The most perplexing question of business organizations today is how to get and sustain competitive advantage. The dependable answer to this question, as Peter Drucker stated, is defining a business in terms of customer values and designing innovation activities to create those values. Hence, market orientation and innovation are the two complementary pillars of success. This research, therefore, develops a conceptual model to examine how 1) internal factors influence the development of market orientation and innovation; and 2) market orientation and innovation impact on the competitiveness of manufacturing businesses in Ethiopia, a least developed country in sub-Sahara Africa. Market and innovation orientations have been broadly recognized as performance antecedents in the strategic management literature. The performance impact of these orientations is extensively examined in the developed countries’ business environments. Studies also indicate that market and innovation orientations affect performance in situations where the competitive intensity is high. However, literature lacks adequate empirical evidence to determine whether market and innovation orientations have positive impact on performance in the least developed countries’ economies; it is also deficient with the required literature to confirm whether the impact of these orientations on performance is minimal in the least economically developed environment where competitive intensity is low. The other shortcoming in the strategic orientation literature is the heterogeneity in defining and measuring market orientation constructs. Market orientation is defined from behavioral, cultural, capability, and integrationist perspectives. Despite the contention on what the integrationist perspective suggests, very limited number of studies applies such comprehensive conceptualization. The study, therefore, is designed to fill these voids in the literature by designing a comprehensive model and testing it in the least developed context. From practical point of view, following the current encouraging economic growth of Ethiopia, changes have been observed on the competitiveness of the business environment. In response to the growing competitiveness of the business environment, organizations should adopt relevant orientations and practices; i.e., practices recognized as appropriate to the western environment. Hence, testing the validity of the sound managerial orientations and practices, based on scientifically accepted procedure in the least developed context, is mandatory before making use of them. The research is conceptually rooted in the argument of resource based view and its extension- the dynamic capability. Based on this, the study a) models strategic orientations and managerial practices as capabilities that affect competitive advantage of firms; b) reviews literature on market orientation, innovation, marketing capabilities, organizational culture, and managerial practices to theoretically validate the proposed relationships in the conceptual model; and c) develops eight main hypotheses for empirical verifications. The investigation pursues positivist paradigm. It applies quantitative research design where the study tests the proposed relationships quantitatively by analyzing 204 usable responses (n=204) of the selected manufacturing companies. The findings show that 1) market orientation and innovation have positive and significant effect on competitiveness of the manufacturing companies in Ethiopia; 2) the level of market orientation and its impact on competitiveness is influenced by sound employee training program, market based reward system, effective marketing program, and organizational culture that emphasize change, entrepreneurship, and achievement orientation; 3) the level of innovation and its impact on competitiveness is influenced by effective marketing program and organizational culture that emphasize change (i.e., adhocracy culture) and control over the change process (i.e., the hierarchy culture); 4) the effect of market orientation and innovation on competitiveness is stronger for the younger and larger organizations when compared to the older and smaller ones, respectively. Based on these findings, the study suggests that managers, beyond ensuring the smooth running of day-to-day operations, should focus on marketplace changes by adopting and developing relevant orientations (i.e., market and innovation orientations) via improving the culture, structure, and other relevant capabilities. / Business Management / D.B.L.

The main objective of this study was to explain top management perceptions of industry and firm effects on firm performance through the mediation of competitive advantage in financial service firms operating in a regulated industry in a developing Ethiopian economy. The resource-based and industry-based views, constituting the two main schools of thought explaining performance variations among firms, were used as theoretical foundation of this study. Porter’s five-forces framework was used during this process. The researcher employed a post-positivist paradigm using a cross-sectional survey design. A total of 27 financial service firms (15 banks and 12 insurance firms) that had functioned for three and more years were selected for the study. The unit of analysis was ‘firms’, while respondents were top level managers with a total target population of less than 300. A census survey rather than a sample survey was undertaken. A total of 287 survey questionnaires were distributed (banks 180 and insurance industry 107), of which 215 were collected from 26 firms (15 banks and 11 insurance firms). Of the questionnaires 206 were properly completed leading to a valid response rate of 71%. These were used for the data analysis. A variance-based PLS-SEM approach, which is relevant to evaluate the predictive effects of the industry and firm factors on firm performance, was used to explain the hypothesized model using SmartPLS 2.00 software as well as the Statistical Package for the Social Sciences program. The assessment of the hypothesized model indicated that the R2 result on firm performance variance due to the combined industry effects and firm effects was 39%, indicating a moderately significant predictive accuracy of the model. The relative direct effect size (f2) of the industry on firm performance was 3%, while firm had a direct effect size of 2%, which was small. The combined indirect relative predictive accuracy of industry and firm effect sizes on firm performance through competitive advantage was high at 27%. This was driven by the relative substantial predictive power of firm effect on competitive advantage (f2 = 65%). Furthermore, the predictive capability (Q2) assessment result of the model indicated that both industry and firm effects had a 23% relevant predictive power on firm performance. The direct relative measure of the predictive relevance (q2) value of industry effect (q2 = 0.02) on firm performance was relatively higher than that of the firm effect (q2 = 0.01). Competitive advantage had a relative predictive power of 0.12, which was driven by the direct relative predictive capability of firm effect (q2 = 0.25) on competitive advantage. The overall assessment results of the structural model revealed that the model had satisfactory statistical power to predict the hypothetical research model. The hypothesis that industry effects had an influence on the performance of financial service firms was not supported. The result indicated that industry effects had a positive and non-significant relationship with firm performance, which points to competitiveness in the financial services industry. These results were achieved against the tenets of Porter’s five-forces framework. The hypothesis that firm effects had a positive predictive effect on firm performance was also not supported, indicating that resources and capabilities do not directly lead to improved firm performance. The direct effect of competitive advantage on firm performance was supported. The mediating effect of competitive advantage between industry effects and firm performance was not significant, while the mediation of competitive advantage between firm effects and firm performance was highly significant. The findings of this study revealed that firm effects were relevant through the mediation of competitive advantage in explaining performance variances among financial service firms, operating in a strictly regulated industry. The relative predictive power of firm effect on competitive advantage was high. Firm resources, particularly intangible resources and dynamic capabilities, are the key predictors of firm performance indirectly through the mediation of competitive advantage. Such an advantage may not last long given the excessive supervision and regulations that exist and the fact that firms are being dictated to by the government to comply with its strategic direction as opposed to pursuing their own firm specific strategies. Such practice could encourage competing financial firms to converge and pursue similar types of strategies and encourage imitations to gain short term competitive advantage and superior performance. This finding contradicts the fundamental premise of the resource-based view and firm heterogeneity even though it tentatively supports the argument made by Foss and Knudsen (2003) who argue that heterogeneity is not a necessary condition to gain competitive advantage and superior firm performance. Financial service firms should not only develop and manage their resources and capabilities, but they should also monitor the changes in the industry. This finding highlights the fact that firms can create competitive advantage and enjoy superior performance in a closed and regulated industry. The findings of this research make a significant contribution to the existing debate on the resource-based and industry-based views in explaining the causes of firms’ performance variations specifically in a regulated environment. / Business Management / D.B.L.