Measuring Firms’ Market Orientation Using Textual Analysis of 10‐K Filings
| Date | 01 October 2020 |
| DOI | http://doi.org/10.1111/1467-8551.12391 |
| Author | Terry Harris,Panayiotis C. Andreou,Dennis Philip |
| Published date | 01 October 2020 |
British Journal of Management, Vol. 31, 872–895 (2020)
DOI: 10.1111/1467-8551.12391
Measuring Firms’ Market Orientation
Using Textual Analysis of 10-K Filings
Panayiotis C. Andreou ,1,2 Terry Harris2and Dennis Philip 2
1Cyprus University of Technology,Department of Commerce, Finance and Shipping, 115 Spyrou Araouzou
Street, 3036 Lemesos, Cyprus 2Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK
Corresponding author email: dennis.philip@durham.ac.uk
Market-oriented firms are committed to understanding their customers’ evolving expec-
tations and meeting their needs, while outwitting competitors, to achieve a sustainable
competitive advantageand improve performance. This paper develops a measure for mar-
ket orientation based on textualanalysis of 10-K filings. It utilizes a bag-of-words method
to identify relevant information fromthe management’s disclosure that underpins the cor-
porate traits measured by the MKTOR scale, a renownedsurvey instrument for measur-
ing market orientation. Unlikeprevious studies that rely extensively on small-scale survey
data to estimate market orientation, this novelmethod leverages instead on the use of big
public archival data. We empirically establish strong construct validity for the measures
of market orientation and its components, namely customer orientation and competitor
orientation. Furthermore, our analyses demonstrate that firms’ performance is positively
aected by market orientation and that this relationship is more pronounced in compet-
itive environments. We contribute to the literature by developing an elegant measure of
market orientation, which allows for conducting large-scale longitudinal analyses of its
antecedents and consequences.
Introduction
Market-oriented firms endeavour to create supe-
rior value for customers by understanding their
evolving needs and catering to their expectations,
while remaining aware of the capabilities and tac-
tics of their competitors, to achieve a sustainable
competitive advantage (Narver and Slater, 1990;
Slater and Narver, 1998). A burgeoning literature
in the marketing and management fields exten-
sively investigates the relationship between market
orientation and firm performance, albeit exhibit-
ing a variation in findings regarding the magnitude
and direction of this relationship.1Predominantly,
1A non-exhaustive list of studies thatempirically consider
this relation includes Agarwal, Erramilli and Dev (2003),
Ellis (2006), Hult, Ketchen and Slater (2005), Jaworski
and Kohli (1993), Korschun, Bhattacharya and Swain
(2014), Najafi-Tavani, Sharifi and Najafi-Tavani (2016),
Narver and Slater (1990), Slater and Narver (1994, 2000)
and Tajeddini and Ratten (2017).
to measure market orientation, most studies rely
on data gathered through survey instruments,
such as the renowned MKTOR scale of Narver
and Slater (1990). Nevertheless,field-work surveys
must maintain a narrow focus to be eective, typ-
ically rely on a single point-in-time sampling and
are frequently based on small samples of inter-
views (Kirca, Jayachandran and Bearden, 2005).
Conversely, our study demonstrates howmarket
orientation can be measured using textual analysis
from management’s disclosure in 10-K filings,
thereby for the first time enabling large-scale
longitudinal analyses of its antecedents and
consequences.2We detail this novel measurement
2Managers from US publicly listed companies are re-
quired to file 10-K reports each year with the US Secu-
rities and Exchange Commission (SEC). 10-Ks’ verbiage
features a detailed review of the firm’s business and the
market it operates in, the risk factors it faces and the fi-
nancial results of the fiscal year. The SEC requires pub-
lic companies to disclose meaningful, comprehensive and
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Measuring Market Orientation Using Textual Analysis 873
approach that operationalizes market orientation
using archival data, and assess the generalizability
of its relationship with performance, based on
a large sample of US publicly listed firms with
58,595 firm-year observations in the period from
1994 to 2017. In this respect, inter alia, our study
contributes to the body of knowledge surrounding
the use of big data to understand firms’ processes
and decision-making. As such, managerial teams,
strategists and business consultants can benefit
from exploiting public archival information in
10-K filings for gauging their competitors’ capa-
bilities and operating philosophies. At the same
time, even to date there are calls for conducting
more research on the direct link between market
orientation and firm performance (Gupta, Atav
and Dutta, 2019). In this respect, our measure
widens the scope for researchers to scrutinize
big data for measuring latent firm characteristics
and testing theoretical relationships by relying on
large-scale empirical analyses.
To operationalize our measure, we develop bags
of words comprising core and contextual words
that underpin the corporate traits measured bythe
MKTOR scale developed by Narver and Slater
(1990). The core words are word stems appearing
in the MKTOR that characterize the two most
important behavioural components of market ori-
entation, namely customer orientation and com-
petitor orientation. The contextual words are word
stems appearing in the MKTOR in combination
with the core words. These words are used in the
MKTOR in a context that elucidates the emphasis
that a firm is placing on traits that shape its market
orientation. Our measure of market orientation is
based on the proportion of times that certain core–
contextual word pairs occur in the 10-K filings. To
the best of our knowledge, this paper for the first
time develops a bag-of-words-based textual mea-
sure by utilizing contextual information in widely
used survey instruments.
We assess the construct validity of our mar-
ket orientation measure by testing the following
relationships, which strongly vindicate the accu-
racy of the measure. Since market orientation re-
flects traits that shape a firm’s culture, we expect
accurate financial information to market participants.
Managers are held liable and accountable before the law
if they provide false or misleading information in the
disclosures.
it to be persistent in time (Deshpand´
e, Farley and
Webster, 1993; Narver and Slater, 1990). Further,
we argue that firms with greater levels of market
orientation should have greater responsiveness to
customers’ needs and preferences, thereby achiev-
ing greater levels of customer satisfaction (Kohli
and Jaworski, 1990). In addition, this relation
should primarily be driven by the customer ori-
entation component, since this component reflects
the emphasis firms place on understanding and
catering to their customers’ evolving expectations.
We also argue that greater levels of market ori-
entation should characterize firms facing greater
levels of market concentration. Further, this rela-
tion should primarily be driven by the competi-
tor orientation component, since this component
features the level of emphasis that firms place on
a course of action directed at outwitting competi-
tors and gaining a sustainable competitive advan-
tage (Jaworski and Kohli, 1993; Slaterand Narver,
1994). The findings of our empirical analysis en-
dorse the above expectations and confirm the va-
lidity of the measure.
Following the validation of the measure, we
study the key question: what is the eect of firms’
market orientation on performance? This is impor-
tant to investigate empirically for several reasons.
The seminal studies posit that market orientation
relates to the forceful pursuit of customer satisfac-
tion and competitiveness through the processes of
acquiring and evaluating market information in
a systematic and anticipatory fashion (Kohli and
Jaworski, 1990; Narver and Slater, 1990). As such,
market orientation enhances the firm’s ability to
adapt to newer developments in a much more
timely and ecient manner within the competitive
market environment. Given the extensive work in
this area, the predominant view is that marketori-
entation is positively associated with performance
(Ellis, 2006; Hult, Ketchen and Slater, 2005;
Jaworski and Kohli, 1993; Kiessling, Isaksson and
Yasar, 2016; Korschun, Bhattacharya and Swain,
2014; Najafi-Tavani, Sharifi and Najafi-Tavani,
2016; Narver and Slater, 1990; Slater and Narver,
1994; Tajeddini and Ratten, 2017). Conversely,
some studies find potential mediating eects that
counteract this positive relationship (Agarwal,
Erramilli and Dev, 2003; Chan and Ellis, 1998;
Gray et al., 1998; Greenley, 1995; Harris, 2001;
Langerak, 2003). The mixed evidence therefore
begs the important question as to whether market
orientation is beneficial or detrimental to firms’
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