RELATIONSHIP BETWEEN ENTREPRENEURIAL ORIENTATION AND PERFORMANCE:
THE MODERATING EFFECT OF THE TASK ENVIRONMENT AMONG DUTCH AND GERMAN SMEs
OLLI ROMPPAINEN S2354802
RIJKSUNIVERSITEIT GRONINGEN Faculty of Economics & Business Small Business & Entrepreneurship
o.p.romppainen@student.rug.nl +358 40 820 1210
July 2014
1 ABSTRACT
The aim of this research is to answer the following research question: Is the firm performance of SMEs enhanced by an entrepreneurial orientation (EO), and is this relationship moderated by the forces in the task environment? In the theoretical framework, EO was conceptualized and arguments were presented in support of the positive influence of EO on firm performance. The construct of EO was defined by using three dimensions of risk taking, innovativeness and proactiveness. Environmental hostility, environmental dynamism and environmental complexity were derived as the moderating forces from the task environment. A sample of 74 Dutch and German SMEs was combined through a pre-existing dataset and through a questionnaire, which was applied for expanding the pre-existing dataset. Hypotheses were formed to suggest a positive relationship between EO and firm performance, positively moderated by environmental factors. A factor analysis and a correlation analysis were conducted to confirm the reliability of different dimensions of the EO construct and moderating variables. A multiple regression analysis was conducted to test the hypotheses. The nationality of the SMEs was used as a control variable to define the differences between performances in different task environments. This research did not produce significant results in support of EO directly enhancing firm performance. The moderating effect of environmental dynamism showed a negative relationship between EO and firm performance. The moderating effects of environmental hostility and environmental complexity were found to enhance the relationship between EO and firm performance. The findings indicate that EO positively affects firm performance when the relationship is positively moderated by the level of environmental hostility and complexity. All of the findings range from significant to highly significant. No significant differences were discovered between Dutch and German task environments. The results strengthen the consensus on the adoption of EO among SMEs: EO is an enhancing factor in terms of firm performance.
Acknowledgements: I would like to thank my supervisor, Dr. Andreas J. Rauch and my co- assessor, Dr. ir. Haibo Zhou for their feedback and suggestions during the thesis project. Their contribution in improving the quality of the research was greatly appreciated.
Keywords: Entrepreneurial orientation, risk taking, innovativeness, proactiveness, hostility, dynamism, complexity, small- and medium sized enterprises
Research theme: The effect of entrepreneurial orientation; strategies of SMEs
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1 Introduction
The relationship between entrepreneurial orientation (EO) and performance is a popular subject for scholars to conduct research. Lumpkin and Dess (2001, p. 430) state that ‘entrepreneurship writers in both the popular press and the scholarly literature have generally extolled the importance of entrepreneurial activities and often implicitly assumed a positive relationship between entrepreneurial orientation and performance outcomes. More recently, Rauch, Wiklund, Lumpkin and Frese (2009) relate the concept of environmental influence to the research domain; in environments of rapid change and shortened product and business model lifecycles, there is uncertainty over future profits from existing operations. Firms need to adjust and constantly seek out new opportunities. Therefore, firms may benefit from adopting an EO (Rauch et al., 2009).
However, the findings of past research have not been unified; some studies have found a positive relationship between EO and performance (Zahra & Covin, 1995; Wiklund & Shepherd, 2003; Wiklund & Shepherd, 2005; Keh, Nguyen & Ng, 2007), while Rauch et al. (2009) state that some studies only discover low or non-existent correlations between EO and performance. A research conducted by Hart (1992) concludes that strategies related to high EO may be associated with poor performance under certain circumstances; the usefulness of EO on firm performance is context-dependent (Covin & Slevin, 1989: Lumpkin & Dess, 1996). However, in general terms the majority of past research on the influence of EO to performance implicitly assumes through differing arguments that EO is beneficial to performance (Rauch et al., 2009; Li, Huang & Tsai, 2009; Wiklund & Shepherd, 2011).
Lumpkin and Dess (1996) state that environmental and industry factors influence the relationship between EO and firm performance. Environmental factors, such as the level of dynamism or hostility, are hypothesized to have an influence on firm performance. A contingency approach in researching the effects of EO on firm performance has often been adopted (Wales, Gupta & Mousa, 2013) in order to achieve a more thorough understanding in which kind of environments the EO is more useful.
This research is primarily interested in discovering how EO is affecting the firm
performance, and how this relationship is moderated by environmental factors. Data is gathered
through a questionnaire consisting closed questions related to conceptualizations of EO, firm
performance and the characteristics of the firm’s task environment. The task environment in this
study is formed from the level of environmental hostility, the level of environmental dynamism and
the level of environmental complexity; the importance of external factors should not be overlooked
(Lumpkin & Dess, 1996).
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2 Research question
The aim of this research is to find out whether a positive relationship between entrepreneurial orientation and performance can be found among Dutch and German SMEs.
As mentioned in the introduction, previous research has found evidence for EO having a positive effect on performance. While a meta-analysis by Rauch et al. (2009) suggests a moderately large correlation between EO and performance, it is also stated that the results are affected by both cultural contexts and environmental factors. Wiklund and Shepherd (2005) support this view by stating that a configurational approach involving environmental characteristics might result in greater insight; previous studies have highlighted the importance of the two-way interaction between EO and performance, while environmental characteristics have been largely ignored.
Lumpkin and Dess (1996; 2001) also suggest that external factors may moderate the relationship between EO and performance. Relying solely on the main relationship between EO and performance thus provides an incomplete understanding on SME performance (Wiklund &
Shepherd, 2005). The expected positive effect of EO on performance would therefore be moderated by environmental factors; the factors in this context are environmental hostility, environmental dynamism and environmental complexity (Lumpkin & Dess, 1996).
Therefore, our research question is the following:
Is a firm’s entrepreneurial orientation (EO) positively influencing firm performance, and how this relationship is moderated by environmental factors?
From a theoretical perspective, this research is looking to provide additional evidence for the effect of EO to firm performance. There is considerable variance in the reported relationships between EO and firm performance, and clarifying the extent to which the results replicate across different task environments contribute to future research and help with the generalizability for theorizing about entrepreneurship (Rauch et al., 2009).
From a managerial perspective, this research provides guidelines for entrepreneurs for operating in different task environments. The research is looking to add to existing knowledge on how task environment moderates the usefulness of the EO construct in terms of firm performance.
Entrepreneurs may reflect on the results and adjust their business strategy accordingly, should they
desire to alter their approach.
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Figure 1. Conceptual framework
ENTREPRENEURIAL
ORIENTATION PERFORMANCE
ENVIRONMENTAL FACTORS
Environmental hostility
Environmental dynamism
Environmental complexity
+
H1H2
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3 Literature review
Entrepreneurial processes represent the methods, practices and decision-making styles managers use to act entrepreneurially; the dimensions of autonomy, innovativeness, risk taking, proactiveness and competitive aggressiveness have been useful for characterizing and distinguishing these processes (Lumpkin & Dess, 1996). These processes can be described as a firm’s entrepreneurial orientation (EO). Wales et al. (2013, p. 357) claim the EO construct is
‘widely considered to be a cornerstone of the literature on firm-level entrepreneurship’.
Entrepreneurship, however, is not represented by these dimensions. Lumpkin and Dess (1996, p. 136) define new entry as the central idea underlying the concept of entrepreneurship; ‘new entry can be accomplished by entering new or established markets with new or established goods or services’. Burgelman (1983) furthers the definition by describing new entry as engaging entrepreneurship with a new venture through a new firm or an existing firm, or through intrapreneurship. Thus, new entry explains what entrepreneurship consists of, while EO describes the processes and activities leading to new entry (Lumpkin & Dess, 1996).
Rauch et al. (2009, p. 763) summarized the concept of EO by stating that ‘EO may be viewed as the entrepreneurial strategy-making processes that key decision makers use to enact their firm’s organizational purpose, sustain its vision and create competitive advantage(s)’. Covin and Miller (2014) conclude that in a practical sense, new entry and EO are inseparable constructs; new entry is implied by EO and potentially driven by different leading processes. Broadly speaking, EO can be described as the methodology on how firms act upon opportunities or how firms conduct activities that lead to new entry (Miller, 1983; Lumpkin & Dess, 1996).
The EO construct is a firm-level phenomenon and should not be applied on the individual level; the entrepreneur is regarded as a firm (Lumpkin & Dess, 1996; Covin & Miller, 2014). In their qualitative review of empirical EO literature, Wales et al. (2013) mention the construct of EO as comparable to other concepts in entrepreneurship literature, such as corporate entrepreneurship (Zahra, Jennings & Kuratko, 1999) and small business orientation (Runyan, Droge & Swinney, 2008). While these constructs relate to activities internal to the firm, such as intrapreneurship and the business owner’s emotional attachments to the firm, EO relates to the strategic posture (Covin &
Slevin, 1989) of the firm as a whole. Lumpkin and Dess (1996) summarize (as cited in Wales et al., 2013, p. 361) by stating that ‘EO allows for distancing the intentions and attitudes of key individuals within the firm from the firm’s overall proclivity towards entrepreneurship’
Miller and Friesen (1983) state the entrepreneurially orientated firm can be evaluated in
terms of its ability to innovate and exploit environmental opportunities while containing
environmental threats. Lumpkin and Dess (1996, p. 144) state that ‘firms with an entrepreneurial
orientation are often typified by risk-taking behavior, such as incurring heavy debt or making large
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resource commitments, in the interest of obtaining high returns by seizing opportunities in the marketplace’.
Conceptualization of EO
In order to conduct research about the effect of EO, the dimensions of the construct require conceptualization. This research applies the conceptualization of strategic posture by Covin and Slevin (1989).
More recent research (Wiklund & Shepherd, 2003; Hughes & Morgan, 2007; Rauch et al., 2009) has evolved the view on EO to reach a consensus that entrepreneurial orientation mainly consists of three dimensions: innovativeness, proactiveness and risk taking. These dimensions have been identified as the main ingredients of EO and have been consistently used in research and literature (Rauch et al., 2009: George & Marino, 2011; Wales et al., 2013). Before 2011, 98 empirical research articles (Wales et al., 2013) applied the dimensions of innovativeness, proactiveness and risk taking as the conceptualization of EO. Covin and Slevin (1989) propose these three dimensions could be aggregated together in order to evaluate the firm’s overall level of EO. These dimensions are aligned with the popular conceptualization of an entrepreneurial firm by Miller (1983), who states that an entrepreneurial firm engages in product market innovations, undertakes risky ventures and is first to develop proactive innovations; a firm operating with a high EO thus possesses the dimensions of risk taking, innovativeness and proactiveness. Further justification for these dimensions is provided by Wales et al. (2013, p. 359), who classify the source articles, Miller (1983) and Covin and Slevin (1989) respectively, as ‘classic’ publications in the entrepreneurship literature.
The concept of EO was initially introduced as a unidimensional construct (Miller, 1983).
Later research (Covin & Slevin, 1989; Lumpkin & Dess, 1996; Rauch et al., 2009) has gradually evolved the concept of EO; currently EO is largely considered as a multidimensional construct.
Wales et al., (2013) support this statement by claiming the use of a multidimensional construct in research has increased in recent years. Thus, a firm could be entrepreneurial without achieving high levels on all the dimensions of EO (Edmond & Wiklund, 2010).
The three dimensions mentioned earlier often vary independently instead of in relation with
each other (Lumpkin & Dess, 2001; Edmond & Wiklund, 2010), suggesting the usefulness of EO is
dependent on the organizational or environmental conditions under which the strategic decisions are
made. Kreiser, Marino, Dickson and Weaver (2010) conducted a study of 1 048 firms in six
countries to assess whether differences can be discovered in the propensity for risk taking and
proactiveness in SMEs in different countries, in relation to the institutions representative of national
culture. The results of the research suggest significant differences in levels of risk taking and
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proactiveness between countries. These differences are linked to the unique attributes of the institutional environment. The results of the research support the claims of Lumpkin and Dess (2001); the effect of EO depends on environmental factors and the dimensions of EO vary independently of each other.
The selection of these dimensions is supported by Rauch et al. (2009, p. 761), who state that
‘the development of a cumulative body of knowledge has been limited and slow because researchers fail to build upon each other’s results and because measurements of key variables are typically weak.’ George and Marino (2011) further stress the importance of construct validity by stating that studies on EO have defined and measured constructs differently, and consequently theory building between studies is made more complicated; the prospects of enhancing our knowledge base are thus limited by varying constructs.
Despite the growing popularity of a multidimensional approach, this research is applying a unidimensional conceptualization of EO. There are a couple justifications for the choice. First, this research is looking to add to the existing knowledge over the effects of EO as a unidimensional construct. Second, as can be observed later in the methodology section, the relatively small sample size of this research will be more efficiently applied by analyzing a unidimensional construct.
Risk taking
In the early literature of risk taking, Liles (1974) proposes that in any case, the entrepreneur risks financial and psychic well-being, along with career opportunities and family relations; the potential entrepreneur should carefully analyze the risks associated and then determine whether or not the risks are worth undertaking. As can be seen from the questionnaire, however, the risk taking factor of this study is considered as a construct in the organizational level (Miller & Friesen, 1984), not a construct in the individual level. Therefore, definitions of risk taking referring to the organizational level construct are more viable in this research.
Risk taking involves bold actions by venturing into unknown markets or committing significant resources to ventures in uncertain environments, where the error cost can be very high or the outcomes are unpredictable (Lumpkin & Dess, 2001; Wiklund & Shepherd, 2003; Rauch et al., 2009).
Risk taking generates high levels of outcome uncertainty and firms must have tolerance for
ambiguity in strategic situations (Kreiser et al., 2010). Dew, Sarasvathy, Read and Wiltbank (2009)
state the risk taking properties of SME managers differ and are related to the perception of
affordable loss, which influences entrepreneurial choices. Begley and Boyd (1987) claim the
relationship between risk taking and firm performance is curvilinear; highest levels of performance
are reached with moderate levels of risk taking.
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Previous research on the effect of risk taking on performance has provided ambiguous results. Covin and Slevin (1989) argue that firms operating in benign environments are well advised to steer clear from taking risks, as often the risks have an adverse effect on firm performance. Risk taking can have negative or positive effects on performance; the effect is context-dependent (Wiseman & Catanach, 1997; Wiklund & Shepherd, 2005).
In their research of Icelandic SMEs, Lechner and Gudmundsson (2014) discovered a negative and a significant effect between risk taking and performance. Naldi, Nordqvist, Sjöberg and Wiklund (2007) studied Swedish family firms; the findings indicate that risk taking has a negative effect on performance in family firms. A research by Tan (2001) studied Chinese entrepreneurs; the results show that entrepreneurs adopted a strong tendency towards risk taking in environments depicted by dynamism and complexity. These results strengthen the claims of Wiseman and Catanach (1997) of risk taking being related to the context where the firm is operating in.
Innovativeness
Hughes and Morgan (2007, p. 652) define innovativeness as an approach ‘embracing and supporting creativity and experimentation, technological leadership, novelty and R&D in the development of products, services and processes’. According to Covin and Miller (2014, p. 15), innovativeness can be appropriately conceptualized as ‘an ability to produce innovations’, and the strength of the ability is typically assessed through the existence of innovation process outcomes such as new product introductions. Innovativeness may manifest itself in several forms; the level of innovativeness may range from simple experimentations with products and processes to radical transformations that cause technological discontinuities (Lumpkin & Dess, 1996; Garcia &
Calantone, 2002).
A literature review by Garcia and Calantone (2002, p. 113) divides innovativeness into two separate perspectives: macro and micro perspectives. From a macro perspective, innovativeness is
‘the capacity of a new innovation to create a paradigm shift in the science and technology and/or
market structure in an industry’. From a micro perspective, innovativeness is ‘the capacity of a new
innovation to influence the firm’s existing marketing resources, technological resources, skills,
knowledge, capabilities or strategy’. These perspectives relate to product innovativeness, which is a
distinct construct from firm innovativeness. Firm innovativeness is defined as the propensity to
innovate or develop new products (Garcia & Calantone, 2002). This research is interested in the
firm innovativeness construct, as 1) the innovativeness of a product may not truly reflect the level
of firm innovativeness, and 2) a highly innovative product may not imply a highly innovative firm
(Garcia & Calantone, 2002). Therefore, it is more viable to measure firm innovativeness to assess
9 the effect of EO on firm performance.
Innovativeness requires an investment of resources and innovation increases uncertainty due to the risks involved (Covin & Slevin, 1991). However, since the early literature (Schumpeter, 1935) on the effects of innovativeness, it is argued that both the introduction of new products and the continuous improvements of existing products lead to growth and development. Regarding EO, innovativeness is an important dimension as it reflects a firm’s proclivity in pursuing new opportunities (Lumpkin & Dess, 1996).
Recent research not included in the meta-analysis also discovered a positive relationship between innovativeness and performance. A research by Lechner and Gudmundsson (2014) discovered a positive and a significant effect between innovativeness and performance.
Proactiveness
Proactiveness is described as ‘an opportunity-seeking, forward-looking perspective characterized by the introduction of new products and services ahead of the competition and acting in anticipation of future demand’ (Rauch et al., 2009). Miles and Snow (1978) state proactiveness reflects the behavior of a firm with regard to participation in emerging industries, constant search for market opportunities and experimentation with potential responses to the requirements of the changing environment. A characteristic of proactiveness, especially demonstrated by marketplace leaders, is the ability to shape the environment (Lumpkin & Dess, 2001).
Proactive firms possess the desire to pioneer, lead rather than follow, and capitalize on emerging opportunities (Lumpkin & Dess, 1996; Wiklund & Shepherd, 2005). Proactive SMEs can utilize first-mover strategies in order to gain competitive advantages over rival firms (Lieberman &
Montgomery, 1988). Venkatraman (1989) suggests that not only is proactiveness related to the search for new opportunities and the introduction of new products and brands ahead of competition, but proactiveness is also related to eliminating processes that have reached their mature or decline stages in their life cycle. Due to the emphasis on initiating activities, proactiveness is closely related to innovativeness and the two constructs are likely to covary with each other (Lumpkin & Dess, 1996).
Lumpkin and Dess (2001) conducted a research of 94 firms on how proactiveness affects
firm performance. The results of their research showed that proactiveness has a significant positive
effect on sales growth, return of sales and profitability. The authors (2001) also mention that the
stage of industry life cycle has an influence on the effect of proactiveness; the performance of firms
with a proactive orientation was enhanced when the firms were in the early stages of the industry
life cycle.
10 The relationship between EO and performance
In their meta-analysis of the relationship between EO and performance, Rauch et al. (2009) analyzed 51 separate studies and discovered a moderately large correlation between EO and performance. Edmond and Wiklund (2010) conducted a literature review of more than a hundred empirical studies. In a more collective view, the literature review reached three areas of agreement:
1) EO typically has a positive effect on firm performance,
2) The measurement of EO is typically carried out using the scale developed by Miller (1983);
this scale was later refined by Covin and Slevin (1986; 1989), and
3) The measurement instrument is technically sound and has predictive, discriminant and convergent validity.
Wiklund and Shepherd (2003, p. 72) state that ‘a high EO provides businesses the ability to find and/or discover new opportunities that can differentiate them from other firms and create a competitive advantage’. Businesses adopting a high EO can target premium market segments, charge higher prices and act in the market ahead of competitors, increasing their performance in the process (Zahra & Covin, 1995).
Firms pursuing high EO face decisions concerning risk taking and the allocation of scarce resources; risk taking has a potential downside to it and the committed resources could be applied elsewhere more effectively (Rauch et al., 2009). However, generally the past research has shown a positive relationship between EO and performance (Rauch et al., 2009), depending on the environmental factors. Wiklund (1999) suggests that the positive relationship between EO and performance will increase over time.
As a conclusion, it can be assumed that adopting an EO results in advantages for SMEs.
Considering the dimensions of EO, a summarization by Covin and Slevin (1991) is applicable: EO involves a willingness to innovate to rejuvenate market offerings, take risks to try out new and uncertain products, services and markets, and be more proactive than competitors toward new marketplace opportunities. Our first hypothesis is:
H1: A firm’s entrepreneurial orientation (EO) is positively influencing firm performance
Moderating factors of EO
Lumpkin and Dess (1996; 2001) state that environmental and organizational factors have an effect
on the relationship between EO and performance; it is claimed that dynamism, munificence,
complexity and industry characteristics are the sort of environmental factors to moderate the
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relationship. These factors affect the uncertainty an entrepreneur perceives, influencing the strategic decisions as a consequence (Miller & Friesen, 1982). The factors are similar to the factors conceptualized for this research; the concepts of environmental hostility (Khandwalla, 1976), environmental dynamism (Miller & Friesen, 1982) and environmental complexity, respectively.
Wales et al. (2013, p. 367) state ‘that the role of moderators influencing the relationship between EO and its various organizational outcomes have been the subject of extensive research’.
The authors (2013) highlight two factors, based on previous research, explaining the considerable attention given to moderating variables:
1) EO may be a necessary, but an insufficient condition for superior outcomes (Stam & Elfring, 2008)
2) In the absence of a suitable context, adopting an EO may be a strategic error since the development and maintenance of EO requires substantial investment of resources (Covin &
Slevin, 1991).
As mentioned earlier, external factors are found to have an influence on the overall effect of EO (Lumpkin & Dess, 1996; 2001; Wales et al., 2013); these factors include environmental factors, such as dynamism and hostility, and societal cultural factors, such as individualism and uncertainty avoidance (Wales et al., 2013).
Conceptualization of moderating variables
In this section, the moderating variables of the EO-performance link are defined.
In this research, we are applying the moderating effect of the task environment in the EO- performance relationship. Contingency approaches have often been adopted to identify the conditions under which EO will be more useful, while externally focused variables are often receiving the attention as moderators influencing the effect of EO (Wales et al., 2013). Task environment of a company provides resources and opportunities for entrepreneurial strategies; these characteristics of the environment are then likely to enhance or deteriorate the effect of EO (Miller, 1983; Covin & Slevin, 1991).
Wiklund and Shepherd (2005) claim that a high EO can facilitate the performance of businesses which are facing performance constraints in terms of a stable environment and limited access to capital. In their meta-analysis on task environment-performance relationship, Rosenbusch, Rauch and Bausch (2013) discover that environmental munificence, environmental hostility, environmental dynamism and environmental complexity affect EO and firm performance.
Environmental hostility and environmental dynamism are often chosen (Wales et al., 2013)
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as dimensions of the task environment. Along with the two previously mentioned dimensions, this research will also apply the dimension of environmental complexity. Environmental hostility is conceptualized by using the definitions of Khandwalla (1976), environmental dynamism is conceptualized by using the definitions of Miller and Friesen (1982) and environmental complexity is conceptualized by using the definitions of Rosenbusch et al. (2013).
Environmental hostility
Environmental hostility can be evaluated on the basis of the negative, uncertain and unfavorable conditions of the environment, where resources and opportunities are scarce and the environment is beyond the immediate control of the firm (Covin & Slevin, 1989; Miles, Arnold & Thompson, 1993).
Covin and Slevin (1989) argue that firms operating in a hostile environment may gain benefits by adopting a high EO strategy, while firms operating in a benign environment generally do better with a more conservative approach. Miles et al. (1993) further this claim by stating that there is a positive relationship between the perceived environmental hostility and the propensity to adopt an EO; EO may be consciously adopted as a strategic response to environmental uncertainty (Smart
& Vertinsky, 1984). More support for this view is claimed by Lumpkin and Dess (2001);
proactiveness is positively related to performance in hostile environments.
Interestingly, a research by Miles et al. (1993) discovered a negative relationship between EO and perceived environmental hostility. Rosenbusch et al. (2013) suggest that in order to perform well, firms in a hostile environment should adopt an orientation characterized by low risk taking and experimentation. The results of the studies are contradicting the results of earlier research (Covin & Slevin, 1989).
The first part of the second hypothesis is the following:
H2a: The relationship between EO and performance is stronger in hostile environments
Environmental dynamism
Environmental dynamism is indicated by the unpredictability of future events, the level of difficulty in predicting future events and the impact on the firm the changes in the environment have (Khandwalla, 1977). The unpredictability can appear as changes in customer needs, as shifts in the behavior of competitors and suppliers, or as technological discontinuities (Rosenbusch et al., 2013).
In dynamic environments, firm strategy formation usually becomes more complex (Priem, Rasheed
& Kotulic, 1995).
Rosenbusch et al. (2013) claim that firms may face exploitable opportunities due to the
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unpredictability of the environment; however, rapid changes in technology, demand and competitor behavior can also turn existing opportunities and resources obsolete. It is suggested that firms adopting an EO improve their prospects to adjust their operations in dynamic competitive environments (Covin & Slevin, 1989).
Lumpkin and Dess (2001) discovered that proactiveness enhances the performance of firms in dynamic environments, where conditions are rapidly changing and the environment presents numerous opportunities; the initial costs and risks associated with novelty and originality can be reclaimed in such environments through capturing new product-market niches. When operating in a dynamic environment, SMEs can gather first-mover advantages by speed, stealth and sound execution, increasing their chances of survival in the process (Tan, 2001).
Past research (Tan, 2001; Ruiz-Ortega et al., 2013) has suggested that firms adopting EO are significantly influenced by environmental dynamism. Therefore, the second part of the second hypothesis is the following:
H2b: The relationship between EO and performance is stronger in dynamic environments
Environmental complexity
Due to lack of a broad, conceptually clarified and empirically sound operationalization (Cannon &
St. John, 2007), environmental complexity has not yet reached a unanimous conceptualization.
Early literature over environmental complexity (Thompson, 1967; Mintzberg, 1979) describes complexity as environmental heterogeneity or diversity, where the environment can be evaluated on the basis of the amount of diversity of information, knowledge, resources and capabilities needed to successfully operate in the environment.
Complex environments are characterized by high resource and differentiation requirements and opportunities created by diverse customer needs (Rosenbusch et al., 2013). Firms operating in complex environments will have a higher chance of exploiting these opportunities and achieving higher levels of financial performance by adopting an EO (Rosenbusch et al., 2013).
In manufacturing industries, complexity has been evaluated on the basis of the level of technological complexity; the more sophisticated technical knowledge is required, the more complex the environment is (Cannon & St. John, 2007). This conceptualization matches well with the questionnaire items of this research.
Firms can benefit from environmental complexity by adopting a high EO (Rosenbusch et al., 2013). Therefore, the third part of the second hypothesis is the following:
H2c: The relationship between EO and performance is stronger in complex environments
14 Conceptualization of performance
The relationship between EO and firm performance may be dependent on the performance indicators (Lumpkin & Dess, 1996). According to Rauch et al. (2009), the EO-performance relationship is mainly focused on financial performance. The authors (2009) also suggest that the relationship between EO and non-financial goals is not as straightforward; the relationship is indirect and thus weaker than the relationship between EO and financial goals. Therefore, relying on the conceptualization of performance in financial terms is better suited to this research.
The Performance variable in this research has been defined as a combination of performance
satisfaction and company development in the past three years. In addition to inquiring the
respondent of the level of satisfaction in performance, the respondents scaled the company
development in terms of sales and revenue growth, growth in employees, profit margin,
product/service and process innovation, adoption of new technology, product/service quality and
variety, and customer satisfaction.
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4 Methodology
In this section we discuss the methods of conducting the research.
Sample
The data collection method for this study is based on a questionnaire built by Andreas Rauch of Rijksuniversiteit Groningen. The questionnaire has earlier been applied to research in Germany, where a dataset of 93 German SMEs was compiled. The questionnaire represents an analysis (see Appendix) of the external environment of the firm, along with indicators for performance and the adopted EO of the firm.
The study population consists of Dutch and German SMEs. Due to the structure of the questionnaire, the businesses were expected to have been operational for at least one year, with a maximum operational period of eight years. The businesses were required to have at least one employee. These requirements limited the usefulness of previously gathered German SME data, cutting down the number of German respondents to 64 SMEs. Furthermore, 21 German SMEs failed to comprehensively report their performance according to the requirements of the questionnaire. Therefore, in terms of firm performance, only 43 German SMEs were qualified for this research.
The Dutch SME data for the research was gathered by using two methods: companies were contacted by through an e-mail or the companies were personally visited for an invitation to participate in the research. E-mails were sent to 102 SMEs located the Dutch regions of Groningen, Friesland and Drenthe. These enquiries were specifically sent to independent companies with less than ten employees. These e-mails resulted in a single respondent, making the response rate slightly below one percent. Personal visits to the companies resulted in nine respondents, making the total amount of respondents to ten Dutch SMEs. The amount of visits to companies reached 48 by the end of the data collection; 18,75 percent of enquired companies filled in the questionnaire.
Therefore, the total sample size amounts to 74 SMEs. All of the Dutch SME responses were generated by owner-managers of their respective companies.
The ten participating Dutch companies in this research were founded between 2008 and
2013. The range of industries leans heavily towards services; among the ten respondents, legal
consultancy, online business services, financial services and Horeca (hotels, restaurants and cafés)
services are represented. These services account for seven of the respondents. The remaining three
companies out of the sample concern real estate business, dairy trade and niche retail trade.
16 Measurements
To measure the constructs of this research properly, a questionnaire was built for the entrepreneurs.
The questionnaire consists of predefined closed questions and the content relevant to the dependent
and independent variables of this research concern strategic posture, performance satisfaction and
company development in the past three years. Strategic posture represents the firm’s EO as an
independent variable, while performance satisfaction and company development in the past three
years represent the performance of the firm, which is the dependent variable of the research. The
moderating effects of environmental factors are defined as environmental hostility, environmental
dynamism and environmental complexity regarding environmental technological sophistication. The
questions will apply a 7-point Likert scale, with the exception of the variable Company development
in the past three years, which will apply a 5-point Likert scale.
17 Entrepreneurial orientation
This research will apply the measurements of Covin and Slevin (1989) as indicators of EO. The measurements are commonly accepted among scholars (Kreiser, Marino & Weaver, 2002; Edmond
& Wiklund, 2010; Wales et al., 2013) as the most widely utilized conceptualization of EO, in both the entrepreneurship and strategic management literature. The measurements of Covin and Slevin (1989) also possess high cross-cultural reliability and validity (Knight, 1997) The conceptualization contains nine items that focus on risk taking, innovativeness and proactiveness.
The measurement of innovativeness by Covin and Slevin (1989) has a strong focus on product innovations (Lechner & Gudmundsson, 2014); process innovations, however, are not explicitly excluded as evolved products may result in evolved processes.
Table 1. Measurement of the entrepreneurial orientation construct
Construct Dimension Measurement
Entrepreneurial orientation Risk-taking
My firm has a strong proclivity for high-risk projects, with chances of very high returns
My firm believes that bold, wide-ranging acts are necessary to achieve the firm's objectives, owing to the nature of the environment
Innovativeness
My firm favor a strong emphasis on R&D, technological leadership and innovations
My firm has very many new lines of products or services
marketed in the past five years
The changes my firm has made in product or service lines have
usually been quite dramatic
Proactiveness
My firm typically initiates actions which competitors then respond to
My firm is very often the first business to introduce new products/services, administrative techniques, operating technologies etc.
Environmental factors
The environment in this study consists of three factors: environmental hostility, environmental dynamism and environmental complexity.
In their longitudinal study, Zahra and Covin (1995) applied a three-item measurement to
conceptualize environmental hostility; the measured used were the inverse of the industry’s growth
rate, the inverse of the industry’s net profit margin and the number of bankruptcies in an industry
divided by the total number of firms in that industry. This study will apply the three-item
measurement of Khandwalla (1976) and the five-item measurement of Miller and Friesen (1982) to
represent environmental hostility and environmental dynamism, respectively. There are two reasons
for the selection: higher validity of the research due to consistency (Rauch et al., 2009; Wales et al.,
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2013), and the shorter timeframe of this study, which does not enable longitudinal data collection.
Environmental complexity is measured by using the two-item measurement of Rosenbusch et al.
(2013).
Table 2. Measurement of environmental factors
Construct Dimension Measurement
Environmental factors Environmental hostility
The environment is very risky, one false step can mean the undoing of my firm
The environment is very stressful, exacting and hostile; very
hard to keep a float
The environment is a dominating environment in which my business unit's initiatives count for very little against the tremendous political, technological or competitive forces
Environmental dynamism
My firm must change its marketing practices extremely frequently (e.g. semi-annually)
The rate at which products/services are getting obsolete in the industry is very high (as in some fashion goods and semi- conductors)
The actions of my firm's competitors are unpredictable
Demand and consumer tastes are almost unpredictable (e.g. high
fashion goods)
The modes of production/service technology change often and
in a major way (e.g. advanced electronic components)
Environmental complexity
The environment is technologically a very sophisticated and complex environment
The principal industry of my firm is an extremely R&D oriented industry (e.g. telecommunications, space technology or
pharmaceutical drugs)
Performance
Performance indicators can be divided to financial and non-financial measures (Walker & Brown, 2004). The authors distinguish financial measures as traditional indicators of business performance, such as economic measures or the number of employees. Walker and Brown (2004) also estimate that the popularity of economic measures of performance are ground to the fact that they are ‘hard’
measures; however, implicit to these measures is an assumption that all entrepreneurs aspire to grow their business.
In this study, we are mainly focused on the financial measures of business performance. The
argument of the relationship between EO and firm performance is based mostly on financial aspects
of performance (Wiklund & Shepherd, 2003).
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Table 3. Measurement of performance
Construct Measurement
Performance
How did your company develop during the last three years relatively to your two most important competitors?
Sales growth
Revenue growth
Growth in employees
Net / Profit margin
Product/service innovation
Process innovation
Adoption of new technology
Product/service quality
Product/service variety
Customer satisfaction
Research method
In order to fully understand the effects of strategic posture and the moderating effects of the external environment, variables were built from the measurements indicating strategic posture, environmental hostility, environmental dynamism and environmental complexity. Questionnaire items (see Appendix) SP1-SP9 (Covin & Slevin, 1989) represent a firm’s strategic posture: SP1-SP3 for Innovativeness, SP4-SP6 for Proactiveness and SP7-SP9 for Risk taking. These measurement items were combined to create the concept of EO. Questionnaire items EH1-EH3, SPS1-SPS5 and CPL1-CPL2 represent the external environment of the firm. These items were combined to create the concepts of environmental hostility, environmental dynamism and environmental complexity, respectively.
The construct of EO and the moderating variables of the task environment were recoded into mean centered variables. This recoding is required for the creation on interaction variables that are helpful in determining the relationship between EO and the moderating variables.
A factor analysis was conducted to discover whether the dimensions of EO and the task environment are significantly distinct from each other. Cronbach Alpha’s were computed in order to discover the reliability of the independent and moderating variables.
A correlation analysis was conducted to prove that multicollinearity does not significantly exist among the variables. Testing for multicollinearity is a prerequisite for conducting a valid multiple regression analysis. Multicollinearity occurs when an independent variable is highly correlated with other independent variables (Donald & Robert, 1967).
In order to discover the relationships between variables, a multiple regression analysis was
conducted. This analysis allowed an examination of the relationship between EO and firm
performance, moderated by the effect of the task environment. A moderator effect is an interaction
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where the effect of one variable is dependent on the level of another variable (Frazier, Tix &
Barron, 2004).
Figure 2 presents the regression model for this research. Coefficient in bold represents the independent variable construct of EO, while moderating variables and the control variable of company nationality are also presented.
Figure 2. Regression model
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5 Data analysis
In this section, the results of the research are presented.
Results
Tables 5 and 6 present the results of the factor analysis. The factor analysis applied the principal components technique with a varimax rotation. The extraction was done by forcing a single factor solution.
As can be seen, the component loadings suggest a fairly high correlation among the
construct of EO and the moderating variables. Two items out of the EO construct only show minor
correlation; however, as the scale is derived from the influential work of Covin and Slevin (1989),
the construct will remain untouched for this research.
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Table 5. Factor analysis and component loadings of the EO construct
Entrepreneurial orientation
Extraction Component
loadings Eigenvalues
Variance explained (%)
SP1
In general, the top managers of my firm favor a strong emphasis on R&D, technological
leadership and innovations
,413 ,642 3,367 37,408
SP2 My firm has marketed very many lines of new
products or services in the past five years ,252 ,502 1,667 18,527
SP3
Changes in product or service lines in my firm have usually been quite dramatic in the past five years
,430 ,655 1,144 12,715
SP4
In dealing with its competitors, my firm typically initiates actions which competitors then respond to
,075 ,275 ,936 10,404
SP5
In dealing with its competitors, my firm is very often the first business to introduce new products/services, administrative techniques, operating technologies etc.
,309 ,556 ,576 6,397
SP6
In dealing with its competitors, my firm typically adopts a very competitive, 'undo-the-
competitors' posture
,082 ,286 ,448 4,975
SP7
In general, the top managers of my firm have a strong proclivity for high-risk projects (with chances of very high returns)
,671 ,819 ,385 4,279
SP8
In general, the top managers of my firm believe that owing to the nature of the environment, bold, wide-ranging acts are necessary to achieve the firm's objectives
,529 ,727 ,283 3,149
SP9
When confronted with decision-making situation involving uncertainty, my firm typically adopts a bold, aggressive posture in order to maximize the probability of exploiting potential
opportunities
,606 ,779 ,193 2,145
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Table 6. Factor analysis and component loadings of the moderating variables
Environmental hostility
Extraction Component
loadings Eigenvalues
Variance explained (%)
EH1 The external environment my business unit functions in is very risky; one false step can mean the undoing of my business
,694 ,833 1,710 56,992
EH2 The external environment my business unit functions in is very stressful, exacting, hostile; very hard to keep afloat
,569 ,754 ,782 26,080
EH3
The external environment my business unit functions in is a dominating environment in which my business unit's initiatives count for very little against the tremendous political, technological or competitive forces
,447 ,668 ,508 16,929
Environmental dynamism
SPS1
Our firm must change its marketing practices extremely frequently (e.g. semi- annually)
,640 ,800 2,834 56,687
SPS2 The rate at which products/services are
getting obsolete in the industry is very high ,665 ,816 ,803 16,059
SPS3 Actions of competitors are unpredictable ,458 ,677 ,652 13,036
SPS4 Demand and tastes are almost
unpredictable (e.g. high fashion goods) ,368 ,607 ,404 8,075
SPS5 The modes of production/service change
often and in a major way ,702 ,838 ,307 6,142
Environmental complexity
CPL1
The external environment my firm operates in is technologically a very sophisticated and complex environment
,848 ,921 1,697 84,845
CPL2
The external environment my firm operates in is extremely R&D oriented industry (e.g.
telecommunication, space, pharmaceuticals)
,848 ,921 ,303 15,155
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Table 7. Descriptive statistics and correlations for total sample
Variable Mean SD 1 2 3 4 5 6 7 8
1 EO 32,58 8,617
2 Performance* 36,02 5,160 ,237
3 Innovativeness 10,84 4,128 ,794*** ,158
4 Proactiveness 11,86 3,128 ,689*** ,412*** ,312***
5 Risk taking 10,07 4,036 ,801*** ,044 ,443*** ,378***
6 Environmental hostility 10,55 3,488 ,096 - ,488*** ,057 - ,136 ,200
7 Environmental dynamism 16,33 6,349 ,281** - ,260 ,366*** - ,011 ,216 ,478***
8 Environmental complexity 6,60 3,499 ,221 - ,255 ,388*** - ,099 ,203 ,069 ,390***
N = 74
* Only 53 companies could be analyzed in terms of performance
** p < 0,05
*** p < 0,01
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Table 7 presents descriptive statistics and correlations of all the scale variables used in this research.
In studies concerning the effect of EO, the dimensions of innovativeness, proactiveness and risk taking often appear moderately or highly correlated with each other (Rauch et al., 2009). The results of the correlation analysis support the claim of Rauch et al. (2009); significant moderate correlation can be discovered among the dimensions.
Table 8 presents the Cronbach’s Alpha values of the EO construct and the moderating variables. Cronbach’s Alpha represents the reliability of the scales in terms of internal consistency (Field, 2005). Generally a value above 0,7 (Field, 2005) is considered appropriate in terms of a reliable scale. With the exception of environmental hostility, all of the values exceed the threshold.
Table 8. Cronbach Alpha’s of the EO construct and moderating variables
Variable Cronbach's Alpha
EO ,761
Environmental hostility ,619
Environmental dynamism ,803
Environmental complexity ,821
Table 9 presents the variance inflation factor (VIF) values of the variables used in the regression analysis. The occurrence of multicollinearity is represented by VIF; when VIF is exceeding a certain threshold, multicollinearity exists. The value threshold is subject to debate (Kutner, Nachtsheim, Neter & Li, 2004), but a value of 5 is often used as a threshold. As can be seen from Table 9, multicollinearity is not a problem among the researched variables.
Table 9. Variance inflation factors of variables
Variable VIF
EO 1,227
EO x Environmental hostility 2,009 EO x Environmental
dynamism 2,376
EO x Environmental
complexity 1,242
Nationality of an SME 1,042
Table 10 presents the standardized betas and the total variance of the regression model.
A regression analysis of four separate models was conducted. The first model inspected the
effect of nationality of the company as a control variable. The second model included the construct
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of EO in the analysis. The third model analyzed the moderating variables along with nationality and EO. Finally, the fourth model included the interaction variables between EO and moderating factors of the task environment. Due to the insignificant results of the first model of nationality, the model was not included in this research.
The relationship between EO and performance is found to be positive (β = ,239, p = ,087), but the results fail to produce a high level of significance. Furthermore, the first model of the regression analysis did not produce significant results. Hypothesis 1 is therefore rejected.
The moderating variables significantly affect the relationship between EO and performance.
Environmental hostility is found to enhance the relationship (β = ,349, p = ,015); the results are significant. Hypothesis 2a is therefore supported. Environmental dynamism causes the opposite effect; adopting EO in dynamic environments has a deteriorating effect (β = -,322, p = ,037) on firm performance. Similarly to environmental hostility, the findings are significant. Hypothesis 2b is therefore rejected. The strongest relationship is discovered between performance and the interaction between EO and environmental complexity (β = ,496, p = ,000). The findings are also highly significant. Hypothesis 2c is therefore supported.
The nationality of an SME does not seem to create significant differences in performance.
The effect is slightly negative (β = -,087, p = ,397), but the analysis suggests the results are not significant. Reliable predictions cannot be drawn over the effect differences of Dutch and German task environments.
Total variance (R
2) measures the quality of prediction of the dependent variable in the
regression analysis. The independent variables used in this research explain 60,4 percent of the
variability of firm performance. Due to the high significance level (p = ,000), the findings from the
regression analysis can be considered reliable.
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Table 10. Standardized betas and the total variance of the regression model
