Customer orientation and SME performance: the role of networking ties

Brownhilder Ngek Neneh (Department of Business Management, University of the Free State, Bloemfontein, South Africa)

African Journal of Economic and Management Studies

ISSN: 2040-0705

Publication date: 11 June 2018

Abstract

Purpose

The purpose of this paper is to examine the moderating effect of networking ties on the relationship between customer orientation and firm performance.

Design/methodology/approach

This study adopted a survey approach to collect data from 251 respondents in the Mangaung Metropolitan Municipality in the Free State province, South Africa. Scales for data collection were operationalised from prior studies. A hierarchical regression analysis was used to examine the moderating effect of networking ties on the relationship between customer orientation and firm performance.

Findings

The results showed that customer orientation had a significant positive association with firm performance, thus supporting the existing calls for examining the unique contributions of customer orientation to firm performance. Furthermore, this study hypothesised that business, political, and social network ties positively moderated this association. However, the results showed that only business and social network ties had a positive and significant moderating effect, with the influence of customer orientation on firm performance being more pronounced for firms with high as opposed to low business and social network ties. Nevertheless, all the three types of network ties showed a positive and significant direct relationship with firm performance, thus supporting the consolidated literature on the positive impact of network ties on firm performance.

Practical implications

The practical implications are twofold. First, it encourages business owners to develop a customer-oriented approach as a key strategic objective in their pursuit for optimal business performance. Second, business owners and managers should increasingly exploit their business and social network ties to accumulate vital resources for effectively exploiting their customer-oriented capabilities as a means to improve their performance.

Originality/value

Even though customer orientation is a valuable internal strategic capability, its benefit on firm performance might be limited in small and medium enterprises (SMEs) when the businesses are unable to respond quickly to customer needs. This is more common when the SME is faced with resource limitations required for exploiting the new market opportunities. However, this study showed that SMEs can mitigate this issue by depending on their business and social network ties for valuable resources to effectively exploit opportunities that emerge from identified customer needs.

Keywords

Citation

Neneh, B. (2018), "Customer orientation and SME performance: the role of networking ties", African Journal of Economic and Management Studies, Vol. 9 No. 2, pp. 178-196. https://doi.org/10.1108/AJEMS-03-2017-0043

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Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited


Introduction

The competitive nature of today’s economic landscape has exerted enormous pressure on small businesses, necessitating the adoption of vital strategic choices for success. One of such strategic choice is customer orientation, which is particularly suitable for small businesses due to the unique closeness that exists between small business owners/managers and their customers (Brockman et al., 2012).

Customer orientation was coined by Narver and Slater (1990, p. 21) as “the sufficient understanding of one’s target buyers to be able to create superior value for them continuously”. This definition has been widely used throughout marketing and entrepreneurship literature (Alteren and Tudoran, 2016; Wang et al., 2016). Customer orientation has been identified as an essential driver of firm performance (Kirca et al., 2005; Smirnova et al., 2011) and a fundamental focus for any firm’s relationship to its market (Leeflang, 2011; Pekovic and Rolland, 2016). However, researchers (Kirca et al., 2005; Smirnova et al., 2011; Pekovic and Rolland, 2016) have increasingly questioned the universality of the positive influence of customer orientation on firm performance due to mixed findings from different studies. For example, some studies failed to replicate this positive association of customer orientation and firm performance under some conditions (Brockman et al., 2012; Zhou et al., 2007; Neneh, 2016a), while others have even found a significant negative association between customer orientation and firm performance (Solberg and Olsson, 2010; Sorensen, 2011). Consequently, it has been recommended that more studies are needed to better understand the nature of the association between customer orientation and firm performance in different settings (Brockman et al., 2012; Kadic-Maglajlic et al., 2017).

Researchers (Frambach et al., 2016; Olson et al., 2005) have progressively argued that the best performance outcome of customer orientation can be obtained in combination with other strategic factors. This follows from existing evidence that acquiring a competitive advantage and enhancing firm performance does not rest on a single characteristic, but instead depends complementarily on the relationships amongst multiple factors (Wiklund and Shepherd 2005). Nonetheless, there is little documentation of all the possible strategic factors that firms can consider when adopting a customer-oriented perspective, since current studies have mostly focussed on its interaction with risk-taking, innovativeness, and opportunity focus (Brockman et al., 2012; Racela, 2014).

It is common knowledge that in many cases, opportunity exploitation in small and medium enterprises (SMEs) is often constrained by lack of resources (Neneh, 2016b; Su et al., 2015). Therefore, customer-oriented firms can still miss out on opportunities identified from customer needs if they lack the resources to exploit such opportunities. This is because effective implementation of customer orientation is resource intensive and so its net positive impact on firm performance might diminish if the needed resources are unavailable (Homburg et al., 2011; Kadic-Maglajlic et al., 2017). In this given case, customer-oriented firms could benefit from resource availability, which in SMEs is most often easily obtained through networking ties (Acquaah and Eshun 2010; Danso et al., 2016; Machirori, 2012; Watson, 2007). Therefore, this study proposes networking ties as a valuable resource for SMEs to use in the process of exploiting opportunities availed to them via customer orientation. This view is supported by the positive performance implications of network ties on other strategic orientations like entrepreneurial orientation and market orientation (Boso et al., 2013; Su et al., 2015).

From the preceding discussion, this study has as objective to evaluate the impact of the interrelation between customer orientation and network ties on firm performance. This will add new knowledge in identifying new boundary conditions under which customer orientation can benefit SMEs, as its significant role has been shown to vary under different conditions. Additionally, this study contributes to the debate on the direct association of customer orientation and firm performance, especially by providing evidence from a developing world context. It also takes into consideration the fact that prior studies have yielded mixed results (Brockman et al., 2012; Zhou et al., 2007; Solberg and Olsson, 2010; Sorensen, 2011). Finally, this study has practical implications for SMEs with regards to how different network resources can be valuable for exploitation of opportunities identified from their customer-oriented strategies.

Theory and hypotheses

Overview of the conceptual model

The concept of customer orientation was introduced by Saxe and Weitz (1982, p. 344) who theorised that customer orientation referred to “degree to which businesses practice the marketing concept by trying to help their customers make purchase decisions that will satisfy customer needs”. Customer orientation emerged quite early in the marketing literature at the heart of market orientation because it directly focusses on marketing activities towards satisfying customer needs (Frambach et al., 2016). Market orientation was conceptualised by Narver and Slater (1990) as a three-dimensional construct consisting of customer orientation, competitor orientation, and inter-functional coordination. Even though a part of market orientation, customer orientation has been shown to be a unique factor that exists separately from the three-dimensional construct of market orientation (Brockman et al., 2012; Frambach et al., 2016). This is because customer orientation can be implemented as a distinct strategic driver of firm performance without the need for competitor and inter-functional dimensions emphasised in the market orientation literature (Kadic-Maglajlic et al., 2017; Tajeddini et al., 2013). By focussing on the creation of customer value, businesses can be able to generate higher levels of satisfaction, loyalty, and innovation, which in turn will enhance the performance of the business (Kirca et al., 2005; Wang et al., 2016).

Albeit, customer orientation has been found to influence firm performance, a major argument for the present study is that the effectiveness of customer orientation depends on networking ties, as these ties could provide the necessary resources for small businesses to effectively appropriate opportunities identified from emerging customer needs. The conceptual model for this study is present in Figure 1.

Figure 1 illustrates the interrelation between customer orientation, network ties, and SME performance. The model postulates that customer orientation has a positive and significant influence on SME performance after controlling for several factors such as business age, business size, marital status, age, and the educational level of the entrepreneur. The model further suggests that this positive association between customer orientation and firm performance is contingent on networking ties, such that social, business, and political network ties will have a positive moderating effect on the association. The development of the hypotheses for each of these relationships is explained in the subsequent sections.

Customer orientation and SME performance

Customer orientation requires that sellers understand the value chain of its buyers in order to continuously create superior value for them (Narver and Slater, 1990). These authors postulated that customer orientation in a firm will lead to superior firm performance. This follows from the view that focussing on the creation of customer value enables a firm to improve customer satisfaction, loyalty, innovation, and subsequent performance and success (Frambach et al., 2016).

This view is supported by an array of studies that confirmed the existence of a significant positive relationship between customer orientation and SME performance (Asikhia, 2010; Dauda and Akingbade, 2010; Kirca et al., 2005; Neneh, 2016a; Pongwiritthon and Awirothananon, 2014; Smirnova et al., 2011). The fact that the customer is the focal point in the strategy of a customer-oriented firm improves the firms’ chances of fostering performance as superior treatment of customers can result in sales growth. This is because customer-oriented firms put their customers at the centre of their operations, formulate action plans based on market intelligence as opposed to verbalised customer opinions alone, and ensure that they deliver goods and services to meet their needs (Asikhia, 2010).

These strategic moves by business owners attract customers to buy products and services that are born out of their needs, which in turn will further translate into sales growth and improved overall performance. Hence, following the above, this study hypothesis that:

H1.

Customer orientation will have a positive association with SME performance.

Moderating effect of managerial network ties

Managerial networks are defined as “the structure in which managers of firms connect with others who are directly or indirectly connected with the organisation” (Panda 2014, p. 5). Managerial networks consist of relationships with suppliers, buyers, customers, competitors, and other businesses that enhance the legality of the business.

Managerial ties have been divided into two pertinent sub-dimensions, namely political ties and business ties. Political ties refer to when managers cultivate networking activities in order to establish symphonic relationships across all levels of government officials, supporting bureaus and industries as well as leaders in regulation. Business ties, on the other hand, reflect the scenario whereby business owners/managers create networking activities with managers/owners of other businesses, as well as suppliers, buyers, customers, and competitors (Li et al., 2008; Shu et al., 2012).

Business network ties

When entrepreneurs establish ties with suppliers, they will be able to obtain quality materials, secure good services, and ensure timely delivery. These are some of the aspects that can provide a firm with competitive resources to exploit existing market opportunities. With the necessary resources in place, a customer-oriented business is likely to improve its performance as the business knows exactly which customer needs to satisfy (Frambach et al., 2016). Although customer orientation enables businesses to identify customer needs, developing long-term beneficial relationships with these customers rest upon the ability of the business to create network ties with its buyers. This is because creating ties with buyers will lead to better customer satisfaction, customer retention, and repeated purchase (Maurya et al., 2015). Identifying customer needs through customer orientation, and building lasting customer relationships via business network ties can enable businesses to tap into information and knowledge resources embedded in customer networks which can enable the business to be more innovative in its service offering (Wang and Chung, 2013). Also, the establishment of relationships with managers/owners from other businesses will promote the development of possible inter-firm collaboration that can benefit the associated businesses, especially in combining resources to the exploit opportunities that emerged from their understanding of customer needs (Li and Zhou, 2004). Collaboration with other businesses also helps SMEs to reduce uncertainties that exist in the exploitation of new opportunities (Acquaah and Eshun, 2010). Additionally, prior research has suggested that a business that only relies on customers to determine their needs for new products and services is economically vulnerable, as some of such customer needs might have no long-term value (Lamore et al., 2013; Narver et al., 2004). As such, the company creates little opportunities for improving customer dependence and loyalty (Narver et al., 2004). It is, however, vital for customer-oriented firms to also provide new products and services that do not necessarily stem from the needs of their own customer but that parallel the product and services responses from competitors while considering the apparent price competition (Lamore et al., 2013; Narver et al., 2004). Thus, firms with managerial ties will be better off to add more value to customer needs as their ties with competitors, distributors, and suppliers provides them with the added knowledge and opportunities to provide quality services that are far above simply what their customers indicate as their new product/service needs (Narver et al., 2004). Consequently, the influence of customer orientation on firm performance will be more positive for firms with strong business network ties. Thus, we propose the following hypothesis:

H2.

Business network ties will positively moderate the relationship between customer orientations and SME performance.

Political network ties

Since most developing markets are characterised by weak formal institutions, business owners and managers often tend to depend on their connections with people in power as a valuable social resource for achieving their business objectives (Acquaah and Eshun, 2010; Wang and Chung, 2013). Political network ties can influence the association of customer orientation and firm performance in two ways. First, even though a firm might be customer-oriented, breaking into some markets in developing countries can be difficult. However, this constraint can be eliminated by political network ties which enable businesses to obtain preferential market information that can be used to gain a significant market share (Wang and Chung, 2013). Furthermore, such preferential market information provides a competitive knowledge advantage that can guide customer-oriented firms to take more risk in exploiting opportunities identified from customer needs. Second, political network ties enable business people to tap into valuable resources provided by governments such as incentives which can be used to organise their strategic activities (Danso et al., 2016). As such, in resource-constrained environments, firms with political network ties will be at an advantageous position to receive government incentives, gain financial or knowledge resources, or reduce bureaucratic processes (Acquaah and Eshun, 2010; Danso et al., 2016; Wang and Chung, 2013). Given that the pursuit of customer orientation and exploitation of opportunities arising from customer needs is resource intensive (Homburg et al., 2011; Kadic-Maglajlic et al., 2017), firms that benefit the above-mentioned resources from their political networks will be more offensive in addressing customer needs as they are not resource constrained. As such this study hypothesis that:

H3.

Political networks ties will positively moderate the relationship between customer orientations and SME performance.

Moderating influence of social network ties

Social networks refer to the ability of individuals to acquire benefits from their social structures, connections, and memberships using privileged connections (Pinho and Prange 2016). An individual’s social network is usually comprised of friends, acquaintances, family members and relatives, friends (Desta, 2015).

SME owners use social networks to obtain information and knowledge about customers and their needs, raise capital, locate materials, identify new markets, and shape their product and services to fit their clients’ needs (Desta, 2015; Salaff et al., 2002).

Likewise, social networks have been noted to enable business owners to identify information regarding viable business opportunities and resources (Konchellah, 2013). Given that customer-oriented firms put their customers at the centre of their operations and seeing that customers’ needs are ever-changing, entrepreneurs can use social network to better access new information, knowledge, and resources which can be used to tailor their product and service offerings to meet the needs of both their current and potential customers, as a means to improve their sales and overall performance. Additionally, in SMEs, it is common for customers to express their dissatisfaction with some products and services by complaining to family members or friends of the business owner (Davis and Farrell, 2016). As such, an SME owner with close ties to these social networks will easily gather such information and effectively discover the courses of the customer dissatisfaction and addresses them (Davis and Farrell, 2016). This is likely to increase customer satisfaction and subsequently result in better firm performance. As such, this study hypothesis that:

H4.

Social networks will positively moderate the relationship between customer orientation and SME performance.

Methodology

Context of this study

South Africa is one of the largest economies in Africa; however, its economic growth rate over the past couple of years has been quite a dismay, to the extent that the country entered into a technical recession in the second quarter of 2017 (Stats SA, 2017a). In addition to a weak economic growth, the country is currently characterised by a very high unemployment rate which peaked at 27.7 per cent in the second quarter of 2017 (Stats SA, 2017b). In the face of these challenges, the South Africa Government is increasingly looking at small businesses as a key vehicle for propelling the nation’s inclusive economic growth and creating the much-needed jobs to absorb the unemployed populace, as articulated in the country’s national development plan (South African National Treasury, 2015). Following the 1996 Small Business Act, a small business in South Africa is officially defined as “a distinct and different entity which includes non-governmental organisations and cooperative enterprises managed by a single or many owners, that includes subsidiaries or branches if one of them is mainly carried out in any economic segment or sub-segment as outlined in the size standards schedule and can be categorised as SME by substantiating the criteria stated in the size standards schedule” (Government Gazette of the Republic of South Africa, 2004). This definition categorises small business into four groups (micro, very small, small, and medium) based on the size of the firm, its turnover, and the industry. As such, SMEs basically fall under this broad definition of small businesses in South Africa. Even though the criteria for SMEs generally differ across industries, small businesses have fewer than 50 full-time employees, while medium enterprises have fewer than 200 employees in most industries except for agriculture which is capped at 100 employees.

It has been widely touted that SMEs in South Africa account for over 90 per cent of all businesses, contribute about 50 per cent of the country’s GDP, and over 60 per cent of the country’s job creation. However, many SMEs in the country do not survive long enough to make lasting contributions to the country’s development, as between 50 and 95 per cent of SMEs in the country fail within the first five years (Willemse, 2010). To ameliorate this situation, there has been growing need for research in South Africa that focusses on investigating and understanding the factors that can promote the performance and growth of the country’s SMEs (Neneh, 2016a; Sitharam and Hoque, 2016). This study’s rational for taking this discursive trend is to provide a better understanding of how the interplay between customer orientation and networking ties can foster the performance of SMEs in South Africa.

While there is growing literature from around the world on the importance of customer orientation on firm performance, research from South Africa is very limited in this domain. Researchers in South Africa have mostly focussed on examining the determinants of market orientation and its association with SME performance (Beneke et al., 2016; Dubihlela, 2013; Moyo, 2013; Neneh, 2016a). As a result, the role of customer orientation on SME performance in the South Africa is mostly implied from the market orientation literature. This limits our understanding of the role of customer orientation in South Africa given the increasing calls for studying the unique influence of customer orientations out of the composite market orientation concept (Brockman et al., 2012; Frambach et al., 2016). More so, given that studies from other countries have shown that the influence of customer orientation on firm performance is not universal (Brockman et al., 2012; Neneh, 2016a; Zhou et al., 2007), and that customer orientation can, in some cases, negatively affect performance (Solberg and Olsson, 2010; Sorensen, 2011). Building on these perspectives, it would therefore be interesting to establish this association in the context of South Africa. This accounts for the need to test H1.

In addition to the direct association between customer orientation and firm performance, there is increasing evidence that the association is contingent on other factors. One such factor could be network ties of which the interrelation with customer orientation has not been tested either in South Africa or elsewhere. Even though network ties are important moderators of the association between strategic firm capabilities and firm performance (Acquaah and Eshun, 2010; Wang and Chung, 2013), the direction of their impact differs significantly across different cultures. For example, political network ties have shown to play a vital role in firm performance in Ghana (Acquaah and Eshun, 2010; Danso et al., 2016), yet they have a negative influence in China where it is observed that the cost of maintaining political networks is more expensive than the benefits obtained from the network ties (Su et al., 2015). In South Africa, the trends might be different because political ties have been known to benefit South African entrepreneurs over the years (Madi, 2016). However, SMEs in the country have been regularly warned to build their business on rational commercial grounds instead of being over-reliant on political ties (Business Environment Specialist, 2013; Penfold, 2012). Moreover, with the current Broad-Based Black Economic Empowerment (B-BBEE) codes, SMEs can instead benefit from business networks than political networks as the B-BBEE codes force big businesses to use SMEs for sub-contracts (enterprise development) and invest in them for skills development (Gumede, 2015). In addition, evidence from South Africa indicates that entrepreneurs with business and social network ties have a higher propensity to obtain external finance (Machirori, 2012). Therefore, taking that proper implementation of customer orientation requires significant financial resources (Homburg et al., 2011; Kadic-Maglajlic et al., 2017), the interrelation between customer orientation and the network ties that facilitate access to finance would be interesting to unearth. Other studies from the African continent (Acquaah and Eshun, 2010; Danso et al., 2016) did not use social networks as a moderator. Instead, they focussed only on business, political, and community leadership ties. This as such, necessitates for the examination of H2, H3, and H3 in the South African context.

Sample and data collection

To test the aforementioned hypotheses, this study adopted a survey approach to collect data from entrepreneurs in the Mangaung Metropolitan Municipality (Bloemfontein, Botshabelo, and Thaba Nchu) in the Free State province of South Africa. Owing to the lack of a database of entrepreneurs in the region, convenience and snowball sampling techniques were adopted for this study. Convenience sample enabled the researcher to administer and collect data directly from entrepreneurs in the selected areas. Two data collectors (honours students) were recruited to handle the distribution and collection of the administered questionnaires. The researcher provided training to the data collectors on data collection processes, especially with regards to the ethical issues. Only SME owners who provided consent to willingly participate in this study were issued the questionnaires. The SME owners also provided their contact details which the researcher used to contact them to appreciate their participation in this study and also to act as a control measure to ensure that the right people completed the questionnaires. The data collectors approached SME owners directly at their place of business to elicit their participation in this study. The SME owners were also asked if they could provide referrals to other SME owners who could be willing to participate in this study. Snowball sampling method was then applied by using the referrals gotten from the contacted entrepreneurs to access their other peers and elicited their participation in this study. Based on response rates of existing SME studies in the region (Neneh, 2016a, b) it was estimated that issuing 350 questionnaires could provide a reasonable number of valid responses while ensuring that this study was conducted within the available resources. As such, a total of 350 questionnaires were administered to entrepreneurs, of which only 251 were completed and returned, yielding a 71.7 per cent response rate.

In order to reduce social desirability bias, respondents were assured of the confidentiality with which their data will be treated in addition to the anonymity with which data were collected. Additionally, respondents were clearly informed of their choice to withdraw from this study at any time in the process without any penalty. Moreover, since the questionnaire was not completed in the presence of the data collectors, but at the convenience of the respondents, any social desirability that could arise from face-to-face interaction was minimised.

Measurements

In this study, constructs were measured based on multi-item scales operationalised from prior studies. A five-point Likert scale anchored by 1 (strongly disagree) to 5 (strongly agree) was used for all main constructs in this study. Customer orientation was measured using a five-item scale taken from Brockman et al. (2012) without any changes to the items. The scale by Brockman et al. (2012) was selected because the authors based it on prior studies that had increasingly refined and validated the original customer orientation scale by Narver and Slater (1990) for applicability in SMEs. The reliability of the scale was shown to have a Cronbach’s α value of 0.86, which is slightly above the 0.82 value obtained by Brockman et al. (2012). Measures of business network ties were adopted from prior studies (Danso et al., 2016; Li and Zhou 2004), measures of political network ties were adapted from Acquaah and Eshun (2010), and measures of social network ties were extracted from Desta (2015). Business networking ties captured the extent to which the SME owners/managers interacted with their suppliers, distributors, and competitors. Three items were used to capture these interactions. The three items were the same as in prior studies (Danso et al., 2016; Li and Zhou 2004), except for the fact that this study measured the items using a five-point Likert scale as opposed to a seven-point Likert scale used in the studies. This was performed in order to standardise the scales across the different factors. Political network ties captured the association of the SME owner/manager with politicians at different levels of government operations. Instead of four items as in Acquaah and Eshun (2010), this study used three items because city council politicians and district council politicians broadly fall under local government politicians in the context of South Africa. The other two items pertaining to the regional and national government were left unchanged. The three items were measured using a five-point scale. Measures for social networking ties captured the SME owner/manager’s association with friends, family, and social associations. Three items were taken from Desta (2015) without any modification, as the items were previously validated in a similar context to this study. The Cronbach’s α values obtained for business (α=0.74), political (α=0.79), and social (α= 0.83) networking ties were all above the tolerable threshold. These Cronbach’s α values are similar to those obtained by Acquaah and Eshun (2010), but considerably lower than those obtained by Danso et al. (2016).

Firm performance is usually seen as a multidimensional construct that is often measured using a multiplicity of indicators that can be broadly classified as either financial (e.g. sales growth, net profit, and return on investment) and non-financial (e.g. market share, customer satisfaction, and employee satisfaction) performance indicators (Stam et al., 2014). In order to effectively capture performance, researchers combine both financial and non-financial indicators (Brockman et al., 2012; Danso et al., 2016; Neneh, 2016a), which was the approach used in this study. These performance indicators can be captured using either objective or subjective measurements. Although objective measures are considered to be the most preferable, researcher have widely documented the difficulty of obtaining objective performance measures (Brockman et al., 2012), especially from SME owners and managers in developing countries (Neneh and Van Zyl, 2012; Danso et al., 2016). Owing to this difficulty, this study used subjective measurements to capture performance. A five-item self-reported scale (sales growth, market share, net profit, return on investment, and return on equity) was used in measuring the SME performance. The scale was taken from Brockman et al. (2012) without modification. The respondents were asked to rate how satisfied they were with each of the performance dimensions on a five-point scale anchored by “very dissatisfied” to “very satisfied”. An acceptable level of reliability (α=0.88) was obtained for the performance, which is similar to that obtained in prior studies (Brockman et al., 2012; Danso et al., 2016). Also, this study used five control variables, namely the business age, the age of the entrepreneur, marital status, business size, and the level of education.

A factor analysis of firm performance, customer orientation, and the networking variables are presented in Table I. The items loaded into five underlying factors with an eigenvalue greater than 1. All the items loaded on their expected factors and there were no cross-loadings (i.e. items with loadings above 0.40 in more than one factor). As already indicated above, all factors had acceptable levels of internal consistency with Cronbach’s α values above 0.7.

Results

Profile of respondents

The detailed characteristics of the respondents and their businesses are presented in Table II.

The respondents were almost evenly distributed between men and women, with men making up 47 per cent and women comprising 53 per cent. This almost even distribution of gender is important as it minimises possible issues of over-representation of one gender given that gender sometimes influences performance outcomes (Danso et al., 2016; Kadic-Maglajlic et al., 2017). This is however different from other studies in South Africa that tend to have an over-representation of men in the sample (Desta, 2015; Matchaba-Hove et al., 2015; Sitharam and Hoque, 2016). Also, the majority of the respondents had a degree or lower qualification, were over 31 years of age and operated in the business services industry, and their businesses had been in existence for at least three years. This demographic profile is quite similar to other studies from South Africa (Desta, 2015; Matchaba-Hove et al., 2015; Neneh, 2016a; Neneh and Van Zyl, 2012; Sitharam and Hoque, 2016).

Results of hierarchical regression models

The results in Table III show the moderating effect of networking ties on the customer orientation to performance relationship. Three main models were assessed. Using variance inflation factor values for each of the models, it was determined that none of the models had collinearity issues.

Model 1 assessed the impact of the control variables on SME performance. Model 2, focussed on the influence of the main effects of variables (CO, BT, PT, and ST) on SME performance while controlling for the factors introduced in model 1. In model 3, all variables, as well as the interaction variable, were assessed. The results are explained based on the individual hypotheses.

The F-values for all three models were significant at the 1 per cent level showing the overall significance of the three models. Also, the introduction of both the main effects (F-change = 21.681; p<0.00) and the interaction effects (F-change=6.114; p<0.01) showed a significant increase in the variable explained by the overall model. In model 1, the business size, the age of the entrepreneur, and formal education had a significant and positive influence on firm performance. These findings are congruent with prior studies (Danso et al., 2016; Neneh, 2016b). Also, the business age had a negative association with SME performance.

H1, suggested that customer orientation had a positive relationship with SME performance. This association was examined in model 2, where it was established that customer orientation had a significant positive relationship with SME performance (β=0.509; p<0.00). Hence, H1 was supported. This concurs with prior studies that confirmed a significant positive relationship between customer orientation and SME performance (Asikhia, 2010; Dauda and Akingbade, 2010; Kirca et al., 2005; Neneh, 2016a; Pongwiritthon and Awirothananon, 2014; Smirnova et al., 2011). This finding also provides empirical support for the existing marketing literature in South Africa that has called for the need for SMEs to adopt a customer-centric approach to doing business (Beneke et al., 2016; Dubihlela, 2013; Moyo, 2013; Neneh, 2016a).

H2 proposed that business network ties will positively moderate the relationship between the customer orientation and SME performance. As shown in model 3, the interaction of entrepreneurs’ business network ties with customer orientation is significant and positive (β=0.227, p<0.00). Hence, this result supports H2. Moreover, also established in model 3 is the fact that the interaction between the entrepreneurs’ political network ties with customer orientation has no significant effect on SME performance (β=0.053, p⩾0.05). Hence, this result does not support H3, which posited that political networks ties will positively moderate the relationship between customer orientations and SME performance. The outcome for H2 supports the growing evidence from South Africa that SMEs can significantly benefit from business network ties (Desta, 2015; Machirori, 2012). On the other hand, entrepreneurs in South Africa have been cautioned to depend more on creating innovative businesses instead of relying on political ties (Business Environment Specialist, 2013; Penfold, 2012). This could possibly explain why the interrelation between customer orientation and political ties was not significant (H3) as customer-oriented firms are more likely to focus on building solid innovative business models (Brockman et al., 2012; Kirca et al., 2005; Wang et al., 2016) instead of relying on political ties like the so-called tenderpreneurs in South Africa (Madi, 2016).

Additionally, H4 argued that social network ties will positively moderate the relationship between the customer orientation and SME performance. As shown in model 3, the interaction of entrepreneurs’ social network ties with customer orientation is significant and positive (β=0.223, p<0.00). Hence, this result supports H4. This finding aligns with studies from South Africa that have shown that SME owners can depend on their social networks to bootstrap resources that can be used to improve the performance of their businesses (Desta, 2015; Machirori, 2012). Each interaction graphs for the significant associations are explained in Figures 2 and 3.

Figures 2 and 3 clearly indicate that business performance tends to increase consistently for SMEs with high customer orientation. However, the extent to which this performance increase is more pronounced in the presence of high business and social networking ties.

The interaction graph in Figure 2 shows that the relationship between customer orientation and SME performance is more positive for entrepreneurs with high business network ties, as opposed to low business network ties.

Similarly, the interaction graph in Figure 3 indicates that the relationship between customer orientation and SME performance is more positive for entrepreneurs with high social network ties, as opposed to low social network ties.

Discussion and implications

Amongst marketing and entrepreneurship academics and practitioners, customer orientation has been identified as a key focus for any business relationship to its market and a vital element for firm success. Customer orientation is a particularly important tool for small businesses to use as a source of competitive advantage in differentiating themselves from large businesses (Brockman et al., 2012). Nonetheless, motivated by the fact that there is relatively limited empirical research in this area, especially from a developing world context, this study makes several theoretical and practical implications.

The results support H1, which indicated that customer orientation has a positive relationship with SME performance, which is line with prior studies (Asikhia, 2010; Brockman et al., 2012; Dauda and Akingbade, 2010; Kirca et al., 2005; Neneh, 2016a; Pongwiritthon and Awirothananon, 2014; Smirnova et al., 2011). While there is growing support for the vital role of customer orientation in fostering firm performance, the fact that existing empirical findings have not been consistent suggesting the need for contextual studies to ascertain the performance implications of customer orientation in different settings (Kirca et al., 2005; Pekovic and Rolland, 2016; Smirnova et al., 2011; Solberg and Olsson, 2010; Sorensen, 2011). As such, this study is not simply another replication of the positive customer orientation to performance association, but a means to ascertain the performance implication of customer orientation in the South African setting. This is particularly important in this context, as prior research in South Africa has mostly focussed on market orientation as a whole, without isolating the unique role of customer orientation as suggested by other researchers (Brockman et al., 2012; Frambach et al., 2016; Tang, 2014; Ziggers and Henseler, 2016). This has important theoretical and practical implications. From a theoretical perspective, the empirical support for the separate and positive influence of customer orientation on SME performance in South Africa provides a sufficient background for academics to further explore and broaden our understanding of the concept in the South African setting. For example, academics can focus on understanding antecedents of customer orientation and other interactive factors that can enhance the effectiveness of the association between customer orientation and firm performance in South Africa. From a practical perspective, SME owners and managers can concentrate their efforts on improving their customer orientation, which can be a more cost-effective strategy, as SMEs often lack the resources to implement full-blown marketing research and inter-functional coordination as suggested in field of marketing (Kadic-Maglajlic et al., 2017; Tajeddini et al., 2013). The reason for this is that focussing on customer orientation, SMEs in South Africa can deploy their limited resources to addressing core customer demands, which will result in customer satisfaction and subsequent maximisation of performance (Tang, 2014).

While it is important for SMEs to focus on customer orientation, it is imperative for SME owners and managers to understand that there is always a trade-off between increasing investments in customer orientation and the time/effort that could be invested in other areas of the businesses (Homburg et al., 2011). For example, it is a costly activity both in terms of time and money to be able to continuously gather and analyse customer needs (Brockman et al., 2012; Kadic-Maglajlic et al., 2017). However, simply understanding customer needs does not in itself increase performance as the SMEs still need to develop innovative products and services to meet the customer needs, which are also resource-intensive activities (Homburg et al., 2011; Kadic-Maglajlic et al., 2017). Consequently, there is value in understanding moderating factor that can interact with customer orientation to improve firm performance (Brockman et al., 2012; Pekovic and Rolland, 2016). It is in this light that this study proposed networking ties (business – H2, political – H3, and social – H4) as possible moderating factors of the customer orientation to performance relationship. H2 and H4 were supported, while H3 was not. The fact that business and social network ties positively moderate the customer orientation to performance relationship adds new theoretical knowledge by broadening our understanding of the network ties that can improve the effectiveness of customer orientation. The practical implication of this outcome is that by working with their businesses’ associates or depending on human and financial capital from social networks, SME owners can be able to develop innovative products to exploit opportunities arising from customer needs.

Finally, political network ties were seen to have a positive influence on firm performance, but not on the interrelation with customer orientation. The significant positive association between political ties and firm performance confirms the existing views that political ties can play a vital role in the success of a business, especially in developing countries where some business owners heavily rely on their connections with government officials and those in power to attain certain business objectives (Danso et al., 2016; Su et al., 2015; Wang and Chung, 2013). However, for a firm that requires a customer-centric approach to fostering progress, political network ties might be less desirable in increasing the potential benefits of its customer-oriented business approach.

These findings have several implications for South African SMEs, academics, and policymakers. For SMEs, a key takeaway is to reconfigure their resources to pursue a customer-oriented strategy. Current research in South Africa has called on SMEs to pursue a market orientation strategy (Beneke et al., 2016; Neneh, 2016a). However, given the resource constraint of SMEs, it is more cost effective to focus on customer orientation without the need for other market orientation aspects like inter-functional coordination, which might not be applicable to most SMEs (Kadic-Maglajlic et al., 2017; Tajeddini et al., 2013). Also, this study demonstrates another means through which business and social ties can benefit SMEs in South Africa through their interrelation with customer orientation. Some of the factors that prevent SMEs from effective implementation of customer orientation are lack of financial resources and skills (Homburg et al., 2011; Kadic-Maglajlic et al., 2017). These are two factors that have been known to impede the progress of SMEs in South Africa (Machirori, 2012; Neneh, 2016b; Sitharam and Hoque, 2016). However, South African SMEs can leverage their business and social networks for these skill and financial resources. For example, through business networks, South African SMEs can engage in B-BBEE deals that can help in skills development. Also, both social and business networks have been known to help SMEs obtain external finance in South Africa (Machirori, 2012), and this financial capital can be used for proper implementation of a customer-oriented strategy.

For academics in South Africa, the implications are twofold. First, the paper shows that need for academics to study customer orientation as a unique firm strategy capability as proposed by several researchers (Brockman et al., 2012; Frambach et al., 2016), instead of only seeing the concept as an integral part of market orientation as done in the current SME literature in South Africa (Beneke et al., 2016; Dubihlela, 2013; Moyo, 2013; Neneh, 2016a). This can be achieved by conducting studies to identify the antecedents of customer orientation among SMEs in the country, while also looking at how customer orientation can be better leveraged to improve SME performance. Second, this study showed how business and network ties could benefit SMEs, especially in increasing the effect of customer orientation on firm performance. This harmonises the current literature from the developed world emphasises that the best performance outcome of customer orientation can be obtained in combination with other strategic factors (Frambach et al., 2016; Olson et al., 2005). Thus, researchers in South Africa can continue to look for other firm strategic capabilities that can moderate the customer orientation to performance relationship as this can further improve our understanding of the phenomenon. Additionally, social networks are important for SME performance and act as a key source of financial resources for SMEs in South Africa (Beneke et al., 2016; Dubihlela, 2013; Moyo, 2013; Neneh, 2016a). However, there is limited research into social networks like stokvels that act as a vital source of financial capital for many SMEs in South Africa. Furthermore, the family embeddedness literature is highly missing in South Africa and this can provide a more profound understanding of entrepreneurs’ use of social networks in the country.

Finally, for the government, the key implication is, for developing and implementing policies, that can enable SMEs to fully develop the customer orientation capabilities and business/social network ties. The South African Government plays a vital role in providing funding to SMEs through its different initiatives. However, most of them focus on funding for start-ups. Given that customer needs are always constantly changing, providing funds tailored for market research can significantly benefit SMEs in continuously understanding customer needs. This is because it is a costly activity both in terms of time and money to be able to continuously gather and analyse customer needs (Brockman et al., 2012; Kadic-Maglajlic et al., 2017). As such, market research funding can reduce such cost for SMEs and improve the effectiveness in developing a market-oriented strategy, which is likely to significantly improve their performance. Also, government training programmes for SME owners can focus on teaching them marketing concepts associated with customer orientation, given that a study by Sitharam and Hoque (2016) revealed that many SME owners and managers in South Africa did not have formal training in marketing. Additionally, policies like the B-BBEE are meant to benefit SMEs, however, only SMEs that are able to form good business network ties with large firms might benefit the most. As such, the government should create avenues for networking between SMEs and big businesses so that many SMEs without such network ties can be able to develop them as this can benefit them in skills development, as skills are vital for implementing a customer-oriented strategy.

Conclusion

This study examined the interrelation between customer orientation, networking ties, and firm performance in a developing world context. This study contributes to the growing literature that has identified customer orientation as a unique internal strategic orientation with the capability to interact with other factors to boost the performance of businesses. This solidifies the important role of customer orientation that has mostly been implied via the multidimensional nature of market orientation.

SMEs are often known to be resource constrained, and so can be able to focus the limited resources on developing customer orientation as opposed to building all the tenets of market orientation. With the increasingly competitive nature of the business environment as a result of globalisation, SMEs today, more than ever need to increasingly find ways to ensure their sustainability. Consequently, the potential benefits from customer orientation can be very useful for SMEs in the developing world, as they can use their proximity to customers as an avenue for differentiation from large businesses and exploit niche existing market opportunities by offering superior customer value.

Moreover, this study showed that the association of customer orientation with firm performance was more positive when business and social networking ties were high, as opposed to low. This consolidates the social capital theory that has increasingly suggested the need for businesses to use their network ties to enhance their performance and well as the performance implications of networking ties on internal strategic orientations of businesses. One can, therefore, not overemphasise the need for entrepreneurial firms to develop appropriate business and social network ties, as these, when leveraged effectively, can considerably improve the competitiveness and performance of the business.

Limitations and directions for future studies

The limitations of this study are twofold. First, this study used a convenience sample which comes with several disadvantages such as sampling bias or over/under-representation of portions of the population. For example, because SMEs were selected based on convenience, the sample used in this study might not be a good representation of the characteristics of SMEs in South Africa which thus limits the generalisability of the findings. This could account for why some were not significant. For example, the fact that political network ties did not moderate the CO-performance relationship could result from the unintentional exclusion of politically connected SMEs when conducting the convenience sampling. Future studies can use sampling techniques that adopt a random approach to examine to test the hypothesis developed in this study. Second, this study used a subjective measure of firm performance which is not the optimal approach as subjective performance measures can be subject to social desirability bias. However, research over the years has suggested that subjective performance measures are a good reflection of actual performance (Frambach et al., 2016; Brockman et al., 2012) and is valuable for use in a context like South Africa where it is difficult to obtain objective performance data from SMEs (Neneh and Van Zyl, 2012). Future studies can examine the proposed association using objective performance data to ascertain the role of the interrelation of customer orientation and network ties on firm performance.

Figures

Conceptual model of the interrelation between network ties and customer orientation

Figure 1

Conceptual model of the interrelation between network ties and customer orientation

Moderating effect of business network ties

Figure 2

Moderating effect of business network ties

Moderating effect of social network ties

Figure 3

Moderating effect of social network ties

Factor analysis for performance, customer orientation and networks

Factors
Scale and items 1 2 3 4 5
1. Performance
Market share growth 0.87
Sales growth 0.83
Return on investment 0.77
Return on equity 0.66
Net profit margin 0.64
2. Customer orientation
My business objectives are driven by customer satisfaction 0.92
I make sure that my company’s competitive advantage is based on understanding customers’ needs 0.83
I closely monitor and assess my company’s level of commitment to serving customers’ needs 0.72
I ensure that business strategies in my company are driven by the goal of increasing customer value 0.67
Providing value for our customers is the most important thing my company does 0.63
3. Business network ties (networking with top managers of other firms)
Suppliers 0.89
Distributors 0.77
Competitors 0.74
4. Political network ties (networking with political leaders)
Local government politicians 0.78
provincial government politicians 0.73
National government politicians 0.67
5. Social network ties (networking activities associated with your business)
Family 0.77
Friends 0.65
Social associations 0.58
Eigenvalue 3.12 2.84 2.01 1.67 1.03
Percentage of variance 23.68 18.76 13.26 9.24 7.83
Cumulative percentage of variance 23.68 42.44 55.7 64.94 72.77
Cronbach’s α 0.88 0.86 0.74 0.79 0.83

Characteristics of the respondents

Characteristics of firms Percentage Characteristics of the business owners Percentage
Age of firms (years) Marital status
1-2 19.1 Married 52.6
3-5 29.9 Unmarried 47.4
6-10 22.7 Education
>10 28.3 No formal qualification/dropped out before high school 17.5
Number of full-time employees High School diploma (Matric) 22.8
<5 46.2 Diploma/degree 38.2
5-10 37.1 Honours/masters/PhD 21.5
>10 16.7 Age (years)
Industry <20 12.4
Agriculture/manufacturing/real estate/technology 12.4 21-30 22.7
Business services/catering/hospitality/health-fitness 35.5 31-50 46.2
Retail and consumer services/crafts/others 52.1 >50 18.7

Hierarchical regression on moderating role of network ties on the customer orientation-performance relationship

Model 1 Model 2 Model 3
Factors β t-value β t-value β t-value
Control variables
Constant 19.786** −1.161 −1.317
Business age −0.192 −2.918** −0.096 −1.464 0.026 0.355
Business size 0.307 4.577** 0.248 3.703** 0.302 4.481**
Age of entrepreneur 0.156 2.519* 0.011 0.181 −0.097 −1.451
Marital status 0.075 1.359 0.175 3.358** 0.120 2.304*
Education 178 2.503* 0.108 1.658 0.066 1.013
Main effects
H1: customer orientation (CO) 0.509 5.842** 0.514 5.874**
Business ties (BT) 0.197 2.699** 0.247 3.317**
Political ties (PT) 0.189 3.263** 0.270 4.479**
Social ties (PT) 0.278 4.257** 0.272 4.255**
Interaction effects
H2: CO×BT 0.227 3.284**
H3: CO×PT 0.053 0.803
H4: CO×ST 0.223 3.724**
Model parameters
R2 0.348 0.495 0.531
Adjusted R2 0.322 0.474 0.506
F-value (sig.) 21.681 (0.00)** 23.540 (0.00)** 20.677 (0.00)**
R2-change 0.147 0.036
F-change 21.681 (0.00)** 6.114 (0.00)**
Max VIF 1.888 1.962 2.186

Notes: *,**Significant at the 5 and 1 per cent levels, respectively

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Corresponding author

Brownhilder Ngek Neneh can be contacted at: brahilder@gmail.com