A Study of the Effect of Market Orientation on Malaysian Automotive Industry Supply Chain Performance

The liberation of world trade has significantly reduced Malaysian government protectionism of its national automotive industry. Local manufacturers have to strive for excellence in order to be able to compete in a business world that is dominated by a few big players. They cannot compete without excellent organizational behavior and culture. One of the important aspects of organizational culture and behavior is market orientation. A company’s ability to win orders depends on how much it and the other companies in the supply chain are able to understand, translate and act upon customer requirements. This study is devoted to analyzing the relationship between market orientation, supply chain management, and the supply chain performance of all the industry’s supply chain players. It also examines the mediating effect of supply chain management. Data were collected from manufacturers and suppliers in the automotive industry in Malaysia through questionnaires. Structural Equation Modeling (PLS-SEM) was employed to test the above relationship. The results indicate that supply chain management mediates the relationship between market orientation and supply chain performance. However, they also show that the relationship between market orientation and supply chain performance is insignificant. This finding has a major implication for policymakers and manufacturers, as will be discussed in this paper.

Automotive industry; Market orientation; Supply chain management; Supply chain performance

in October 1982, the government has substantially protected the local industry with high import tariffs and duty on imported foreign cars. During the first few years after the launching of the first national car, Proton, the import tariffs on complete built- up (CBU) passenger vehicle were 90 to 200 percent (Segawa et al., 2014).  The tariff increased to 140 to 300 per cent in 1997. In addition two local content requirement policies (LCRPs) that have been introduced in 1980s and 1990s (i.e. the Mandatory Deletion Program (MDP) in 1980 and the Local Material Content Program (LMCP) in 1992) have successfully reduced the import of foreign automotive components (Segawa et al., 2014).  

However, under pressure from the World Trade Organization (WTO), Malaysia has been forced to reduce its protectionism. As a result, the Malaysian government has since phased out the LCRP, MDP and the LMCP. Not only in Malaysia, but the automotive industry in the whole of Southeast Asia has also pursued the same action since the late 1980s (Segawa et al., 2014). After being protected for a relatively long time (in fact the government is still protecting the industry in some ways), are the national automotive manufacturers ready to compete in the more liberal and open market and to face the tremendous challenge of competing with the major multinational vehicle assemblers and suppliers? A study by Mashahadi and Mohayidin (2015) indicates that even before the implementation of the Asian Free Trade Agreement (AFTA), there was a clear trend in Malaysia to prefer imported cars. Based on their findings, the national automotive manufacturers should continuously respond to market needs and preferences to win customer orders.

In response to the findings of Mashahadi and Mohayidin (2015), this paper examines one the fundamental aspects of the competition in the field, the level of market orientation (MO) among the players in the industry’s supply chain, in the sense of their commitment to understanding and fulfilling customer needs and requirements. A company’s ability to win orders depends on how much it understands customer requirements and is able to deploy information in various company functions in order to meet these requirements. However, in a modern competitive world, a company cannot excel alone, since it depends on the other players in the supply chain (Quang et al., 2016). All the companies in the chain need to be market-oriented. Poor market orientation among them leads to their inability to determine end market demands. This results in what has been termed as the ‘bullwhip effect’ (Wisner et al., 2014), which is defined as “demand distortion” as it moves upstream in the supply chain. This is due to the inconsistency of orders, which may be higher than sales (Lee & Billington 1992). In addition, the bullwhip effect will have adverse effects on the companies in the supply chain. For example, a manufacturer that only pays attention to its immediate order will be distorted by higher demand. Considerable additional costs will be incurred due to the unplanned procure of raw materials, insufficient capacity planning and utilization, inefficiency over time, and additional transportation costs. Other than the issue of collaboration, the other main reason for the distortion in market demand information is due to the level of market orientation of the firms or companies in the supply chain (Min et al., 2005).

Market orientation is defined by Kohli and Jaworski (1990) as “the organization-wide generation of market intelligence pertaining to customers, competitors, and forces affecting them, internal dissemination of the intelligence, and reactive as well as proactive responsiveness to the intelligence”. Firms that are highly market-oriented have the ability to provide firms with important information to help them to become more competitive in the market (Noble et al., 2002; Kirca et al., 2005). MO is also regarded as a strategic ability that results from a firm's continuous improvement process, starting from its customer responsiveness capabilities and customer sensing (Zamani et al., 2017).

Other than the definition by Kohli and Jaworski (1990), another one that is widely used in the literature is that of Narver and Slater (1990). They define MO as “the culture that most effectively and efficiently creates the behaviors for the creation of superior value for buyers”, and that it “consists of three behavioral components – customer orientation, competitor orientation, and inter-functional coordination – and two decision criteria – long-term focus and profitability”. The first of these definitions stresses that MO is behavioral, while the latter states that it is a cultural aspect. However, there is no contradiction between them, since the latter will also lead to employee commitment to fulfilling customer requirements. In general,   market orientation is regarded as generating and disseminating market intelligence, and working on the intelligence by related departments. This paper inclines to use Kohli and Jaworski’s (1990) definition of market orientation, since it has fewer issues in operationalizing the term.

An empirical study has been conducted on local car manufacturers and manufacturers of components and parts. The study analyzes the level of market orientation and its relationship with the companies’ supply chain performance. Supply chain management (SCM) has been used as the mediator between the dependent and independent variables. SCM allows the process of information sharing between its members, at tactical, operational and strategic levels, including information from the market (MO).  For example, the valuable information for market-based activities which is provided by buyers can be shared directly with suppliers. This will help companies to improve forecasting, replenishment and collaborative planning (CPFR) decisions. SCM also mediates the information, improving production and delivery information decisions. This allows partners or players to collaboratively manage the flow of decision-based activities so that they can be used to improve the quality of the decisions made by the company (Lee & Billington, 1992; Lee et al., 1997) Therefore, this study proposes that there is a strong and positive relationship between market orientation, supply chain management and supply chain performance (MO, SCM & SCP).

Although the results of the study show an insignificant relationship between MO and SCP, in themselves they are significant for policymakers and the industry. The study has potentially revealed the level of the embedded behavior and culture of the players in the national automotive industry. Since the government still has considerable interest in the local automotive industry, the results of the study may alarm the authorities; besides emphasizing technology-related issues, they also need to scrutinize the strategic behavior or orientation issues and to foster a strong market orientation among the players in the industry. Although the industry is gradually becoming more independent, little is known about the culture and behavior of the companies within it. To be able to survive and compete in the global market, policymakers and companies need to inculcate a strong market orientation among workers in the organizations. For future study, the first proposition is to include firm performance as a dependent variable. This is to ensure that supply chain performance will lead to better firm performance. The second is to acknowledge the effect of environmental uncertainty and hence to include it as a moderator. The rapid changes in the technological advancement of products and processes in the automotive industry, and the increase in customer preferences, foster environmental turbulence or uncertainty. Hence it is important to include environmental uncertainty in future studies. 

The authors wish to thank the Universiti Utara Malaysia for funding this study under the Research Generation Scheme grant (SO Code: 12120).

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