2.1 Entrepreneurship
The term entrepreneurship has been used for decades, yet to this day there is little consensus about its definition (Williams et al.
2010). Many perspectives can be found in the literature but the most common themes include: creation of wealth, creation of enterprise, creation of innovation, creation of change, creation of employment, creation of value, and creation of growth (Morris et al.
2008). Considerable effort has recently been put into developing a uniform definition. For example, Morris et al. (
2008) performed a keyword analysis of the definitions of entrepreneurship found in relevant literature and found 18 keywords used at least five times. Subsequently, they defined entrepreneurship according to the definition of Stevenson and Jarillo-Mossi (
1986) that “entrepreneurship is a process of creating value by bringing together a unique package of resources to exploit an opportunity” (p. 10), because this definition captured all the core keywords of entrepreneurship encountered in their research.
This definition does not limit the kind of organizations in which entrepreneurial activities may appear. Indeed, entrepreneurial behaviour is not only possible in new ventures, but also in firms regardless of their size and age (Kraus et al.
2011). The entrepreneurial activities of existing and established firms have for example been described as
corporate entrepreneurship (Burgelman
1983; Zahra
1993),
entrepreneurial orientation (Lumpkin and Dess
1996; Wiklund
1999), or
intrapreneurship (Antoncic and Hisrich
2001,
2004).
Within the present article, the entrepreneurial activities of an established firm will be referred to as its ‘Entrepreneurial Orientation’ (EO). EO refers to the decision-making styles, practices, processes and behaviours that lead to ‘entry’ into new or established markets with new or existing goods or services (Lumpkin and Dess
1996; Wiklund and Shepherd
2003; Walter et al.
2006). This definition of EO is consistent with the view that EO leads to new market entry in either new or existing markets, but also explicitly recognizes that this can be achieved with either new or existing goods or services. In a manner of speaking then, a firm that is entrepreneurial oriented ventures into new or existing markets, with innovations that are either based on new or existing products and services, in a manner that is appreciative of the uncertainty and incurs risk in doing so.
The relationship between EO and business performance has been researched intensively. The entrepreneurship research started in the United States of America (USA) and until the year 2000 most studies are conducted in this country setting. Later, researchers performed studies in, among other places, Sweden (Wiklund and Shepherd
2003,
2005), Slovenia (Antoncic and Hisrich
2001,
2004; Antoncic
2006), South Africa (Goosen et al.
2002), China (Chen et al.
2005), Greece (Dimitratos et al.
2004), Finland (Jantunen et al.
2005), Germany (Walter et al.
2006), Vietnam and Thailand (Swierczek and Ha
2003), Netherlands (Kemelgor
2002; Stam and Elfring
2008), United Kingdom (Hughes and Morgan
2007) and Turkey (Kaya
2006). Among the legacy of studies that have taken place over the years, the business performance consequences of EO have not always been clear.
Recently, Rauch et al. (
2009) performed a meta-analysis of the relationship between EO and business performance. Their study included 51 articles and showed a significant positive relationship between EO and business performance. The control variable for cultural differences between continents included by the authors turned out to be statistically insignificant, meaning that the relationship between EO and business performance is “of similar magnitude in different cultural contexts” (Rauch et al.
2009, p. 779). Of the 51 papers included, only four other studies reported mixed or no significant findings. Slater and Narver (
2000) did not find a significant relation between entrepreneurial orientation and business performance at all. Swierczek and Ha (
2003) found only a partial positive relationship and Walter et al. (
2006) found that EO is not directly related with business performance. Covin and Slevin (
1989) found that there is a larger positive effect of entrepreneurship on business performance in hostile environments, while there seems to be no significant relation in benign environments. Also, other researchers have included environment as a moderator or as a control variable in their models. Lumpkin and Dess (
2001) found environmental hostility to be a significant moderator in the relationship between EO and firm profitability. Wiklund and Shepherd (
2003) use environmental munificence and heterogeneity as control variables within their research on knowledge-based resources and EO. Within their research, environmental munificence emerged as a significant control variable.
As our study, the research executed by Kemelgor (
2002) and Stam and Elfring (
2008) is also performed in the Netherlands. Kemelgor (
2002) performed a comparative analysis of the differences in EO between Dutch companies and their direct competitors from the USA. Their findings showed a positive relationship between EO and all of the performance measures incorporated in their study (number of new innovations, number of patents received and return on sales) for the US firms. In the Netherlands, however, this relationship was only proven to be significant for the number of patents received and return on sales. Furthermore, the significance is lower (5% compared to 1%) and, more importantly, the relationship is weaker. Kemelgor (
2002) suggests two possible reasons for these differences. The first is the differences in the culture towards entrepreneurship between the Netherlands and the USA. A second reason, according to Kemelgor (
2002), is the existence of a Work Council in Dutch companies, required by Dutch law, where employees can discuss organizational operations. This was argued to lead to a situation in which “participation [in the firm’s EO] is a social obligation rather than a vehicle to truly impact business performance” (2002, p. 82).
In theory, for an entrepreneurial orientation to affect firm-wide behaviour and be adopted as an organizational mindset, it is necessary for employees across the firm to participate in the entrepreneurial actions captured within an EO on a voluntary basis. Lumpkin and Dess (
1996) for example commented on the extent to which employees were involved in the use of entrepreneurial activity as supported (or otherwise) by the culture and structure of the firm. In corporate entrepreneurship research for example, Ireland et al. (
2009) posited that buy-in into an entrepreneurial vision for the business depends on “[t]op-level managers [working] to create organizational architectures in which entrepreneurial initiatives flourish without their direct involvement” (p. 30). Ireland et al. (
2009), similar to Lumpkin and Dess (
1996), suggest that the structure and culture of the firm should encourage “a proclivity toward such qualities as decentralized decision making, low formality, wide spans of control, expertise- (vs. position)-based power, process flexibility, free-flowing information networks, and loose adherence to rules and policies… [g]reater mechanization implies the opposite” (p. 31), as well as “being highly committed to work and willing to accept responsibility for outcomes resulting from it” (p. 31). Following Kemelgor’s (
2002) logic, Dutch firm might be restricted form putting in place such structural and cultural conditions owing to the nature of Work Councils demarcating employees and management. Similar points can be drawn from the work of Hornsby et al. (
2002) in that employee involvement shapes their understanding of top managers’ willingness to facilitate and support entrepreneurial behaviour. When coupled with a voluntary acceptance of work discretion and autonomy, the EO of the firm would be expected to be more effective.
Stam and Elfring (
2008), on the other hand, performed a different kind of analysis than Kemelgor (
2002). They investigated whether and how the founding team’s intra- and extra-industry networks influence the performance of new ventures. From their research, it can be concluded there is a strong relationship between EO, measured by its network, and performance, but that it is weakened in firms with low social capital.
Wiklund and Shepherd (
2005) concluded after reviewing previous research that “the differences [among study findings] reflect the fact that EO may sometime, but not always, contribute to improved performance” (p. 2). The meta-analysis of Rauch et al. (
2009) nonetheless leads to an aggregate conclusion that an overall significant relationship between EO and business performance exists. Still, what these studies do suggest is that the value of EO might vary and so it is necessary for researchers to better appreciate the context in which EO is used by firms (e.g., Stam and Elfring
2008).
2.2 Dimensions of entrepreneurial orientation
According to Wiklund (
1999), most researchers agree that EO is a combination of three dimensions: innovativeness, proactiveness and risk-taking. Indeed, many studies (e.g., Covin and Slevin
1989; Naman and Slevin
1993; Zahra and Garvis
2000; Kemelgor
2002) follow this three dimensional model created by Miller (
1983). Research by Stetz et al. (
2000), Kreiser et al. (
2002) and Hughes and Morgan (
2007) have shown that the dimensions can vary independently from each other and should also be allowed to vary (as proposed by Lumpkin and Dess
1996). However, only a few researchers allow the dimensions described above to vary within their model and create a truly multidimensional EO model. The discussion lies in not whether the dimensions can differ from each other but is based on the belief that an entrepreneurial firm should score on all three dimensions (Covin et al.
2006). This issue is an important one because Lumpkin and Dess (
1996) posited that not all of the dimensions of EO would directly or positively affect business performance under different circumstances. Thus, to more fully appreciate the influence of EO, assessing the relative impact of each dimension of EO separately is arguably necessary.
Schumpeter (
1942) was one of the first to point out the importance of innovation in the entrepreneurial process. He called the disruptive innovation process ‘creative destruction’, a process that occurs when wealth is created by the introduction of new products or services that disrupt the current market and causes a shift in the use of resources. Extrapolating this view further, the EO dimension of
innovativeness is about pursuing and giving support to novelty, creative processes and the development of new ideas through experimentation (Lumpkin and Dess
1996).
The second dimension is
proactiveness. Proactiveness refers to processes which are aimed at “seeking new opportunities which may or may not be related to the present line of operations, introduction of new products and brands ahead of competition and strategically eliminating operations which are in the mature or declining stages of the life cycle” (Venkatraman
1989, p. 949). Indeed proactiveness concerns the importance of initiative in the entrepreneurial process. A firm can create a competitive advantage by anticipating changes in future demand (Lumpkin and Dess
1996), or even shape the environment by not being a passive observer of environmental pressures but an active participant in shaping their own environment (Buss
1987).
The third dimension,
risk-
taking, is often used to describe the uncertainty that follows from behaving entrepreneurially. Entrepreneurial behaviour involves investing a significant proportion of resources to a project prone to failure. The focus is on moderated and calculated risk-taking instead of extreme and uncontrolled risk-taking (Morris et al.
2008) but the value of the risk-taking dimension is that it orients the firm towards the absorption of uncertainty as opposed to a paralyzing fear of it.
Lumpkin and Dess (
1996) posited that the dimensions of EO can vary independently and proposed that each dimension might not necessarily contribute to business performance in each instance. Despite the caution advocated by Lumpkin and Dess (
1996), most studies have used a combined measure of risk taking, innovativeness and proactiveness to capture EO. For example, in the meta-analysis performed by Rauch et al. (
2009), only 25% of the articles included in their analysis use a multidimensional model in which the dimensions of EO can vary from each other. The authors conclude that the dimensions are of equal value to the EO-performance relationship and therefore can be indexed into one variable. Other studies like Yoo (
2001) and Covin et al. (
2006) confirm this, but some studies suggest otherwise (e.g., Hughes and Morgan
2007; Swierczek and Ha
2003). Swierczek and Ha (
2003) for example found in a sample of firms from Vietnam and Thailand, that the EO dimensions of proactiveness and innovativeness were positively related to firm performance, while risk-taking was not. Hughes and Morgan (
2007) show similar results in the UK while investigating incubating firms. In their sample, both risk taking and innovativeness is not significantly related to customer performance.
In concurrence with the work of Covin et al. (
2006), who argue that including the subdimensions to the model could lead to new theories, a multidimensional model with all three subdimensions described above will be tested. While the research evidence on the effects of the subdimensions of EO are far less clear than those that have assessed their combined effect as a single EO construct, the broad thrust of the literature is that EO should be associated with improvements in the business performance of firms in general (see e.g., Lumpkin and Dess
1996; Rauch et al.
2009). Indeed, over time a firm deploying an EO would be expected to develop a suite of skills (e.g., ability to manage uncertainty; ability to innovate to meet emerging opportunities and threats; ability to anticipate direction and nature of market change; ability to tolerate risk) that shape a firm entrepreneurship capability to further improve business performance. In line with results from earlier research on EO overall, research including separated dimensions and the high correlations between the dimensions, it is expected that all three dimensions are positively related to SME business performance. Thus, we hypothesize the following:
2.3 Environment
In their conceptual paper, Lumpkin and Dess (
1996) argued that the characteristics of the environment might have a strong effect on the strength and direction of the relationship between entrepreneurial orientation and firm performance. Empirical research has found support for this view, proposing that the relationship of EO and firm performance is contingent upon the firm’s external environment (e.g., Covin and Slevin
1989; Naman and Slevin
1993; Zahra
1993; Zahra and Covin
1995).
Uncertainty is one of the main characteristics of environmental and market turbulence. Miller (
1988) stated that the dimensions of dynamism and unpredictability are “the key components of the overarching construct of uncertainty” (p. 291). Therefore ‘unpredictability’ and ‘dynamism’ will be used and incorporated in an overall scale typically called
market turbulence (Miller and Friesen
1982). ‘Dynamic’ environments are described as markets in which products have a short life cycle, the level of industry innovation is high and customers’ demands as well as competitors’ actions are highly ‘unpredictable’ (Zahra
1993; Wiklund and Shepherd
2005).
Firms that invest in an EO could be expected to maintain and even improve business performance under conditions of high market turbulence market conditions because these firms tend to possess an ability to react to the constant shifts taking place in the environment by exploring and exploiting new opportunities. Firms with out an EO risk strategic paralysis when faced with change. The logic for this belief stems from the argument that EO drives exploration within the firm and allows the reconfiguration of resources and knowledge into better product-market solutions to meet anticipated change (Atuahene-Gima and Ko
2001; Hughes et al.
2007; Hughes and Morgan
2007). Firms that have not invested in building an EO may not be able to profit from changing conditions since they are unable to reconfigure their resources and knowledge. It is likely that the products of these firms move out of market demand resulting in lower business performance (Wiklund and Shepherd
2005), or lose competitiveness within the changing market (Atuahene-Gima and Ko
2001).
In the face of complex market turbulence, the skills associated with an EO, such as the ability to manage uncertainty, the ability to innovate to meet emerging opportunities and threats, the ability to anticipate direction and nature of market change, the ability to tolerate risk, would likely lead the managers of an entrepreneurially oriented firm to reframe and interpret events that result from market turbulence as opportunities for further business model change, growth and innovation, as opposed to threats that can only undermine the business. Indeed, Barr and Glynn (
2004) found that a greater propensity towards uncertainty avoidance, which might be thought of as an antithesis to classic views of EO, has been associated with greater interpretation of strategically relevant events as threats as opposed to opportunities. Given that the skills engendered and embedded by an EO would be expected to shape a firm entrepreneurship capability in time (see Wiklund and Shepherd
2003, for treatment of EO as a firm rare resource or capability), such a capability should enable a firm to better manage market turbulence such that the firm ought to be able to capitalize when market turbulence is acute. As such, business performance would be expected to improve.
A contingency theory perspective of this kind suggests that the direction and strength of the EO-performance relationship might be influenced by market turbulence (see Luthans and Stewart
1977; Miller
1981). We suggest that, besides the direct effect on EO on business performance, innovativeness, risk-taking and proactiveness will be positive related to the business performance of SMEs in environments where the uncertainty caused by acute market turbulence is high. This expectation is consistent with prior research that has associated EO with superior business performance in hostile environments as opposed to benign environments. For example, Covin and Slevin (
1989) found that EO was not directly related to firm performance but only the interaction term with environment; Miller (
1988) found that in an uncertain environment, innovation was positively related to business performance; and Zahra’s (
1993) empirical research found a strong positive relationship between business performance and entrepreneurship in firms operating in dynamic growth environments. We therefore postulate the following: