A major development in the literature has been on the conceptual model of entrepreneurship as firm behaviour. Miller (1983) saw a firm’s Entrepreneurial Orientation (EO) as a combination of the firm’s risk-taking, innovation and proactiveness. Covin and Slevin (1991) clarified the role of these dimensions (postures), and linked
them clearly to enhancing firm performance. Lumpkin and Dess (1996) expanded the EO framework by adding the dimensions: autonomy and competitive aggressiveness. Although there is general agreement that EO does impact on firm performance (Lyon, Lumpkin and Dess, 2000), the affect of each EO dimension on firm performance remains a matter of debate.
Innovation: Covin and Miles (1999) suggested that entrepreneurship would not exist without innovation.
They defined innovation as the firm’s tendency to support new ideas, experimentation and creative processes earlier than competitors. Peters (1990) said that innovation requires creativity, and an obsession to see it through. Neely and Hii (1998), considered research and development (R&D) an important source of innovation. These authors said R&D included the ability of the firm to improve existing products, develop new products, and develop new production methods or equipment and product quality.
Proactiveness: Venkatraman (1989) claimed proactiveness was an important ingredient of entrepreneurship. This author defined proactiveness as seeking new opportunities, which may or may not be related to the present line of operations. Venkatraman also suggested firms can be proactive by: shaping the environment;
introducing new products and brands ahead of competition; strategically eliminating operations which are in the mature or declining stages of product life cycle; participating in emerging markets; and by anticipating and pursuing new opportunities.
Competitive Aggressiveness: The intensity of a firm’s efforts to outperform industry rivals and taking them head on at every opportunity is defined as competitive aggressiveness. It is characterised by a strong offensive posture, which is directed at overcoming competitors (Lumpkin & Dess, 1997: 2). Venkatraman (1989) suggested that competitive aggressiveness is accomplished by setting ambitious market share goals and taking bold steps to achieve them, such as cutting prices and sacrificing profitability.
The entrepreneurship literature regards the dimensions of proactiveness and competitive aggressiveness synonymously. However, Lumpkin and Dess (1997) argued that there is an important distinction between the two dimensions. They suggested proactiveness and competitive aggressiveness are distinct concepts that may not co-vary and are differentially related to firm performance. In their study, Lumpkin and Dess (1997: 2) said that proactiveness is “a response to opportunities whereas competitive aggressiveness is a response to threats”.
Risk Taking: Miller and Friesen (1978: 923) defined risk-taking as “the degree to which managers are willing to make large and risky resource commitments”. Recent research indicates that entrepreneurs have higher scores on risk-taking tests than non-entrepreneurs (Falbe & Larwood, 1995). This view is supported in a study by Saravathy, Simon and Lave (1996) who suggest that entrepreneurs are more prone to accept risk as a part of everyday business. Moreover, Morris (1998) found that entrepreneurs tended to be moderate or calculated risk-takers. Calculated risk-taking is explained by Morris as an attempt on the part of the entrepreneur to find ways to mitigate, shift or share risk.
Autonomy: Put simply, autonomy is having the authority to follow through on your convictions. A more complex definition regards autonomy as the freedom granted to teams and individuals encouraging them to exercise their creativity in bringing forth an idea and being able to follow it through to completion (Lumpkin & Dess, 1996).
Thus entrepreneurs have the autonomy to make strong and decisive decisions and guide the direction of the business (Mintzberg & Waters, 1985).
Some authors report that top management in high performing firms encourage employee interaction and suggest that ideas of employees at all levels are valued (Kanter, 1983). According to these authors, employees are energised by the orientation of the firm and new ideas are routinely generated and embraced by employees who feel they belong and their contributions are valued. Schrivastava and Grant (1985), suggest an alternative view is to regard autonomy as using an autocratic leadership style. These types of managers depend on their position: their power comes from being an owner of the business or occupying a high position.
EO and Performance: According to Lyon, Lumpkin and Dess (2000) the research to-date indicates there is general agreement that EO does influence firm performance. Typically this research suggests that increasing the EO of the firm is associated positively with financial performance (Covin & Slevin,1989; Miller, 1983; Zahra, 1993).
However, there has been much debate over the appropriate intensity of entrepreneurial behaviour and the implications entrepreneurial activities such as risk taking will have on firm performance (Zahra, 1993). Miller and Friesen (1982) even warn that increasing entrepreneurship beyond a particular threshold can harm a firm’s financial performance.
Lyon, Lumpkin and Dess (2000), suggested the challenges in measuring the strength of the relationship between entrepreneurship and performance are possibly due to problems with the operationalisation and measurement of entrepreneurship, or in the theoretical models employed. Some empirical research on the relationship between entrepreneurial behaviour (as measured by EO) and firm performance indicates that contingent rather than direct relationships may provide more accurate explanations of performance outcomes (Lyon, Lumpkin
& Dess, 2000).
Lumpkin & Dess (1996) recognised a number of potential internal and external factors that might ameliorate the effect EO has on firm performance. Wiklund and Shepherd (2005) also looked at these environmental influences in their longitudinal study of 413 Swedish firms. They found that performance could be better explained using a configurational approach (three way model covering the relationship between EO, the firm’s internal attributes and external environmental characteristics) as certain elements of strategy, structure, process and environment tend to cluster together to form configurations and these work best where key variables are aligned. This approach showed the importance of internal and external factors in terms of their impact on firm performance.
The dilemma raised above is how can a firm align its EO dimensions with its environmental factors to enhance performance? This paper assesses the results of past studies to ascertain what EO dimensions were identified as performance related. It also looks at the potential for “relational dynamism” to help build performance via EO – environmental alignment.
METHODOLOGY
Four previous studies that investigated the impact of the EO dimensions on different industries within Australia were reviewed. Two of the studies used a quantitative approach as their core methodology - a mail survey, followed up with telephone interviews. The other two studies collected their information via face-to-face interviews. The results of each study were compared to identify similarities and differences in interviewees’
perceptions of the relevance of each dimension on business performance. The four studies focused on different industries in Australia: the wine industry; the automotive components industry; the franchising industry; and the music recording industry.
Three of the studies used a questionnaire with both open ended items and five point Likert scale items to ascertain the respondents’ perceptions of the impact of each EO dimension on business performance. As one of the studies did not use numerical results, discussions were held with the original researchers, and agreement reached on converting these results to a three category ranking Low-Moderate-High enabling the four studies to be compared.
FINDINGS
Table 1 shows respondents’ perceptions of the impact of each EO dimension on business performance for the four studies (mean scores). All of the EO dimensions were considered by respondents to be important, although some more important than others. Autonomy was the highest scoring across the industries with risk taking the lowest.
INSERT Table 1: A comparison of the EO dimensions from four Australian studies (on last page of this paper)
Innovation: The literature review suggested that innovation should be strongly linked to business performance (Neely & Hii, 1998). This appeared to be the case in the reviewed studies where innovation was identified as important, although none of the studies identified it as the most important dimension.
According to Lumpkin and Dess (1996:143), innovation may occur along a continuum from a simple willingness to either try a new product line or experiment with a new advertising venue, to passionate commitment to master the latest in new products or technological advances. This broad definition makes measurement a challenge and comparisons across industries difficult. One thing that stood out in reviewing each study was that people in different job roles and industries, at least in these studies, had different interpretations of the term innovation. Respondents generally identified innovations as being major new ideas, not modifications as part of a continuous improvement program. Many suggested that lead times for new ideas to be put into practice were approximately 6-12 months but sometimes much longer, depending on the area or type of innovation. For example, in the wine industry, the introduction of a new grape variety to meet an identified market would take years to develop and produce.
Some respondents did not see research and development (R&D) as part of innovation. For example, in the wine industry experimentation with blends occurred regularly but the interviewees did not regard this as R&D as it generally occurred externally at industry level. The opposite approach was identified in the automotive parts industry. Here, respondents spoke widely about their research and development departments and how they were responsible for searching the market for new materials and production techniques to revamp and modify existing products. Many respondents further discussed how their companies were constantly analysing and updating their machinery in order to minimise the risk of damage and improve quality of products to their clients. These industry examples of innovation meet the definition of Lumpkin and Dess (1996), however innovation was frequently only identified as technological or product modification rather than involving support service changes such as marketing, management and customer support.
According to Romano (1990), innovative firms constantly source knowledge from their customer base. All four studies however showed respondents were mostly reactive to customer complaints rather than proactively seeking out their opinions. This thinking was most obvious in the wine and automotive components industries where the strong buying power of customers ensured a fast response to customer demands for innovation.
An
important observation from the franchise industry survey was that innovation diminished over the five year survey period. This could have been due to the apparent conservative nature of the franchisor, who once established, is reluctant to deviate from the proven course; as Peters (1990) said innovation is the numbers game, and this may be why continued new ideas are not part of the franchise culture. Quinn (1985) refers to innovation as requiring a personal obsession. Although this was apparent with the franchisors, it was not as apparent in their overall organisations. This suggests an entrepreneur’s obsession for innovation may not reflect in the organisational culture.
Proactiveness: Proactiveness was present in all of the reviewed studies but at different levels. For example, the automotive components industry regarded proactiveness as the most important dimension, whereas in the wine industry and the franchise industry it ranked third in importance. A key part of proactiveness is the ability to seek out opportunities and capitalise on them (Kirzner, 1985). Items that related to identifying new opportunities at start-up, scored highly in the Australian studies and were consistent with other international studies.
Previous studies have found that it is vital for proactive firms to introduce new products and brands ahead of competitors (Venkatraman, 1989). However, the results from the Australian studies demonstrated that although respondents identified themselves as proactive, they did not consider this meant being first to the market. For example, in the wine industry, 37percent of respondents were neutral on their response to being the first to launch new products. In the automotive components industry this figure rose to 50percent. These responses suggest that first mover advantage is not a driving force within these industries. The researchers observed that managers in the wine and automotive parts industries seemed to associate proactive strategies with what is defined in the literature as a reactive approach. According to Miller (1983), firms who are reactive offer products whose successes have
already been implemented by competitors, often at a lower price. This was found to be the case in both the wine and automotive components studies. Lowering prices were usually achieved through efficiency gains, as product quality and integrity of the brand were considered imperative.
The surveys suggested that strategies, defined as reactive in the literature, could actually have a proactive element. For example, in the automotive components industry one company explained that it developed better quality products than those produced by the market leader, thus gaining a competitive edge in the quality and reliability stakes. The franchise industry study also suggested that proactiveness was critical at the start-up stage, but less important once a firm was established. This study also found that franchise firms may have been far more proactive than they thought. Miller and Friesen (1978) wrote of the desire to shape the markets as an attitude of proactiveness. While the interviewees did not recognise it, two of them were found to have reshaping their automotive after sales market by proactively joining resources and starting a franchise group that achieved industry sales leadership.
Competitive Aggression: Previous studies found that new entrants attempt to gain market share via lowering their prices (Venkatraman,1989), being “fast followers” in copying successful products (Miller & Camp, 1985) or broadening their product range and market channels in new and existing markets (Porter, 1985). It has also been found that new entrants can adopt unconventional tactics to challenge industry leaders (Cooper et al, 1986), target competitor weaknesses or focus on high value-added products (MacMillan & Jones, 1984)
The Australian studies in this review found that a range of the competitive strategies were used, though the most common strategies were price cutting and to focus on quality. Respondents displayed little interest in targeting competitor weaknesses or challenging industry leaders. Analysis of the four studies showed that quality, including a quality reputation, was their key aggressive strategy. For example, many respondents in the wine industry survey did not consider price important compared to their reputation and quality of products. Their main strategies related to quality included building brands, both based on regional differences and individual winery specialisations and image. In the automotive components industry quality strategies included investment in new plant and equipment, and using non-conformance reports to monitor the supplier base, in particular suppliers with a history of inconsistent performance. The franchise industry respondents targeted advertising to build their image in the marketplace while music companies focused on promoting their reputation and history of successful clients.
The other consistent competitive strategy identified in the surveys related to developing strategic alliances or networks. For example, participants within the wine industry fiercely defended their reputations but worked in regional alliances to build region based profiles, even the local subsidiaries of multinational wine firms! In the automotive components industry competitive strategies in the form of strategic alliances were consistently linked to the competitive aggressiveness dimension. Within the franchise industry the move towards alliances did not involve competitors as in the wine industry, but was similar to the automotive parts industry in securing long-term supplies for their franchisees, usually at low prices because of volume based purchasing power. In the music record business alliances took more the form of informal networks. The whole industry evolved around a series of relationships that were constantly changing. Small music companies found their survival was often dependent on their ability to network with publishing companies, singers, bands and even radio disc jockeys.
All studies identified that price was important. In both the study on the automotive components industry and the wine industry, there was little room identified to employ price reductions aggressively. Both industries had invested extensively into technology to gain a competitive edge and lower their costs but soon found their competitors followed thereby reducing the potential for sustainable competitive advantage. In the automotive components industry all major contracts were with four major local car manufacturers and based on competitive tendering. This had resulted in very low profit margins, forcing a move to acquisition, specialisation and exports to survive. In the wine industry, price was considered less important compared to brand and image. This was because respondents recognised the limited value of price reductions in an industry that had seen ten years of price reductions, and therefore their focus was on other competitive strategies to ensure survival. The franchise companies surveyed said they always operated at low margins and that price reduction strategies were difficult to employ. The music industry respondents felt they were generally living at existence level only and further price
reductions would lead to further rationalisation and could lead to a dangerous reliance on sales from international artists at the expense of local artists.
Many respondents did not actively employ a mechanism to identify competitive threats nor did they have the capacity to deal with threats even when identified. The ability to respond to a competitive threat is important.
Active responses to competitive data could be a vehicle to bring about change and build group cohesion via focus on the “common enemy”. In the case of the Australian automotive components industry it was noted that local operations had limited authority and often required approval from head office to respond to competitive threats. In the franchise industry all franchisees required approval from the franchisor in order to respond to competitive threats and in the wine industry, long term supply contracts with major bottling companies made it difficult to act to short term threats except on issues outside these contracts. Given the timeframe to change such things as grape varieties or build new brands, reaction time was usually measured in months or years.
Risk Taking: Brockhaus, (1980) found that entrepreneurs have a greater propensity to take risks than non-entrepreneurs. For these reasons, risk taking is assumed to have a significant impact on the success or failure of entrepreneurial firms. However, in a study of the Australian wine industry, risk taking was rated the lowest in terms of improving performance compared to the other four EO dimensions. The exact reason for this result was not clear;
but it may lie in the different interpretations of the term risk taking by the respondents. For instance, it may be due to respondents wanting to believe their companies were risk adverse when considering risk in isolation and not associating it with calculated or manageable risk in the overall consideration of a proposal. The quantitative analysis of the Australian wine industry study supported the suggestion that there was a definition difficulty with what risk meant. For example, while risk in the study was associated with potentially positive or negative outcomes, one company indicated that they had invested heavily in technology but that it was not a risk, rather a sound business policy to reinvest profits.
Similar results were found in the Australian automotive components industry study where taking calculated/manageable risks was deemed to be important. The results in this study also suggested planned and calculated risks had a positive effect, whereas risk taking that was bold and unforeseen had negative consequences
Similar results were found in the Australian automotive components industry study where taking calculated/manageable risks was deemed to be important. The results in this study also suggested planned and calculated risks had a positive effect, whereas risk taking that was bold and unforeseen had negative consequences