the Mediating Effects of External Networking Behavior
between Autonomy, Competitive Aggressiveness
and Firm
Performance
Pim Hoeflaak
January 19t
h
, 2015
Master thesis
Msc. Small Business & Entrepreneurship
Faculty of Economics and Business
PREFACE
ABSTRACT
Entrepreneurship research reveals that a relationship between entrepreneurial orientation (EO) and firm performance exists. In this empirical study the author examines whether external networking behavior mediates the EO - firm performance relationship. EO is normally performed on a firm level. This study looks at EO on an individual level, since not much literature has been written about this specific topic. Dutch self - employed (entrepreneurs and business owners) are the subject (N=102). The EO dimensions include autonomy and competitive aggressiveness. Regression tests were conducted. The results show proof that autonomy has significant effect on external networking behavior, but not on firm performance. Competitive aggressiveness has significant effect on both external networking behavior and firm performance. However, no evidence was found that external networking behavior acts as a mediator in both the autonomy - firm performance relationship and the competitive aggressiveness - firm performance relationship. The implications are discussed for both the academic world and practitioners.
INDEX
1. A. INTRODUCTION 5
A.1 Introduction & research question 6
A.2 Relevance 6
2. B. THEORETICAL FRAMEWORK 7
B.1 Entrepreneurial orientation (EO) 7
B.2 EO dimensions 7 B.3 External networking behavior 8
B.4 Linking the concepts 9
B.5 Conceptual framework 11
3. C. METHODOLOGY 12
C.1 Data collection and sampling 12 C.2 Measures 13
4. D. RESULTS 17
5. E. DISCUSSION AND CONCLUSION 20
6. F. REFERENCES 24
A. INTRODUCTION
A.1 Introduction & research question
It is noteworthy that entrepreneurship literature reveals more and more articles about entrepreneurial orientation (EO). Numerous studies have already indicated that it is positively linked to firm performance (e.g. Boso, Story & Cadogan, 2013; Rauch et al., 2009; Sharma and Dave, 2011; Vij & Bedi, 2012). However, the relationship between EO and the success of a firm is not straightforward (Hughes & Morgan, 2007). Wang (2008) states that researchers who examine the effect of EO on firm performance must look further. Wiklund and Shepherd (2003) and Li et al. (2009) argue that scholars who mainly investigate the direct relationship between EO and organizational success are short - sighted. This is, because they ignore the mediating effects in the EO - firm performance relationship. Naudé et al. (2014) mention that little research has yet been carried out about the mediating effect of networking mechanisms in the relationship between EO and firm performance. They examined the role of external networking behavior as a mediator in the EO - SME performance relationship. The EO dimensions that they examined are risk - taking, proactiveness and innovativeness. Covin and Slevin (1989) originally developed them. Similarly, this study examines the mediating effects of external networking behavior in the relationship between EO and firm performance. However, the EO dimensions that are examined in this study are autonomy and competitive aggressiveness. Lumpkin and Dess (1996) developed them. They mention that autonomy refers to the fact that firms are willing to act autonomously and that competitive aggressiveness refers to the propensity of firms to act aggressively against competitors.
As said, Naudé et al. (2014) used risk - taking, proactiveness and innovativeness. They have not used autonomy and competitive aggressiveness or all five dimensions in their research. Nor have they examined EO on an individual level. EO is described both on a firm level and on an individual level (Rae, 2013). However, the individual level remains often underexposed. Entrepreneurship literature fails to describe much about competitive aggressiveness on an individual level (Rae, 2013). Lumpkin and Dess (1996) mention that autonomy is explained as individuals or teams taking independent actions. This indicates that, although autonomy is usually described on a firm level, it also makes sense to examine it on an individual level as it is about individuals.
follows:
What is in a self - employed context the mediating effect of external networking behavior in the EO dimensions (autonomy, competitive aggressiveness) - firm performance relationship?
A.2 Relevance
This study attempts to make a contribution to the academic field and practitioners in the following ways. First, it intends to validate external networking behavior as a generalized mediator. That is why the mediating effects of it are tested in the EO - firm performance relationship. Second, it attempts to create more understanding about EO. As opposed to Naudé et al. (2014) who used risk - taking, proactiveness and innovativeness in the context of external networking behavior and firm performance, this study however focuses on autonomy and competitive aggressiveness. Thus, studying these EO dimensions in this context forms an addition to existing literature. Third, entrepreneurship literature describes EO mostly on a firm level. This considerable gap in the literature encouraged examining autonomy and competitive aggressiveness on an individual level.
B. THEORETICAL FRAMEWORK
B.1 Entrepreneurial orientation (EO)
The critical success factor EO includes all the activities that are needed for new entry (Covin & Slevin, 1989). According to Lumpkin and Dess (1996), new entry is the pivotal act of entrepreneurship. This new entry encompasses entering new or established markets with new or existing products or services. It is about the firm and market newness of economic activities (Davidsson, 2004, p.8). Another description explains new entry as the act of starting a new venture by creating a startup firm, via an existing firm or through “internal corporate venturing” (Burgelman, 1983). The dynamic process of creating a new venture involves the actions and intentions of key players. This includes all the practices, processes and decision - making activities. Miller (1983) and Covin and Slevin (1989) were the original developers of the EO concept. They categorized EO into separate dimensions. These EO dimensions are risk - taking, proactiveness and innovativeness. Later, Lumpkin and Dess (1996) designed yet two more EO dimensions, autonomy and competitive aggressiveness. These dimensions are now described.
B.2 EO dimensions
B.2.1 AutonomyB.2.2 Competitive aggressiveness
Competitive aggressiveness is defined as the way in which firms relate to their competitors. These firms show a specific relation to competitors in the market during new entry. It is about the way in which they fight for market demands to see which one gets the largest share (Lumpkin & Dess, 1996). A typical characterization of competitive aggressiveness is that firms adopt a highly competitive ‘undo-the competitors’ attitude (Covin & Covin, 1990). When these firms start actions against competitors, the latter often follow the strategy of the former. The trick of being competitively aggressive is to out – maneuver competitors (Wiklund, 1999). Another philosophy of adopting an aggressive attitude against competitors is that it can lead to an increase in firm performance. It might be assumed that, when scholars talk about competitive aggressiveness, they implicitly refer to those who are responsible for the operations of the firm and who take ultimately the decisions. In other words, they might refer to the competitiveness of managers, entrepreneurs and business owners. The findings in Rae’s (2013) study suggest that the concept of competitive aggressiveness needs to be redesigned to include multiple forms of competitiveness. In other words, competitiveness is part of competitive aggressiveness. The competitiveness of individuals may at least act as an indicator of a firm’s competitive aggressiveness.
B.3 External networking behavior
B.4 Linking the concepts
Because now entrepreneurial orientation, autonomy, competitive aggressiveness and external networking behavior have been introduced, it is time to link them. After linking the concepts, they are integrated into a conceptual model presented in the next section.
External networking behavior provides managers the resources for their firm. They get access to
resources, which may otherwise not have been obtained. Trust plays an important role in these external relationships. Rather, when relationships are prolonged (Cook, 2005). Access to resources (i.e. information) may help managers to adjust the operations of the firm and so to improve firm performance. The same may apply to self - employed individuals. External networking may provide them access to resources, which helps to improve their firm and accordingly their firm performance. The hypothesis is formulated as follows:
H1: External networking behavior is positively related to firm performance.
Autonomy is explained as individuals or teams taking independent actions. It provides them the
freedom to work without restraints (Lumpkin and Dess, 1996). This definition of autonomy has been designed on a firm level, whereas it implies the role of autonomously acting managers and employees. Although EO theory is widely used on both firm - and individual level (Frese et al, 2002; Lumpkin & Dess, 1996), scholars examine EO mostly on the firm level. Self - employed individuals can experience autonomy as well (source). However, autonomy for the self - employed remains so far rarely mentioned in the literature. That does not mean that nothing has been written at all about this phenomenon. Some scholars have written though that the self - employed report greater job autonomy than employees (Eden, 1975; Hundley, 2001; Tetrick et al., 2000). Kalbers and Cenker (2008) found that autonomy is positively related to job performance. Based on these findings, the following hypothesis is formulated in a self - employed context:
H2: Autonomy is positively related to firm performance.
Gammelgaard et al. (2012) found that there is a positive association between autonomy and inter - organizational networking. This study has focused on subsidiaries and not on self - employed individuals. To examine the relationship between autonomy and external networking behavior in the context of self - employed individuals, the next hypothesis is designed:
The study of Gammelgaard (2012) also indicated that inter - organizational networking has a mediating effect in the relationship between autonomy and firm performance. The effect of autonomy on firm performance increased as inter - organizational networking was tested as a mediator in this relationship. To end this section, a third hypothesis in the context of self - employed is provided that is based on these findings:
H4: External networking behavior positively mediates the relationship between autonomy and firm performance.
Competitive aggressiveness is defined as firms performing competitive attacks (Ferrier 2001). The
competitive actions of individuals form the basic building blocks for this. In other words, individuals initiate competitive actions against rival firms. These individuals represent the managers of these firms, as competitive aggressiveness is mostly described on a firm level (Rae, 2013). Although EO theory is widely used on both firm - and individual level (Frese et al, 2002; Lumpkin & Dess, 1996), scholars examine EO mostly on the firm level. Self - employed individuals can experience competitive aggressiveness as well (Rae, 2013). Competitive actions performed by self - employed remain so far rarely mentioned in the literature. Without a doubt, self - employed individuals can also perform competitive actions. Furthermore, competitive aggressive behavior is related to better organizational performance (Ferrier, 2001). Based on this reasoning, the following hypothesis is formulated in a self - employed context:
H5: Competitive aggressiveness is positively related to firm performance.
Wincent and Westerberg (2005) found, that in a strategic SME network there is a strong association between CEO traits and inter - organizational networking. It seems logical that traits of self - employed individuals show a similar pattern as they are likewise in charge of the firm. Furthermore, larger firms are generally more aggressive than SMEs (Baum & Korn, 1996; Lin, 2006). One of the reasons for this is that they have the resources, which are necessary to take competitive actions (Blackford, 2014). SMEs often lack these resources. It may be that self - employed individuals behave aggressively against competitors, but often do not have the resources, which are required to compete. That is why they intend to form external networks to gather essential resources (i.e. valuable information). Since valuable information may be gathered from internal sources, but also from the external environment (Menon & Pfeffer, 2003). To examine the relationship between competitive aggressiveness and external networking behavior in the context of self - employed individuals, the next hypothesis is designed:
The study of Stam and Elfring (2006) indicated that the effects of EO on firm performance are mediated by the network position of a venture in the industry. The network position enables the firm to connect to firms in other industries. Ventures with a strong EO combine their proactive and risk - taking behavior to engage in network ties with organizations from other industries. Especially, the importance of strategically managing networks is emphasized. An additional note of Stam and Elfring (2006) is that entrepreneurs should sustain informal contacts with founders of rival firms, but need to avoid regular information change as this poses threat to business success. Competitive aggressiveness seems often closely related to proactiveness. Many competitive actions can therefore also be seen as proactive. For example, Covin and Covin (1990) view competitive aggressiveness as a firm’s willingness to dominate competitors by combining proactive and innovative moves. Thus, the dividing line between competitive aggressiveness and proactiveness appears thin. Returning to Stam and Elfring’s (2006) findings, it might be assumed that managing networks can also mediate the relationship between competitive aggressiveness and firm performance. In other words, by performing external networking behavior. To end this section, a sixth hypothesis in the context of self - employed is provided:
H7: External networking behavior positively mediates the relationship between competitive aggressiveness and firm performance.
B.5 Conceptual framework
To provide a better picture of what is expected a conceptual framework has been developed which represents the hypotheses argued above. In this case putting autonomy and competitive aggressiveness together in one conceptual model is sufficient as all the relationships are expected to be positive. The model is presented in Figure 1.
C. METHODOLOGY
In this section the methodology of this empirical study is explained. First the data collection and sampling are discussed followed by the measures.
C.1 Data collection and sampling
The data gathering process consists of conducting a survey using questionnaires. The survey included a digital questionnaire that was produced with an online survey program. An online questionnaire saves both the researcher and the respondent considerable time and it is more environmental friendly. The questionnaire was in Dutch. The respondent was asked to provide his or her name and the name of the firm. Then questions were asked to measure external networking behavior, entrepreneurial orientation and firm performance. Furthermore, the survey was conducted in collaboration with Venture Lab Noord - Nederland. This research institution offers a research - based business development program to startups and established firms that want to accelerate their business growth. Venture Lab provided a list with firms. All the firms on this list have a minimum of three employees. In exchange for this kind gesture, some extra questions were formulated in favor of their research purposes.
solar panel firms to agricultural firms, but also from metal construction firms to computer service firms. The online survey program collected all the answers and provided the researcher a clear picture. Subsequently, the data was used for statistical analysis as statistical tools increase the validity of research.
C.2 Measures
To find any empirical evidence that may ratify the formulated hypotheses, a quantitative study is conducted as this research attempts to figure out whether there are relationships between external networking behavior, entrepreneurial orientation and firm performance and what these relationships actually mean. The measures need to be valid and reliable because if an operationalization has a substantial systematic measurement error (= low validity), researchers will estimate false relationships (Davidsson, 2004, p.105). The existence of mediating effects is examined with the use of Baron and Kenny’s (1986) work. Specifically, the analysis is based on four steps. A short explanation of the mediating steps is provided now. The first step is that the causal variable has to be correlated with the outcome. The second step is that the causal variable has to be correlated with the mediator. The third step is that the mediator has effect on the outcome variable. The fourth step is to determine that the mediator variable partially or completely mediates the causal-outcome relationship.
C.2.1 Dependent variable
Firm performance can be measured in several ways. It is common to see that financial measures
resource & development or marketing projects may alter the profitability of the firm that in turn may have long-term effects. Besides, if the profitability of the firm increases, it may indicate a firm’s growth, while it actually represents the reduction of costs or a combination of both (Rust, Moorman & Dickson, 2002). A third argument in favor of subjective measures stresses that profit performance measures in cross - industry studies may be more useful when they are subjective instead of objective. This holds true, since profit levels can significantly vary across industries, blurring any relationship between the independent variables and the performance of the firm. The fact that firms are able to take into account the relative profit performance of their industry when providing a response makes subjective measures preferably more appropriate. Last point is that there have been various studies that showed a strong correlation between objective and subjective measures (Dawes, 1999). Cameron (1978) argues that performance can be seen as a multidimensional construct by making a comparison of it with competitors which results in the revelation of vital information (Birley & Westhead, 1990).
C.2.2 Mediating variable
External networking behavior in Naudé et al.’s (2014) research is defined as building contacts,
maintaining contacts and using contacts. They adopted this from the work of Wolff and Moser (2006). The former makes use of only external networking behavior with 9 items. These items, which were equally divided among the three constructs, reflect the extent of networking of CEOs with others outside the organization. This study follows the original conceptualization of external networking behavior as it was operationalized as a higher order construct that contains three first order constructs that represent building, maintaining and using relationships. Except, it does not intend to measure the external networking behavior of CEOs, but of self – employed. The three constructs in Naudé et al.’s (2014) study had respectively factor loadings with coefficient alpha reliability estimates of 0.70, 0.68 and 0.68. In this study the reliability estimates are 0.72, 0.70 and 0.68. The 9 selected items as the measures for external networking behavior were three items for each of the three constructs building, maintaining and using contacts. The items are in a 5 - point Likert scale ranging from “1” not applicable at all to “5” fully applicable with a neutral response when the answer is unknown. An overview of the constructs and survey items can be found in Appendix 1.
C.2.3 Independent variables
Entrepreneurial dimensions as part of a strategic posture scale are the indicators of EO presence in
organizations (Covin and Slevin, 1989). Lumpkin and Dess (1996) designed two other dimensions, autonomy and competitive aggressiveness. Hughes and Morgan (2007) attempted to test the relationship between the five dimensions and firm performance. They generated a pool of items that were supposed to reflect either autonomy or competitive aggressiveness using a 7 - point Likert scale ranging from “1” strongly disagree to “7” strongly agree. These measures were mostly sourced from previous studies with some modifications made followed by pre - tests. They used the work of Lumpkin and Dess (1996) as a guide in developing scales for EO dimensions. The competitive aggressiveness measures were developed from Lumpkin and Dess (2001) and the autonomy measures were based on Engel (1970), Hornsby et al. (2002) and Spreitzer (1995). The construct of competitive aggressiveness, which contained three items, had a factor loading with a coefficient alpha reliability estimate of 0.82. The construct of autonomy, which contained six items, had a factor loading with a coefficient alpha reliability estimate of 0.77
D. RESULTS
Hypothesis 1 (H1) states that external networking behavior positively relates to firm performance. Results of the simple regression test indicate that there is support for this relationship (Beta = .173, p < .01). The R - square (.076) indicates that 7.6% of the variance in firm performance can be predicted from external networking behavior. The significant F - value (8.202, p < .01) indicates that external networking behavior reliably predicts firm performance. Therefore the hypothesis that external networking behavior positively relates to firm performance is accepted.
Hypothesis 2 (H2) states that autonomy positively relates to firm performance. Results of the simple regression test show that this relationship is not significant. Therefore the hypothesis that autonomy is positively related to firm performance is rejected.
square (.039) indicates that 3.9% of the variance in external networking behavior can be predicted from autonomy. The significant F - value (4.071, p < .05) indicates that autonomy reliably predicts external networking behavior. Therefore the hypothesis that autonomy positively relates to external networking behavior is accepted.
Hypothesis 4 (H4) states that external networking behavior positively mediates the relationship between autonomy and firm performance. Mediation is not possible as there is no significant relationship between autonomy and firm performance found in the first step already. Therefore the hypothesis that external networking behavior positively mediates the relationship between autonomy and firm performance is rejected.
Hypothesis 5 (H5) states that competitive aggressiveness positively relates to firm performance. Results of the simple regression test show that this relationship is significant (Beta = .371, p < .001). The R - square (.36) indicates that 36% of the variance in firm performance can be predicted from competitive aggressiveness. The significant F - value (56.138, p < .001) indicates that competitive aggressiveness reliably predicts firm performance. Therefore the hypothesis that competitive aggressiveness positively relates to firm performance is accepted.
Hypothesis 6 (H6) states that competitive aggressiveness positively relates to external networking behavior. Results of the simple regression test show that this relationship is significant (Beta = .275, p < .01). The R - square (.079) indicates that 7.9% of the variance in external networking behavior can be predicted from competitive aggressiveness. The significant F - value (8.202, p < .01) indicates that competitive aggressiveness reliably predicts external networking behavior. Therefore the hypothesis that competitive aggressiveness positively relates to external networking behavior is accepted.
E. DISCUSSION & CONCLUSION
The goal in this empirical study is to answer the following research question:
What is in a self - employed context the mediating effect of external networking behavior in the EO dimensions (autonomy, competitive aggressiveness) - firm performance relationship?
The results indicate that external networking behavior is positively related to firm performance as it shows a significant effect for this relationship. The hypothesis (H1) is accepted. To display behavior that aims to create networks outside the firm appears to be fruitful and is able to make a contribution to firm performance. For autonomy however, no significant effect was found that supports the hypothesis (H2). In other words, there seems to be no association between autonomy and firm performance. The hypothesis is rejected. This does not mean that no effect at all was found for autonomy. Apparently, autonomy seems to have a significant effect on external networking behavior. The hypothesis (H3) is accepted. Self - employed who experience autonomy in their working field also tend to engage in external networking. Autonomy provides the freedom to act independently, which leads to forming external relationships. The mediating effect of external networking behavior in the autonomy - firm performance relationship was not found. However, this does not imply that external networking behavior itself has no mediating effect. The problem faced here is that in the first step of testing mediation, there was no link between autonomy and firm performance (H2). Then further steps to test mediation are redundant. Because of this reasoning, hypothesis (H4) is rejected.
mediates competitive aggressiveness and firm performance. No support was found to support this hypothesis, which is therefore rejected. Just as the mediating role of external networking behavior in the relationship between entrepreneurial styles and firm performance was not found (Naudé et al, 2014), this study similarly finds no mediating effects of external networking behavior. Both in the autonomy - firm performance relationship and the competitive aggressiveness - firm performance. Although it is uncertain whether there is really no mediating effect of external networking behavior in the former relationship. Since autonomy already indicates no significant effect on firm performance (H2), it can be concluded that this study cannot find any mediating effects.
Limitations
outcomes of the research. Case studies might be a solution.
This study made an attempt to contribute to research on EO and external networking behavior as well as to practitioners. The intention was to validate external networking behavior as a generalized mediator in the EO - firm performance relationship. Specifically, in the autonomy - firm performance and the competitive aggressiveness - firm performance relationship in the context of self - employed. Naudé et al. (2014) found no mediating effects of external networking behavior in the EO - firm performance relationship. Neither does this study succeed to indicate a significant mediating effect of external networking behavior. However, examining the relationships between autonomy, competitive aggressiveness, external networking behavior and firm performance produced some noticeable outcomes. According to the results, autonomy and competitive aggressiveness have both a positive significant effect on external networking behavior. Likewise, competitive aggressiveness has a positive significant effect on firm performance. This means that there are at least some positive relationships between these concepts, but the mediating effect of external networking behavior has yet to be demonstrated. Another conclusion can be that scholars must become unanimous about the limited value of external networking behavior as a mediator in the EO - firm performance relationship. Anyway, the thing that practitioners, in this case self - employed individuals, might learn from this study is that experiencing autonomy at work can be a good environment for them to engage in networking with outsiders. If they are able to increase their perception of acting autonomously, they may transfer this feeling to their external networking behavior. In other words, they become more eager to network. Being competitively aggressive can also create the urge to start networking with others outside the firm. Competitive self - employed can use the benefits of networking (i.e. access to resources) for themselves and their firm. The majority of the respondents indicated that they are competitive, but do not necessarily want to outperform other firms. Competitive self - employed mainly want to develop their business skills. Thus, networking may provide them the opportunities to improve their daily operations and firm performance regardless of having the intention to outperform others.
Future research
This is, because self - employed often lack a lot of resources and are therefore often more prone to fail during new entry than large firms. To overcome this resource barrier, self - employed may engage in networks. Research on networking mostly concerns managers of firms and ignores self - employed. Therefore research on external networking behavior and the relationship with EO deserves more attention. New insights might be gained to increase the understanding of these concepts. In fact, EO theory should actually be put in another perspective. Too often scholars focus on firm level EO, while the individual level of EO remains underexposed. Scholars should try to focus more on the individual level of EO. Not only on the individual level of autonomy and competitive aggressiveness, but also of risk - taking, proactiveness and innovativeness.
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G. APPENDIX Appendix 1.
Items overview per construct Item description
A. External networking (based on Wolff & Moser, 2006)
Measures of building contacts
1. I develop informal contacts with others outside the firm. 2. I take part in network events or in professional congresses.
3. I use network events or professional congresses to build up new contacts.
Measures of maintaining contacts
4. When I have information, which might be valuable to colleagues or acquaintances of other organizations, I will pass it on to them.
5. I use my contacts outside the firm to ask for business advice. 6. For business purposes, I stay in contact with former colleagues.
Measures of using contacts
7. When I meet people of other organizations, I approach them to get updates about news and changes in their professional careers.
8. I exchange professional tips and hints with colleagues or acquaintances of other organizations 9. When I face a problem during work, which I can’t solve, I contact colleagues or acquaintances of
B. Entrepreneurial dimensions
Measures of autonomy (freely developed from Engel, 1970; Hornsby et al., 2002;
Spreitzer, 1995)
1. I have the feeling that I can think and act freely. 2. I perceive no restrictions during my work.
3. I perform my tasks freely and decide my own approach. 4. I have the freedom to communicate.
5. I have the feeling that I can act independently. 6. I have my own responsibilities.
7. I have access to all the relevant firm information.
Measures of competitive aggressiveness (freely developed from Gill & Deeter, 1988; Houston et
al., 2002; Spence & Helmreich, 1978) 1. I am a competitive person.
2. I look forward to competing. 3. I enjoy competing against others. 4. I like competition.
5. I have a competitive mindset. 6. I try to be the best.
7. I really enjoy working in situations involving skill and competition.
C. Firm performance (based on Wiklund & Shepherd, 2003)
Measures of firm performance compared to two main competitors
1. Revenue growth 6. Product / service variety 2. Sales growth 7. Product / service innovation 3. Net - / profit margin 8. Process innovation
