande and Farley (1998) later tested MARKOR,

MKTOR, and D-F-W using a multi-firm, multi-national sample. They found each to be

reliable and valid across a variety of international contexts. They distilled all three scales

into a more parsimonious 10-item scale (MORTN). Since 1990 literally dozens of

13Inter-departmental conflict is presumed to inhibit inter-departmental collaboration in that people who do not getalong tend not to collaborate well (Kohli and Jaworski, 1990; Ruekert and Walker, 1987). Inter-departmentalconnectedness is presumed to promote inter-departmental collaboration under the assumption that people whointeract with each other regularly tend to collaborate better (Kohli and Jaworski, 1990; Deshpande and Zaltman,1982).14Higher levels of organizational formality and centralization are widely hypothesized to inhibit inter-depart-mental generation and dissemination of market intelligence, although perhaps facilitating organizationwideresponsiveness to it (Kohli and Jaworski, 1990; Zaltman et al., 1973).



empirical studies have been published using one of the three scales or a derivative

thereof.15

Empirical Testing

With market orientation scales in hand and a theoretical/conceptual framework to guide

them, researchers turned their attention to testing the antecedents of market orientation

and the link between market orientation and institutional performance. In addition to large

businesses, researchers studied small-or-medium-sized businesses (Horng and Chen,

1998; Pelham, 1997; Pelham and Wilson, 1996), non-profit organizations (Wood et al.,

2000), and federal government agencies (Hurley and Hult, 1998). Also included were

studies in diverse countries such as Japan (Deshpande et al., 1993); Hungary, Slovenia,

and Poland (Hooley et al., 2000); Australia (Mavondo and Farrell, 2000; Farrell, 2000;

Dawes, 2000); Taiwan (Chang and Chen, 1998; Horng and Chen, 1998); Ghana (Appiah-

Adu, 1998); Greece (Avlontis and Gounaris, 1997); Russia (Golden et al., 1995); Great

Britain (Diamantopoulos and Hart, 1993; Doyle and Wong, 1998; Greeley, 1995; Harris,

2001); Japan, England, Germany and France (Deshpande et al., 1997); Scandinavia

(Selnes et al., 1996); Malta (Caruana et al., 1995). Similar to impact studies in

microfinance, the market orientation empirical findings varied from study to study,

suggesting the importance of contextual factors in determining specific underlying

relationships. Nonetheless, certain findings occurred with sufficient frequency as to

constitute robust evidence of underlying causal relationships.

Of 48 studies testing the relationship between market orientation and institutional

performance reviewed for this paper, 44 found a positive relationship between market

orientation and at least one measure of institutional performance as measured by profit-

ability, sales, market share, or innovation success. This link was found for both reactive

and proactive market orientation (Narver et al., 2000). Even when existing scales of

market orientation were rejected in favor of context-specific scales (Gray et al., 1998;

Golden et al., 1995), the relationship between market orientation and institutional

performance was consistently positive. Studies also found positive relationships between

market orientation and other organizational variables, such as customer retention,

customer service, espirit de corps, trust in senior management, job satisfaction, and

employee intent to remain at an institution (Jaworski and Kohli, 1993; Pulendran et al.,

2000; Selnes et al., 1997; Farrell, 2000; Farrell and Oczkowski, 1998). The preponderance

of evidence is now sufficient to accept a ‘cross-sectional robustness of the relationship

between market orientation and performance’ (Deshpande and Farley, 1998, p. 21).

As for antecedents of market orientation, senior management emerged as the single

most important determinant of market orientation. Studies that examined the role of senior

management (Jaworski and Kohli, 1993; Wood et al., 2000; Farrell, 2000; Pulendran et al.,

2000; Selnes et al., 1997) uniformly found a positive relationship between attributes of

senior management and market orientation. In particular, the level of senior management’s

emphasis on and commitment to market orientation and its willingness to undertake risk

15Several researchers have also performed comparative tests of the scales. For example, Mavondo and Farrell(2000) and Farrell and Oczkowski (1997) compared MARKOR and MKTOR in terms of generalizability,validity, and reliability. Each found MKTOR superior to MARKOR. Others have investigated the psychometricproperties of the two scales (e.g., Han et al., 1998; Gray et al., 1998; Greenley, 1995; Deng and Dart, 1994;Kohli et al., 1993), resulting in modifications to the two or in alternative approaches.

314 G. Woller


were positively linked to market orientation. Studies also found a statistically significant

relationship between reward systems and market orientation. In each instance where

tested, customer-focused reward systems were linked to higher levels of market

orientation (Jaworski and Kohli, 1993; Pulendran et al., 2000; Selnes et al., 1997; Ruekert,

1992).

The empirical findings regarding inter-departmental collaboration tended also to

support hypotheses that lower levels of inter-departmental conflict (Jaworski and Kohli,

1993; Pulendran et al., 2000; Selnes et al., 1997) and higher levels of inter-departmental

connectedness (Jaworski and Kohli, 1993; Pulendran et al., 2000) were associated with

higher levels of market orientation.16 The empirical findings regarding organizational

formality and centralization, however, were mixed making generalization more difficult.

Narver et al. (2000) and Pelham (1997) found some evidence to link greater formalization

with lower market orientation, but Selnes et al. (1997) and Pulendran et al. (2000) found

no evidence for this relationship. Regarding organizational centralization, Jaworksi and

Kohli (1993) found evidence of an inverse relationship with market orientation, but

Pulendran et al. (2000) and Pelham and Wilson (1996) find none. Selnes et al. (1997) find

that centralization diminishes market orientation among US firms, but not among Swedish

firms.

IMPLICATIONS FOR MICROFINANCE

The implications of the market orientation research for poverty-focused microfinance

institutions are many. (The comments in this section apply generally to all other MFIs as

well.) To begin with, the cross-sectional robustness of the positive link between market

orientation and institutional performance suggests that such a link is to be found among

microfinance institutions too. Thus statements that those MFIs who fail to make the

transition from a product orientation to a market orientation ‘will be history’ (Hulme,

1999, p. 24) are not rhetorical flights of fancy but observations grounded in empirical

reality. This in turn implies a fundamental reorientation in how the industry defines

‘success’ and how MFIs set about to achieve it.

The microfinance industry tends to define success in terms of financial self-sufficiency

(Woller et al., 1999). Part and parcel of the concept of financial self-sufficiency is the

understanding that financial self-sufficiency (and hence success) is a function of keeping

costs low, achieving scale rapidly, squeezing maximum productivity out of field staff, and

charging appropriately high interest rates. This is the paradigm that drives the micro-

finance industry, and MFIs have responded with alacrity to the institutional imperatives

contained therein. In contrast, market orientation implies that institutional success be

defined by the degree to which MFIs identify and satisfy the needs and wants (expressed

and latent) of the very poor. The surest way to achieve long-term financial self-sufficiency

and to remain true to the MFI’s social mission is to identify the needs and wants of the very

poor and to provide products and services of value to them.

It follows, therefore, that sustainable competitive advantage is unlikely to be found by

the degree to which an MFI can extract economic rents from very poor clients via high

interest rates. Instead, competitive advantage depends on whether very poor customers

16Jaworski and Kohli (1993) find that inter-departmental connectedness is positively associated with intelligencedissemination but not with organizational responsiveness to it.



perceive value attached to the MFI’s market offerings, for which they are willing to pay.17

If very poor customers do not value the MFI’s market offerings, charging an interest rate

sufficient to cover costs will not lead to long-term financial self-sufficiency. It may,

however, create the illusion of success in the short-to-medium term, particularly if the MFI

is able to replace existing customers with new customers.18 Moreover, to the extent MFIs

explicitly target the very poor and create learning institutions in tune with the needs and

wants of their target market, competition and the drive for sustainable competitive

advantage will drive them to find ways to serve the very poor in an increasingly cost-

effective manner.

Market orientation does not imply that MFIs ought not care about financial perfor-

mance. Nor does it suggest that things such as costs, scale, productivity, or loan pricing do

not matter. All remain important items of focus for MFI management. What it does imply

is that market orientation ought to be an integral element of management focus as well. At

the same time, an MFI’s degree of market orientation will influence strategy and outcomes

in all functional areas of the organization.19 A market-oriented strategy will materially

influence the scale, scope, and types of all activities in which the MFI engages.

In terms of practical implications for MFI management, the market orientation research

stream yields numerous findings, most of which hinge on proactive management leader-

ship. One of the most salient findings is that creating a market-oriented culture is the

distinct responsibility of senior management (see also Senge, 1990). It evident from the

research findings that it is absolutely essential that senior management (i) communicate a

clear commitment to market orientation (and the very poor), (ii) define clearly what this

means in terms of behaviour by organizational members, (iii) link these behaviours to

specific business outcomes, (iv) prioritize critical areas for change, and (v) connect

rhetoric to practice by behaving visibly in a manner consistent with a market orientation

(and a commitment to the very poor).

In terms of specific activities, there are a number of things that senior management

might do. Installing appropriate reward systems, for example, is a relatively unambiguous

statement of managerial values that connect rhetoric to practice. Reward systems both

reflect and affect shared values and behavioral norms within an organization. In the first

sense, it goes to the old adage ‘you measure what you value’. Trite, perhaps, but true

nonetheless. In the second sense, material reward systems strongly influence value

acquisition and value internalization, which in turn shape behavioural norms. Examples

of reward systems are to tie management and employee compensation to outreach

indicators, drop out rates, or to surveys of customer satisfaction or to reward employees

with cash or in-kind bonuses for customer-oriented suggestions that are implemented by

the MFI.

Other management actions that demonstrate commitment include adding measures of

customer retention to regularly tracked indicators, or commissioning routine customer

satisfaction surveys. Management can design and implement tools that identify suitable

job candidates (those inclined toward a market orientation and a commitment to the very

17It should be noted that in their study of Central European firms, Hooley et al. (2000) found that market-oriented firms differentiated themselves on quality and service, but not on price.18Many MFIs have been able to demonstrate rapid growth and strong financial performance, despite high drop outrates, by adding new customers at a faster rate than customers are leaving. Presumably this process cannot lastindefinitely.19For example, research in new product development over past two decades shows that innovation and newproduct success tend to come more from being market-oriented than from being technology-oriented (Zirger andMaidique, 1990; Quinn, 1986).

316 G. Woller


poor) and screen out unsuitable job candidates. Management also needs also to be willing

to fire management and staff who refuse or are unable to adopt the appropriate values and

behaviours or who act as impediments to others. (‘Hire right, and fire right’.)

Integral to any market orientation strategy (including designing reward systems) is that

senior management on down to field staff stay in contact with customers, routinely solicit

customer feedback, and act on that feedback. A variety of methods of customer contact are

appropriate: observation, field visits, personal interviews, focus groups, or celebratory

events. The information gained through routine contact with customers fosters respon-

siveness and can generate empathy for the needs and wants of customers (Gouillart and

Sturdivant, 1994). Combine this with a reward system that rewards individual respon-

siveness to customer needs, and ‘one has the basis for a powerful motivational mechanism’

(Allen et al., 1998, p. 21). From customer contact comes the experiential learning and

value reinforcement that are the foundation of cultural change. Moreover, customer

contact can be embraced by any department and at any level of the organization.

Management must also demonstrate a willingness to undertake risk—both in terms of

trying new innovations and in terms of honestly seeking and assessing feedback, be it

positive or negative. Negative feedback needs to be viewed as an opportunity to learn, as

opposed to an excuse to cast or shift blame. Much constructive learning comes from

unfavorable feedback—case in point, customer satisfaction surveys. Experience has

shown that only around 5 per cent of customers with complaints actually complain. The

rest simply keep their mouths shut or defect, and often defect in large numbers. Customer

satisfaction surveys are a potential gold mine of information that can do much to improve

institutional performance and reinforce a market orientation culture, provided the negative

information found therein is treated appropriately.

Management can also implement policies to reduce conflict and increase interactions

between functional departments. Examples include creating cross-functional work teams,

opening communication channels across departments, holding regular organization-wide

meetings, creating cross functional athletic teams, and so forth. Pushing the locus of

decision-making as close to the customer as possible—empowering staff to use their best,

reasoned judgment—is yet one more way that management can help create and reinforce a

market-oriented culture.

By way of a final suggestion, there are five rules of thumb worth remembering to guide

the transition to a market orientation (Naumann and Shannon, 1992). First, senior

management should not assume that change can be delegated to subordinates to develop

and implement. Second, the transition to a market orientation should be viewed as a long-

term evolutionary process. Third, the transition process must involve all organizational

levels and functions. Fourth, the transition process requires extensive and continual

training and development of staff. Fifth, the transition process must be continually

evaluated, monitored, and reinforced.

Notwithstanding, the difficulty of creating a market orientation should not be under-

stated. Not everyone can do it. Persons within organizations are resistant to change

(Deshpande and Webster, 1989; Trice and Beyer, 1993; Narver et al., 1998). The landscape

is littered with well-intentioned organizations that tried and failed to create a market

orientation (Payne, 1988; Beer et al., 1990; Day, 1990; Webster, 1994). Many perhaps

have assumed that some tinkering at the margins, some sincere proclamations of intent, a

flurry of memos and/or a few management workshops outlining desired behaviors, a

customer complaint box, and a handful of focus groups were sufficient to do the job.

Creating a market orientation requires vision, courage, a commitment to purpose, and



leadership. It requires ‘nothing short of implanting the appropriate culture’ (Narver et al.,

1998, p. 243) in which all organization members accept the core value of delivering

superior value to very poor customers, together with the appropriate set of behavioral

norms.

It turns out that there is no ‘best’ strategy for achieving a market orientation, whether

referring to specific policies or to larger strategy. Empirical research suggests that market-

oriented organizations pursue a wide variety of objectives and employ a wide variety of

strategies in pursuit of those objectives (Slater, 1997). Factors from organizational

characteristics on up to national culture (Nakata, 1999; Deshpande et al., 1997) will

affect what is and what is not possible within a particular MFI as well the relative

effectiveness of what is attempted. This suggests the need to pursue a market orientation

research agenda specific to microfinance with the intent to delineate and test a set of

hypotheses, with appropriate measurement instruments, more finely tuned to the unique

characteristics of microfinance and the practical needs of MFI management. This is the

topic of the final section.

DIRECTIONS FOR FUTURE RESEARCH

The overwhelming nature of the empirical findings from the body of market orientation

research strongly implies broad relevance for microfinance. Nonetheless, it cannot be

denied that the microfinance sector, and in particular those MFIs targeting very poor or

otherwise hard-to-reach customers, is different enough from the traditional business sector

as to raise questions regarding the specific implications of these findings for microfinance.

This suggests the need to pursue a parallel stream of market orientation research in

microfinance.

The conceptual development and empirical findings of the market orientation research

stream have laid the groundwork for a parallel research stream in microfinance, in addition

to providing ample precedent for dealing with issues such as concept definition and

operationalization and research methodology. Microfinance researchers can draw on this

rich body of knowledge so as to craft a well-honed research stream that answers questions

of specific relevance to microfinance and microfinance institutions.

Possible Research Hypotheses

The ideas and empirical findings reported in this paper suggest a large number of

hypotheses that might be tested as part of this research stream. Examples of

possible hypotheses are listed below. (This list is not intended to be totally exhaustive.)

The hypotheses are grouped according to the following categories: senior management,

organizational focus, institutional performance, staff and customer attitudes, reward

systems, funding sources, organizational systems and inter-departmental dynamics, and

markets offerings and terms.

Senior management

H1: The greater the senior managers’ commitment to a market orientation (or to core

values), the greater the MFI’s market orientation.

318 G. Woller


H2: The greater the senior managers’ commitment to a market orientation (or to core

values), the deeper the MFI’s outreach.

H3: The greater the gap between senior managers’ rhetoric and action regarding a market

orientation (supportive rhetoric versus non-supportive action), the lower the MFI’s

market orientation.

H4: The greater the gap between senior managers’ rhetoric and action regarding a market

orientation (supportive rhetoric versus non-supportive action), the shallower the

MFI’s outreach.

H5: The more positive the senior managers’ attitudes toward change, the greater the

MFI’s market orientation.

H6: The greater the senior managers’ risk aversion, the lower the MFI’s market

orientation.

H7: The greater the trust between senior management and middle management, the

greater the MFI’s market orientation.

H8: The greater the trust between senior management and field staff, the greater the


Organizational focus

H9: The greater the focus on financial performance, the lower the MFI’s market

orientation (or focus on core values).

H10: The greater the focus on core values, the greater the MFI’s market orientation.

Institutional performance

H11: The greater the market orientation (or commitment to core values), the greater the

MFI’s financial performance.


MFI’s product innovativeness.

H13: The greater the market orientation (or commitment to core values), the deeper the

MFI’s outreach.

Staff and customer attitudes

H14: The greater the market orientation (or commitment to core values), the higher

MFI’s staff morale.

H15: The greater the market orientation (or commitment to core values), the lower the

MFI’s staff turnover.

H16: The greater the market orientation (or commitment to core values), the lower the

MFI’s customer desertion rate.

H17: The greater the market orientation (or commitment to core values), the higher the

MFI’s level of customer satisfaction.

Reward systems

H18: The more reward systems are based on financial performance, the lower the MFI’s

market orientation.



H19: The more reward systems are based on financial performance, the shallower the

MFI’s outreach.

H20: The more reward systems are based on interaction with customers or are otherwise

customer-focused, the higher the MFI’s market orientation.

H21: The more reward systems are based on interaction with customers or are otherwise

customer-focused, the deeper the MFI’s outreach.

Funding sources

H22: The greater the percentage of market-based funding, the lower the MFI’s market

orientation (or commitment to core values).

H23: The more large donors emphasize financial performance targets, the lower the

MFI’s market orientation (or commitment to core values).

Organizational systems and inter-departmental dynamics

H24: The greater the decision-making autonomy of middle management, the greater the


H25: The greater the decision-making autonomy of field staff, the greater the MFI’s

market orientation.

H26: The greater the inter-departmental connectedness, the greater the MFI’s market

orientation.

Market offerings and terms

H27: The greater the market orientation (or commitment to core values), the more

flexible the loan and savings terms.


variety of products and services offered.

H29: The greater the flexibility of loan and savings terms, the lower the customer

dropout.

H30: The greater the flexibility of loan and savings terms, the deeper the MFI’s outreach.

H31: The greater the flexibility of loan and savings terms, the greater the MFI’s financial

performance.

H32: The greater the variety of products and services offered, the lower the customer

dropout.

H33: The greater the variety of products and services offered, the deeper the MFI’s

outreach.

H34: The greater the variety of products and services offered, the greater the MFI’s

financial performance.

The microfinance movement now stands at a crossroads. The direction the movement

takes will depend to a large degree on its success (and the commitment it brings to the task)

in reaching even further down the poverty spectrum. Market orientation offers a potential

resolution to this dilemma: MFIs can best promote financial sustainability and achieve

deep outreach by focusing on the needs and wants of the very poor and creating products

and services valued by them. To achieve this would be a true revolution. It is hoped

that this paper provides an impetus to investigate this relationship in a more systematic

manner.

320 G. Woller


ACKNOWLEDGEMENTS

The author would like to thank Anita Campion, Mark Schreiner, and Gary Rhodes for their

many helpful suggestions. The author assumes full responsibility for all content found

herein.

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