Nonlinear and dynamic effects of responsive and proactive market orientation: A longitudinal investigation

- First study to investigate the nonlinear and dynamic effects of RMO and PMO on firm performance.
- Development of new theoretical mechanism that explains the effects of RMO and PMO during the current period and beyond.
- Finding that RMO has an inverted-U-shaped contemporary effect and carry-over effects from prior years
- Finding that PMO does not have carry-over effects but has a U-shaped effect on firm performance in the current period.
- Resolution of some of the tensions in the MO literature based on panel data of 504 observations collected over nine years.

Business practice and the extant literature widely acknowledge that market orientation (MO) is a key driver of firm performance, yet some studies question its benefits. Research that has tried to clarify these inconsistencies by investigating the dimensions of responsive MO (RMO) and proactive MO (PMO) has found conflicting results. This study seeks to resolve the debate by identifying the total effects of RMO and PMO on firm performance, thereby helping to extend the understanding of the differing performance consequences of RMO and PMO. The total effects of the two kinds of MO are composed of the contemporary nonlinear relationships between RMO and PMO and firm performance, along with the carry-over effects of the previous levels of RMO and PMO, which may also be nonlinear. Based on objective performance measures and panel data of fifty-six US companies observed over 9 years, we find support for an inverted-U-shaped contemporary effect of RMO that suggests that a medium level of RMO is most beneficial for firms. In contrast, the contemporary effect of PMO on firm performance is U-shaped, so a high level of PMO provides the most promising competitive advantage. Our empirical results only partially support our hypotheses regarding carry-over effects. While the results confirm the proposed inverted-U-shaped carry-over effects of RMO, PMO exerts no carry-over effects, so firms must instead continuously implement PMO at high levels in order to benefit profits in a sustainable way and avoid losing ground to competitors.