Next, we explore each perspective on growth in terms of the relationship between its relevant constructs and small business growth, while controlling for the impact of the major constructs from other perspectives. The results are specified in terms of propositions regarding the direct and indirect effects of these constructs on small business growth through EO. When we find that a construct does not provide a significant explanation of the variance in the dependent construct, we propose that the relationship does not exist in order to provide a challenge for subsequent research to refute the proposed nonrelationship. We will discuss our propositions in light of existing small business literature. However, we would like to emphasize again that not all studies referred to below draw on the same definition of small business and the same operationalization of growth, as we do. Nevertheless, we believe that comparison with these studies does provide some support for the propositions.
4.2 Environment, strategic “Fit,” and small business growth
In general, proposition 2 suggests that the different dimensions of the task environment construct have differential direct and indirect impacts on small business growth. Specifically, proposition 2a suggests that dynamism simultaneously has a positive and a negative impact on small business growth. Dynamism has a direct negative impact on small business growth, which suggests that firms in dynamic environments grow slower than those in more stable environments, if their levels of EO are held constant. However, the indirect positive effect of dynamism on growth through EO suggests that in dynamic environments, where market demand is constantly shifting, opportunities become abundant, and growth should be highest for those firms that have an orientation for pursuing new opportunities because they have a good fit between their strategic orientation and the environment. Firms more content with existing operations, however, are less likely to benefit from a dynamic environment, because market demand might shift away from the firm’s products negatively impacting growth.
Other empirical observations support this notion. Zahra (
1993) found a strong positive relationship between EO and performance among firms in dynamic growth environments, whereas these relationships were largely negative among the firms present in static and impoverished environments. Similarly, Miller (
1988) found that innovative strategies in uncertain (unpredictable and dynamic) environments were associated with higher performance.
Proposition 2b suggests that hostility has only a direct negative effect on small business growth, and no direct effect on growth through EO. Such a finding is consistent with, for example, deterministic perspectives of the environment and firm performance where the environment is all powerful, and there is little that the small business can do to recognize the hostility of the environment and change the firm’s growth trajectory by changing its strategic orientation (e.g., Aldrich and Auster
1986). It is also consistent with the empirical finding that during recessions, when the environment is generally hostile, small firms are more likely than large firms to go out of business.
Proposition 2c suggests that heterogeneity has no direct or indirect effect on small business growth. It could be that this task environmental variable does not increase our understanding of firm growth, or it may be useful for explaining large firm growth, but for small businesses, it has no effect on growth, or, of course, there is an effect (direct and/or indirect), but we are unable to detect the relationship. Whether heterogeneity does, in fact, impact small business growth requires more empirical tests. It will be interesting if others can refute our proposition.
Proposition 3a suggests that dynamism increase has both a direct positive and an indirect positive effect on small business growth. That is, as the environment is perceived to be increasing in dynamism, then this not only directly provides growth opportunities for small businesses, but also encourages these businesses to undertake more EO in order to more effectively discover and exploit these opportunities for growth. It is interesting to compare the implications of propositions 2a and 3a. The direct negative effect of dynamism, in combination with the direct positive effect of dynamism increase, suggests an important difference between an assessment of the snapshot image of the environment and environmental changes over time. Our interpretation of this finding is that small businesses have the ability to move between different types of task environments. Once they find a profitable market niche, it is important that this opportunity is exploited before moving on to pursue other opportunities.
Proposition 3b suggests that a hostility increase has a direct and indirect negative effect on small business growth. As a small business environment becomes more hostile, small businesses are likely to become less entrepreneurial in their orientation, and the environment is likely to provide fewer resources and opportunities to grow the business.
Proposition 3c suggests that heterogeneity increase has a positive indirect, but no direct effect on small business growth. This means that an increase in the complexity of the environment encourages the small businesses to develop a more EO, possibly to find or create attractive niches arising from the additional heterogeneity. It might also be that the small business is able to grow with less threat of retaliation, given the increasing complexity in the environment (e.g., greater causal ambiguity (Rumelt
1987)).
Covin and Slevin (
1991) suggest that industry technological sophistication and industry life cycle stage affect EO, e.g., a disproportionately high share of hi-tech firms have been found to be entrepreneurial due to environmental conditions (Covin and Slevin
1991). However, to the authors’ knowledge, these relationships have not yet been empirically tested. Zahra (
1993) proposes a rationale for not testing these relationships because technological sophistication and industry lifecycle stage refer to one type of conceptualization of the environment, whereas environmental dynamism, heterogeneity, and hostility refer to another. Therefore, according to Zahra, the researcher should choose only one of the conceptualizations, since the other becomes redundant.
Proposition 4 suggests that industry has an effect on small business growth, but no indirect effect, whereas propositions 2 and 3 suggest that the task environment and changes in that environment have both a direct and an indirect effect on small business growth through EO. This suggests that a possible explanation for the lack of research on the relationship between industry and EO in explaining small business growth is that there is no relationship (or it is a difficult one to find), and research presenting nonfindings is less likely to be published. It also has implications for Zahra’s rationale that to include both industry and task environment variables in a single model is redundant; our proposition suggests that the impact of industry and task environment variables differ in their relationship with small business growth. Relative to including task environmental variables in a model, using only industry variables would overlook the direct effects of the environment and understate the importance of the indirect influence of the environment on small business growth though EO.
In sum, rather than a perspective of reductionism targeted at the environmental variables, our propositions suggest that it is likely important to include measures of change in the task environment over and above simply using measures of the current task environment. It also appears important to investigate the direct and the indirect effects (through EO) of the environment on small business growth, at least the indirect effects of dynamism, dynamism increase, hostility increase, and heterogeneity increase. We also propose that the redundancy created by including both industry variables and task environment variables may be less than first expected, and including both the “industry” and “task environment” constructs might improve the explanatory ability of small business growth models.
4.3 Resources and small business growth
In proposition 5a, we suggest that firms with greater access to human and financial resources are more likely to undertake an EO, which, in turn, facilitates small business growth. Studies have found that access to more financial capital facilitates the pursuit of resource-intensive growth strategies (Cooper et al.
1994) because, it is argued, that slack resources can be used for experimentation with new strategies and practices, allowing the business to pursue new growth opportunities (Penrose
1959). Our proposition is consistent with these findings in that financial capital encourages a change to a more EO, which in turn leads to higher growth.
In proposition 5b, we propose that managers with considerable human capital know where to look for opportunities (Shane
2000), can more accurately assess the value of potential opportunities (Venkataraman
1997), and have the ability to exploit these opportunities (Cressy
2006; Kim et al.
2006), which encourages an EO. It is this EO that then facilitates small business growth. We suggest that human capital has little to no direct influence on small business growth—such as producing higher quality decisions that have a positive influence on growth—rather, we propose, human capital has a positive impact on EO, which, in turn, has a positive impact on growth.
In proposition 5c, we address the manager’s social network. Research on social capital suggests that network ties provide access to resources necessary for opportunity exploitation (Birley
1985; Johannisson
2000). We propose that these resources are important to achieve small business growth, but primarily because they encourage an EO, and it is the EO that drives the small business growth. Propositions 5b and 5c both suggest that sources of resources that have an indirect positive effect on small business growth extend beyond the organization, and reside in the small business manager (human capital) and the network of the small business manager, and are consistent with those advocating the importance of investigating the resources of the individual in entrepreneurship research (Alvarez and Busenitz
2001).
The implications for future research arising from proposition 5 is that when investigating the role of resources on small business growth, EO should be considered. EO could be controlled to refute our proposition that resources do not have a direct effect on small business growth. Alternatively, EO could be included in the model to test the nature of the indirect relationship that resources have with small business growth through EO. Our findings suggest that in a small firm, resources must be put to use in creative ways (i.e., through adopting an EO). Merely providing a small firm with more money does not automatically mean it will expand.
4.4 Attitude and small business growth
There have been a few studies that have researched the link between attitude and small firm growth, and have found that attitude may provide an important explanation, at least in part, for why some firms grow, while others do not (cf. Kolvereid and Bullvåg
1996; Miner
1990; Miner et al.
1989; Wiklund and Shepherd
2003b). Our model further delineates this explanation by proposing that the relationship between attitude and growth is two-fold: (1) a direct relationship between growth attitude and growth and, (2) an indirect relationship where growth attitude encourages a more entrepreneurial strategic orientation, which, in turn positively impacts small business growth.
The direct relationship is consistent with motivation theories that posit that, those who are more motivated (have a more positive attitude toward growth) will perform better at a task (in this case growth) when they invest more time and energy into that task (e.g., Davidsson
1989a,
b; Kolvereid
1992; Miner et al.
1989). Furthermore, we anticipate that certain attitudinal patterns of the small business manager, in terms of goals, work tasks, growth aspirations, and expected consequences of growth can be expected to generate a more EO and thus, choose a strategy facilitating growth.
The goals of the small business manager are likely to influence the firm’s strategic orientation. It appears that the personal goals of the entrepreneur have an influence on the strategy of the firm, mediated through the decision to behave entrepreneurially (Naffziger et al.
1994). For example, those individuals who have goals to be creative are more likely to be innovative and strive to develop new products (Amabile
1988), which is anticipated to have a positive influence on EO (see Khan (
1986), who found that creativity was the most important variable in determining new venture success).
The small business manager’s favored work tasks are also likely to influence the firm’s EO. Miner (
1990) found that high growth entrepreneurs scored higher on the motivational construct of “a desire to think about the future and anticipate future possibilities” than did other entrepreneurs. An interest in developing strategies for the future and working in marketing appears to be related to growth, while those who favor work tasks associated with operations and accounting appear to operate small businesses that experience less growth.
Finally, the small business manager’s expected consequences of growth are likely to influence the firm’s EO. Peoples’ images of the future influence their current decisions by determining their goals and the procedures they select for achieving them. A connection between the present and the future is typically forged by people imagining various futures, considering the advantages and disadvantages of each, selecting their preferred end states, and then developing plans to achieve their desired goals, while avoiding negative outcomes (Locke and Latham
1990). Therefore, managers’ images of the future outcomes arising from growth likely influence their strategic orientation.