Entrepreneurial Orientation, External Environment, Internal Resources, and Firm

Entrepreneurship literature has extensively documented the effects of EO.

Scholars have long devoted themselves to studying the linkages between entrepreneurial behavior/entrepreneurial orientation and firm performance (Covin &

Slevin, 1989, 1991; Lumpkin & Dess, 1996; Zahra, 1993). This research demonstrates that the linkage of EO and performance is moderated or mediated by several variables, and this is discussed in the following paragraphs.

In 1991, Covin and Slevin proposed an organization-based conceptual model of entrepreneurial behavior (see Figure 2-6). This model proposes several linkages between entrepreneurial posture, external variables, strategic variables, internal variables, and firm performance. It suggests that an entrepreneurial posture has a positive influence on the following internal variables: top management values and philosophies, organizational resources and competencies, and organizational culture.

Lumpkin and Dess (1996) advance a framework by investigating the relationship between the dimensions of EO and firm performance. Regarding the EO-performance relationship, Lumpkin and Dess (1996) propose three alternative models: the independent effect model, the mediating effect model, and the moderating effect model.

First, the independent effect model views EO as an independent variable that directly influences firm performance. Second, the mediating effect model suggests that internal organization (such as the integration of activities) can mediate the association between

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EO and firm performance (see Figure 2-7). Finally, the moderatimg effect model proposes that the EO-performance relationship varies, depending on a number of contingency variables, such as internal and external factors (Covin & Slevin, 1991;

Lumpkin & Dess, 1996; Zahra, 1993) (see Figure 2-8).

Figure 2-6: Conceptual Model of Entrepreneurship as a Firm Behavior

Source: Covin and Slevin (1991), “A Conceptual Model of Entrepreneurship as Firm Behavior”

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Figure 2-7: Conceptual Framework of an Entrepreneurial Orientation

Source: Lumpkin and Dess (1996), “Conceptual Framework of Entrepreneurial Orientation”

Figure 2-8: Revised Conceptual Framework of Firm-Level Entrepreneurship

Source: Zahra (1993), “A Conceptual Model of Entrepreneurship as Firm Behavior: A Critique and Extension.”

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Based on the model created by Covin and Slevin (1991), a revised model of firm-level entrepreneurship or an entrepreneurial posture that includes mediating models and moderating models is shown in Figure 2-3. There are four differences between the revised model and the original model proposed by Zahra (1993). First, with respect to external factors, the revision uses a simpler classification than that originally suggested. Specifically, it eliminates the technological sophistication variable and incorporates another important environmental variable, munificence, which refers to the abundance of opportunities for innovation in the industry. Second, the internal variables are revised in the following four subcategories of variables: (1) managerial values and background (including age, past experience, and functional expertise); (2) organizational structure (including centralization, formalization, complexity, and organicity); (3) managerial process (including participation and fairness); and (4) organizational culture (including openness and empowerment). Finally, both the financial and non-financial outcomes of entrepreneurial activities are considered in this revised model. The model also suggests that there are certain non-financial benefits to be derived from an entrepreneurial posture, including several non-financial outcomes, such as increasing employee motivation and task involvement.

Figure 2-9 illustrates how the connection between a strategic orientation and its effect on firm performance has received significant attention (Zhou & Li, 2007). Zhou and Li focus on three major types of strategic orientation: market orientation, technology orientation, and entrepreneurship orientation. Teece et al. (1997) stress that

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firms are able to develop and exploit specific capabilities, combine them with existing resources, and further fit the changing environment, thus strengthening their competitive advantage. In addition, some scholars suggest that organizational knowledge should be viewed as a source of competitive advantage in fast-changing environments (for example, Dickson, 1992; Grant, 1996; Hoskisson, Eden, Lau, &

Wright, 2000). Therefore, it is intriguing to examine how EO influences the link between resources-capabilities and knowledge resources (Zhou & Li, 2007).

Figure 2-9: Conceptual Framework of Strategic Orientation

Source: Zhou and Li (2007), “Conceptual Framework of Existing Studies”

Although many scholars have argued that entrepreneurship or entrepreneurial action is an integral part of a resource-based framework (Alvarez & Busenitz, 2001;

Connor, 1991; Rumelt, 1991), past research has failed to integrate the effects of resource characteristics and an EO. Entrepreneurial-orientation opportunities exist

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primarily because different agents among firms have independent views or beliefs regarding the heterogeneity of resources as they decide which resources to utilize as inputs in production (Alvarez & Busenitz, 2001). In addition, Alvarez and Busenitz (2001) argue that entrepreneurs in firms may recognize specialized knowledge regarding resources (such as technological resource) and opportunities; thus, firm rents are produced.

An extensive discussion of the arguments is included in the conceptual literature of Lumpkin and Dess (1996). Their research indicates that performance can be improved when the EO is correctly aligned. The literature discusses certain variables, including internal and environmental factors, which can moderate the EO-performance relationship (Lumpkin & Dess, 1996; Zahra & Covin, 1995; Zahra & Garvis, 2000).

Indeed, these suggestions form the basis of empirical studies examining the relationship between EO and performance.

In a meta-analysis, Rauch, Wiklund, Lumpkin, and Frese (2009) explore the magnitude of the EO-performance relationship and assess the potential moderating variables that impacting this link. These scholars further find that businesses operating in small organizations and dynamic industries are more likely to benefit from an EO. To date, numerous studies have reported the direct effect of an EO on firm performance, and Rauch et al. (2009) recommend that future research tests moderating effects. They suggest that moderating variables could include environmental dynamism, national culture, strategy (low-cost strategy firms being less positively affected by EO than

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differentiation strategy firms), organizational structure (formalization), and various other factors.

In summary, the field of strategy management is concerned with understanding the complex factors that influence firm performance. Two strands of research have been largely separated into outside-in and inside-out view. This study employs industrial structure to analyze environmental dynamism in term of outside-in view and to analyze the resource and capability by using resource-based view in term of inside-out view. In this study, there are two central issues in this study. First, the promotion of value or rareness of resource-capability combinations is dependent on the stimulation of environmental dynamism that firms have capability to face, and this capability is closely connected to the notion of EO. Second, the improved performance through the strategy-making process is dependent on the capability to exploit internal resources, and this capability is also originated from EO. In addition, as mentioned above literature review, previous scholars propose several moderating factors (external environment) and mediating factors (internal organization), which would influence on the association between EO and firm performance in proposed conceptual models.

Therefore, this study examines above two main issues by integrating internal organization and external environment, thus forming outside-in and inside-out strategic logic.

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