The influence of Entrepreneurial Orientation and
Innovation success on Change Strategy: a study
of Small Firms and the Perceived Effectiveness
By
Paul Kindermans
University of Groningen Faculty of Economics and Business
Master Business Administration Small Business and Entrepreneurship
August 2011 Lingestraat 14a 9725 GP Groningen 06 21 71 17 04 paulkindermans@live.nl Student number: s2000326 Seminar supervisor: J.F.J. Vos
Abstract
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By identifying opportunities with the goal of rejuvenation and renewal, entrepreneurs ought to adapt to changing environments, i.e. having innovation success. In the context of small firms, one could argue that their EO innovations are not based on competitors’ movements, but aimed at renewal of their strategy and rejuvenation of its competitive advantage. Concluding that in this research small firm innovation success has no mediating effect when relating to EO and small firm change strategies is astonishing and even troubling. Ever since EO does positively and significantly affect small firms’ innovation success. In addition, EO is significant and positively related to small firm change strategy. There is also overwhelming evidence to infer that EO small firms tend to use planned change strategies, not the emergent type. This conclusion contradicts the literature which state that key decisions about adapting the organizational resources to the environment evolve over time through cultural and political processes (Hayes, 2002). Finalizing this, the results of the change strategies employed by the participating small firms were predominantly perceived effective.
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Keywords: Small firm Change strategy, Small Medium sized Enterprises (SME),
Entrepreneurial Orientation (EO), Innovation success, Perceived effectiveness
Introduction
In the literature on change management various change strategies are being discussed. However, this literature and such strategies particularly focus on large firms. The central concept in this research is change strategy (small firm biased), where “change” is the underlying aspect of a respective strategy. Specific attention will be paid to innovation success which may have been realized in the respective small firms.
Organizational change is always challenging business environments. Some basic examples for this: customers are changing over time, suppliers are coming and going, financial markets are altering their policies etc. So if change is everywhere, it should be something that entrepreneurs are used to deal with. But how do they deal with changes, and how does this affect their strategy in running their firm. The amount of literate that investigates the change strategies in small firms is very small and little is known concerning the perceived effectiveness of these change strategies.
Today’s large firms naturally used to be small ones. According to Magretta (in Duarte & Diniz 2011) they became large by being the best small ones. This raises the question: “What change strategies did, or had, they implement in order to become the best ones”? Interesting here are the factors that mainly influenced their decisions, goals, and plans, in other words, their management or their willingness to change. In addition, how innovative were their ideas with the attempt to change successful? Probably a lot of problems were involved with changing effectively in the early stages. Therefore the relevancy of investigating this particular topic will most likely contribute in a better understanding of the perceived effectiveness of change strategies in small firms. Most of these problems could be related and will affect firms’ management and require flexibility and adaptation capacity in order to overcome these problems, so organizational culture influences firms’ success.
In the researchers’ opinion, EO can be seen as never ending learning experience. Firms that learn more effectively than their competitors possess the basis for more rapid improvement, which can translate into sustainable competitive advantage (Day 1994). This could indicate a presumption that EO is linked to the firms’ change management, resolving in a future strategy.
Often, innovations mean to take some risks. A firm that embraces change is also welcoming innovation and ready to take these risks. For this study, the researcher recognizes such events by management decisions made to innovate bringing along risky change strategies.
On the other hand, change events are determined by entrepreneurial characteristics and linked to firms’ capabilities (Hu & Hafsi, 2010). Even the setting where firms are positioned can influence management options, for instance, on taking risky and emergent strategies. Already at this point, EO can be seen as a determinant of change. Specifically, since EO is an innovation based construct, it is possible that its effect on a change strategy is mediated by another construct, innovation success (i.e., administrative, product and service innovations). EO is expected to have a direct effect on small firm change strategy by itself and also mediated by innovation success, but no direct effect on the perceived effectiveness. This leads to the following research question:
- How does Entrepreneurial Orientation affect a small firm change strategy and was the result perceived as effective?
Theoretical Framework
Entrepreneurial Orientation and its three key dimensions
Entrepreneurial orientated firms give priority to the process of identifying and exploiting market opportunities (Shane and Venkataraman 2000). Furthermore, Covin and Miles (in Baker & Sinkula 2009) view entrepreneurship as exploiting the opportunity to renew and revitalize the firm. For this research the latter theory is a very relevant addition, because the proposition can be made that EO firms use opportunities for renewing, i.e. innovating, the firm.
So for defining EO in the context of small firms the researcher makes use of three dimensions which EO is frequently linked with: innovativeness, proactiveness and risk taking (Zahra; Covin and Slevin; Miller, in Baker & Sinkula 2009).
Innovativeness should not be confused with innovation success, which is a firm performance measure (Baker and Sinkula 2002, 1999). The researcher pays specific attention to this construct to analyze whether innovation success is related with EO and small firm change strategy. In other words, does innovation success determine a change strategy within an EO small firm.
Innovativeness refers to a standard willingness to differ from the status quo and embrace new ideas. One could think of measuring this in terms of managers’ willingness to get rid of lagging ways of thinking (Karagozoglu and Brown 1988). Here the researcher assumes that entrepreneurial firms welcome possible innovations to keep up with changing environments.
Small firm change strategy
For this study (small firm biased) the researcher distinguishes between two general types of change: planned change and emergent change. These two types of change are widely considered as the most dominant strategies in the field of change theory (Kanter, Stein and Jick; Burnes; Weick, in Buitenwerf 2010). In this research, planned and emergent change strategies of small firms are used to investigate its respective relation with EO, also mediated by innovative success. According to Levy (1986), planned change involves a deliberate, purposeful and explicit decision to engage in a program of change and it involves external or internal professional guidance. Based on the definition of Levy, the assumption can be made that small firms that are EO, are not tended to significantly use planned strategies of change.
The second approach of change, in contrary to intentional change, is not initiated through a planned process: emergent change. Hayes (2002) gave a motivation for emergent change which is based on the belief that key decisions about adapting the organizational resources to the environment evolve over time through cultural and political processes. This definition seems to imply that there is not a real strategy for emergent change, but a strategy for emergent change is described by Buitenwerf (2010) in terms of “enabling and encouraging the organization and its employees to change the enterprise”. For this study, this theory is very relevant because now another assumption can be made which is that EO small firms do tend to “use” emergent strategies of change.
Perceived effectiveness
Hypotheses
The relation between EO and innovation success
As stated earlier, EO has three key dimensions which all might have their own influence on the choice of a certain small firm strategy of change. For this study, the researcher takes innovation success within small firms to analyze the respective relation with EO. This relationship can be explained by the fact that innovation is deeply embedded in entrepreneurship, but then again not all innovation is the result of a strong EO.
The following definition might explain why EO and innovation success are a streamlined succession: EO inspired innovation is more than adaptation or reaction to market trends; it is “…aimed at the rejuvenation, renewal and redefinition of organizations, their markets, or industries” (Covin and Miles, in Baker & Sinkula 2009). By identifying opportunities with the goal of rejuvenation and renewal, entrepreneurs ought to adapt to changing environments, i.e. having innovation success. In the context of small firms, one could argue that their EO innovations are not based on competitors’ movements and for instance routine innovation by colleagues, but aimed at renewal of their strategy and rejuvenation of its competitive advantage.
Summarizing this, a considerable and positive influence of EO on innovation success is expected. The kind of innovation involved is of competitive diversity. Small firms with strong entrepreneurial orientations are likely not to base their innovations on copycatting their competitors and/or colleagues, but to renew its standards to maximize organizational performance. This in order to outperform competitors (i.e. large firms) by seeking new customs of achievements. The start of these kinds of innovations depends on management experience and mindset, not traditional customer research.
The relation between innovation success and small firm change strategy
The importance of innovation success is nurtured by literature of this specific construct. It has to be clear that when discussing innovation success, the researcher is referring to the output of the innovation process. Innovation success is a concrete outcome of innovation related behavior. Innovativeness is cultural. It is nearly self-evident to management and entrepreneurship principles that innovation success is a primary means by which small firms organize their strategies to cope with change.
In summary, the researcher predicts that innovation success has a mediating effect between EO and small firm change strategy. This has to prove that for instance competitive advantage gained by innovative success is most likely related to small firm change strategy.
H2: Small firm innovation success is significant related to small firm change strategy as a mediator of EO.
The relation between EO and small firm change strategy and perceived effectiveness
Entrepreneurial firms innovate daringly while taking considerable risks in their strategies (Miller and Friesen, in Renko et al. 2009). Also Zhou, Yim, and Tse (in Renko et. Al 2009) find that entrepreneurial orientation positively affects breakthrough innovations. Combining both literatures above shows that EO firms hold an emergent-innovative aspect. Moreover, in the context of small firms one could expect a far larger enthusiasm for risk-taking and proactive leadership (Khan and Manopichetwattana, in Renko et al. 2009). In the researchers’ opinion an emergent change strategy is most suitable for entrepreneurial small firms. Emergent change will be very effective in an innovative context, because it gives the entrepreneurs the opportunity to grasp certain challenges in a way they find themselves comfortable with. So they can do what in their opinion is most effective, while not being controlled by any procedures or policies.
So the relation of small firms that embrace specifically proactiveness and risk taking in their change strategy is expected to be strong. Out of their orientation on these two entrepreneurial dimensions it also most self-evident that these will contribute to a significant relationship of EO on emergent change strategies. This could indicate a prediction that EO small firms are less likely to use planned change strategies. Overall a predominant perceived effectiveness of the implemented small firm change strategies is expected, since specifically the owners of the firm have been triggered for this study. Concluding, the researcher proposes the following final hypotheses concerning this section:
H3: EO is significant and positively related to small firm change strategy. H3a: EO is significantly related to emergent small firm change strategies H3b: EO is not significantly related to planned small firm change strategies.
H4: The result of the change strategies employed by small firms is predominantly perceived effective.
Figure 1: Conceptual model:
Method
Participating firms
The innovation success of certain change strategies may partially explain why the effects of EO on change strategy tend to be stronger in small firms. Given this, a small business sample was chosen for this research. Data was to be collected from a voluntary acquired random sample of 120 SMEs in the Netherlands. It is essential to define what can be categorized as an SME. According to Nooteboom (in Buitenwerf 2010) an SME is defined by three criteria: the amount of persons engaged, financial numbers and an independence criterion (last two items not mentioned in the questionnaire on purpose because of acquaintance with firms targeted). The questionnaire mailing went specifically to these firms, as they were individually approached by the researcher, and known for sure they matched an employee total of > 10 and < 250 (Bridge et al, in Buitenwerf 2010). A request to participate in the project was mailed (or given in person) to either the owner/managing director of the firm. Ninety eight questionnaires were completed and returned on paper. So this gave an usable sample of 98 firms, a response rate of 81, 7%. In order to guarantee anonymity, no firm names will be used in any section of this research paper.
Research project delimitation and variables operationalized
Type of Change. Before the respondent starts with the questionnaire, it is important that
he/she has one specific change in mind. In the introductory part three questions are dedicated to assist the respondent in structuring this process.
Time of Measurement. The research is conducted after the changes have taken place
within the organization, because it is necessary that the small firm strategy of change employed can be identified.
power-coercive. 15 items are dedicated to measure the planned small firm change strategies. 5 items were used for the emergent type.
The entrepreneurial orientation was operationalized with three independent variables: (1) innovativeness, (2) proactiveness, (3) and risk taking. 12 items were used to assess these three key dimensions of EO.
Innovation success was constructed as a mediator of EO on small firm change strategy, to focus on competitive advantage realization. Important here is that it is not based on movements of competitors and colleagues. This mediator consisted of 3 items.
Measurement scale, tests conducted and further procedures
The seven-point scale is based on the work of Buitenwerf (2010) and is used to measure the scores on each item. This scale asks a rater to agree or disagree with statements that express either favorable or unfavorable attitudes toward the object. The strength of attitude is reflected in the assigned score, and individual scores may be totaled for an overall attitude measure (Cooper and Schindler, in Buitenwerf 2010). In the seven-point the scores go from one till seven. For each concept, e.g. entrepreneurial orientation, the item scores are summed up and converted to one of the two categories: innovation success or all three EO dimensions as a whole.
Simple linear regression analysis was used throughout all hypotheses testing in this research. To test whether or not the item’s internal consistency, that is, how closely the set of items are related as a group, is of respectable and sufficient level the Cronbach test will be conducted. The Cronbach’s alphas should be at least or exceeding the in science-world widely accepted level of .70. Note that for small firm innovation success and small firm change strategy the cronbach alpha is as close as to this accepted level. Since these items are based on the validated work of Buitenwerf (2010), the researcher chose to proceed with these findings.
particular change in mind when they answered the questions. It lasted approximately thirty minutes to complete the questionnaire. Data was analyzed by the researcher using the classifications of the constructs developed in this section.
Findings
Hypothesis Testing
Recall that figure 1 visually depicts the conceptual model and study hypotheses that frame the empirical portion of this study. Simple linear regression was employed to test the significance and positive relation of the respective hypotheses.
Table 1: Cronbach Alpha’s
Construct Cronbach Alpha
Entrepreneurial Orientation .716 Small Firm Innovation Success .670 Small Firm Change Strategy .622 Perceived Effectiveness of Result .896
Table 2: Regression analysis*
Independent variable Dependent variable Entrepreneurial Orientation EO combined with inn. Success Inn. Success as Mediator Perceived Effectiveness of Result Small firm Innovation Success ,000 / B=1.156 - - -
Small Firm Change Strategy ,000 / B= .326 .002 .546 ,001
Emergent strategies ,142 - - -
Planned strategies ,000 - - -
H1 predicted a significant, positive relationship between EO and small firm innovation success. This hypotheses was supported by (B=1.156, p = .000). So there is overwhelming evidence to infer that the relation between EO and small firm innovation success is positive and highly significant.
H2 predicted a significant relationship between small firm innovation success on small firm change strategy, as a mediator of EO. To test this mediating effect the researcher employed three models using simple linear regression. First the independent variable (EO) was tested on the dependent variable (small firm change strategy). This model was highly significant (p = .000). Then EO was tested on the mediator (small firm innovation success) again. This model was highly significant (p= .000). But the final model testing EO plus small firm innovation success on small firm change strategy was not significant. Combining small firm innovation success and EO on small firm change strategy one can see that the significance of EO along with small firm innovation success is larger (p= .002) than measured separately (p= .000). Also small firm innovation success is not significant anymore (p= .546). This means that there is no mediating effect of small firm innovation success between EO and small firm change strategy.
H3 predicted a significant, positive relationship between EO and small firm change strategy. This was supported (B= .326, p = .000). So there is overwhelming evidence to infer that the relation between EO and small firm change strategy is positive and highly significant.
H3a predicted a significant relationship between EO and emergent change strategies. This was not supported (p =. 142). Thus there is no evidence to infer that EO small firms tend to use emergent strategies of change.
H3b predicted no significant relationship between EO and planned change strategies. This hypotheses was also not supported (p = .000). So there is overwhelming evidence to infer that EO small firms tend to use planned change strategies.
Conclusion and Discussion
In summary, all hypotheses, except H2, H3a and H3b, were supported. As predicted, EO does appear to have a positive and significant influence on small firm change strategies. Concluding that in this research small firm innovation success has no mediating effect when relating to EO and small firm change strategies is astonishing and even troubling. Ever since EO does positively and significantly affect small firms’ innovation success. Then again, in contrast to the literature, one could argue the fact that EO in this research supported planned change strategies instead of emergent ones. Often, innovations mean to take some risks. A firm that embraces change is also welcoming innovation and ready to take these risks. For this study, the researcher recognized such events by management decisions made to innovate bringing along risky change strategies. So EO should have been linked to the emergent type of change strategy, namely change drivers enabling and encouraging the implementation of change strategies. But the main conclusion which can be drawn out of this research is that the effect of EO on small firm change strategies is positive and highly significant. Finalizing the fact that the results of the small firm change strategies were predominantly perceived effective, gives the conclusion that change management of small firm strategies were worth the attempt in this study. Since entrepreneurial orientation is a learning construct (Baker and Sinkula 2002, 1999; Slater and Narver, in Baker & Sinkula 2009), and stated that firms that learn more effectively than their competitors possess the basis for more rapid improvement (Day 1994), the researcher concludes that critical evaluation of effectiveness is essential for the 21st century’s upcoming change strategies in small firms.
Limitations and direction for future research
Future research should discover the complexity of the relationship between EO and emergent small firm change strategies. Another factor such as technological enthusiasm may clarify some more on the results found here. In addition to the respondents for future research directions (need to collect more objective data about young, small firms that are categorized in more of the same businesses and the need to further increase the geographic scope of this study to further increase external validity), an area for possible future research has already been suggested above. Furthermore, this research definitely calls for more industry-specific investigations of the drivers of emergent small firm change strategies. One could think of technology-intensive firms, which are very important on innovation level, while typically not taking into account in such studies (Kirca; Jayachandran & Bearden, in Renko et al., 2009).
The main limitation of this study is the single informant problem, which is typical for studies dedicated within the scope of small firms. Overall, the researcher welcomes future efforts to develop measures for emergent change strategies in contexts where small innovative based firms are still far from successfully dealing with radical change.
References
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Academy of Marketing Science 27, 411–427. ——— (2002). “Market Orientation,
Learning Orientation and Product Innovation: Delving into the Organization’s Black Box,” Journal of Market Focused Management 5, 5–23.
Baker, W. E., and J. M. Sinkula (2009). "The Complementary Effects of Market
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Marketing 58 (4), 37–52.
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entrepreneur”, Personnel Psychology 23, 47-54.
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Appendix 1: Questionnaire items
Entrepreneurial Orientation / Small firm innovation success
1.Ik beschouw innovatie als het meest belangrijke speerpunt van onze strategie. 2.Met name door innovatie behaalt het bedrijf concurrentievoordeel.
3.Ik ben altijd op zoek naar nieuwe en betere manieren om de prestaties van het bedrijf te verhogen. 4.De innovaties binnen het bedrijf zijn gebaseerd op wat wij bij onze concurrenten en collega’s zien. 5.Ik beschouw het bedrijf als proactief, wij proberen kansen te creëren in de markt waarin we actief zijn. 6.Het bedrijf wacht kansen en veranderingen in de markt af en reageert hier vervolgens op.
7.Het bedrijf streeft er naar om als ‘first-mover’ voordeel te behalen op de concurrentie.
8.Als eindverantwoordelijke voor veranderingen (in het algemeen) sta ik open voor nieuwe ideeën van anderen (zoals van werknemers).
9.Het nemen van risico’s is voor het bedrijf een absolute vereiste om te kunnen overleven. 10.Het komt binnen ons bedrijf vaak voor dat risico’s worden genomen zonder grondige analyse. 11.De beslissingen die ik als eindverantwoordelijke voor veranderingen (in het algemeen) neem zijn veelal intuïtief.
12.Om veranderingen (in het algemeen) succesvol te laten zijn ben ik altijd bereid hoge risico’s te nemen.
Perceived effectiveness of result:
1.Over het functioneren van het bedrijf na en door de verandering ben ik…
2.Over de mate waarin we de doelen hebben gerealiseerd die we met de verandering hoopten te bereiken ben ik...
3.In het geheel genomen ben ik over het resultaat van de verandering…
Small firm change strategy:
1.Als leidinggevende van de verandering was ik nauw verbonden met de werknemers die de verandering moesten doorvoeren.
2.Als leidinggevende van de verandering richtte ik mij op de feiten en ‘promootte’ ik de voordelen van de verandering.
3.De noodzaak voor deze verandering was gerechtvaardigd door experts die verstand hebben van deze verandering.
4.Om werknemers te laten veranderen, gebruikte ik als leidinggevende van de verandering logische argumenten en feitelijk bewijs om de verandering uitgevoerd te krijgen.
5.Beslissingen over deze verandering werden genomen door experts die erg veel kennis hebben over de verandering.
6.Werknemers hadden veel bevoegdheden om zelf beslissingen over de verandering te nemen. 7.Als leidinggevende van de verandering besteedde ik er veel tijd aan ‘een gevoel te krijgen’ voor de manier waarop de verandering door werknemers zou worden geaccepteerd.
8.De beslissingen over deze verandering werden genomen door werknemers uit veel verschillende lagen van het bedrijf.
9.Om werknemers te laten veranderen, liet ik werknemers uit veel verschillende lagen van het bedrijf participeren in de aanpak van het veranderingsproces.
11.De noodzaak voor deze verandering werd alleen gerechtvaardigd door de leiding van het bedrijf (en dus niet vanuit andere lagen in het bedrijf).
12.Om werknemers te laten veranderen, gebruikte ik mijn positie als leidinggevende om de verandering doorgevoerd te krijgen.
13.Als leidinggevende van de verandering speelde ik de rol van opdrachtgever.
14.Als leidinggevende van de verandering was ik er niet op gericht dat de werknemers de verandering zouden accepteren.
15.Als leidinggevende van de verandering schiep ik afstand tussen mijzelf en de mensen die de verandering moesten uitvoeren.
16.Deze verandering kwam tot stand zonder dat er vooraf plannen waren gemaakt.
17.Om werknemers te laten veranderen, was het enige dat ik deed ze stimuleren en de ruimte geven om het bedrijf te verbeteren.
18.Als leidinggevende van de verandering speelde ik de rol van aanmoediger.
19.Ik was erop gericht dat werknemers zelf een verandering creëerden waar ze enthousiast over zouden zijn.
