Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle

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Abstract

The term “entrepreneurial orientation” has been used to refer to the strategy-making processes and styles of firms that engage in entrepreneurial activities. A popular model of entrepreneurial orientation (EO) suggests that there are five dimensions of EO—autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness (Lumpkin and Dess 1996). This paper reports on two of those dimensions—proactiveness and competitive aggressiveness. Proactiveness refers to how firms relate to market opportunities by seizing initiative in the marketplace; competitive aggressiveness refers to how firms react to competitive trends and demands that already exist in the marketplace. Despite these distinctions, prior research has tended to equate these two concepts and argued that they have a similar effect on firm performance. This paper investigates how these two approaches are related to each other, how they are related to performance, and how their function differs in the environments in which firms exhibit these approaches to strategy making. These distinctions are important because proactiveness and competitive aggressiveness represent distinctly different avenues to entrepreneurial success.

A field study was conducted in which 124 executives from 94 firms were surveyed. These were executives from non-affiliated, non-diversified firms who were actively involved in strategic decision making at the top level of the firm. All firms reporting had at least one respondent who was an owner. Analysis of the data was conducted in two phases. In phase 1, factor analysis was used to examine the distinctions between different dimensions of EO. Proactiveness and competitive aggressiveness emerged as two separate factors indicating that these two strategy-making modes were perceived differently by the executives in the study. In the second phase, the relationship of these two dimensions to performance was analyzed in various contexts. Initial tests found that proactiveness was positively related to performance but competitive aggressiveness tended to be poorly associated with performance.

Subsequent tests of the EO-performance relationship indicated that the stage of industry life cycle tended to favor one entrepreneurial orientation over another. The performance of firms in the early stages of industry development was stronger when their strategy making was proactively oriented. In contrast, a competitively aggressive frame of mind was helpful to firms in more mature stages of industry development. These findings were supported by other tests of the business environment. In dynamic environments, characterized by rapid change and uncertainty, proactive firms had higher performance relative to competitively aggressive firms. In hostile environments, where competition is intense and resources are constrained, competitively aggressive firms had stronger performance.

The findings suggest that these two different approaches to entrepreneurial decision making may have different effects on firm performance. The differences were particularly apparent in the way firms relate to their external environment. Proactiveness—a response to opportunities—is an appropriate mode for firms in dynamic environments or in growth stage industries where conditions are rapidly changing and opportunities for advancement are numerous. But such environments may not favor the kind of combative posturing typical of competitive aggressiveness. Firms in hostile environments, or in mature industries where competition for customers and resources is intense, are more likely to benefit from competitive aggressiveness—a response to threats. A further implication of this research is that the dimensions of an entrepreneurial orientation, often considered to be positively related to performance under all conditions, may not always be associated with successful outcomes. This study indicates that the dimensions of EO often vary independently rather than covary, suggesting that the extent to which an entrepreneurial approach to strategy making is useful will frequently depend on the organizational or environmental conditions under which such decisions are made.

Introduction

Entrepreneurship writers in both the popular press and the scholarly literature have generally extolled the importance of entrepreneurial activities and often implicitly assumed a positive relationship between entrepreneurship and performance outcomes. Articles in business periodicals such as Forbes with titles such as “Innovate or Die” (Young 1994) and “Hooray for Risk” (Postrel 1995) are indicative of this trend. In addition to the inherent “goodness” ascribed to entrepreneurial activity, the academic literature has often conceptualized and operationalized the entrepreneurial process as a unidimensional construct (e.g., Covin and Slevin 1989a). In contrast, we suggest that entrepreneurial processes involve complex phenomena that may not always be associated with strong performance.

To explain these phenomena, we believe that the concept of an entrepreneurial orientation (EO) is potentially important to entrepreneurship research and this paper builds on previous work on the EO construct. We suggest that theoretical development and empirical research directed at this construct is important for the enhancement of both normative and descriptive theory. Earlier theoretical work proposed a contingency framework for exploring the relationship between EO and organizational performance and suggested the usefulness of considering EO (consisting of autonomy, innovativeness, risk taking, proactiveness and competitive aggressiveness) as a multidimensional construct (Lumpkin and Dess 1996).

In this paper, we investigate two dimensions of EO—proactiveness and competitive aggressiveness. We draw on prior theory and empirical research into these components of EO, as well as examples from business practice, to provide a rationale and justification for exploring three related research questions. These are (1) the independence of the proactiveness and competitive aggressiveness dimensions, (2) their relationship to firm performance, and (3) the role of “fit” in explaining their relationship to performance, that is, the extent to which the relationship of proactiveness and competitive aggressiveness to performance is contingent on the business context in which these processes occur. To address the first question, we use factor analysis. To address the second and third issue, we employ regression analysis and test environment and industry life cycle as moderators. To test our hypotheses, a sample of 124 owners and executives from 94 small firms competing in a wide variety of industries will be examined. In short, we seek to investigate both why (via theory development) and how (via empirical analysis) proactiveness and competitive aggressiveness are differentially related to performance and the implications of this distinction for the entrepreneurial firm.

Earlier theoretical work by Lumpkin and Dess (1996) has argued for the independence of several dimensions of EO—including autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness. Briefly, autonomy is defined as independent action by an individual or team aimed at bringing forth a business concept or vision and carrying it through to completion. Innovativeness refers to a willingness to support creativity and experimentation in introducing new products/services, and novelty, technological leadership and R&D in developing new processes. Risk taking means a tendency to take bold actions such as venturing into unknown new markets, committing a large portion of resources to ventures with uncertain outcomes, and/or borrowing heavily. Proactiveness is an opportunity-seeking, forward-looking perspective involving introducing new products or services ahead of the competition and acting in anticipation of future demand to create change and shape the environment. Competitive aggressiveness reflects the intensity of a firm's efforts to outperform industry rivals, characterized by a combative posture and a forceful response to competitor's actions.

In this paper, we will focus on proactiveness and competitive aggressiveness for two reasons. First, these two dimensions of EO have generally been investigated less frequently in the entrepreneurship literature, especially relative to risk taking and innovativeness. Additionally, as discussed below, prior theory and research have often treated proactiveness and competitive aggressiveness as if they were interchangeable. We argue here, however, that they are distinct concepts with unique relationships to performance outcomes. Thus, we feel that this research issue is more “interesting” in that it “denies some aspect of the assumption ground of its audience … it tells them some truth they thought they already knew was wrong” (Davis 1971: 329). Second, any theory of the social sciences includes tradeoffs involving generalizability, accuracy, and simplicity (Weick 1979). Thus, investigating several EO dimensions at once may increase accuracy in the depiction of the EO construct but might result in a corresponding loss of parsimony. Arguing, for example, how all five (or even three or four) subconstructs relate to each other—as well as to performance—would be quite complex and cumbersome and we prefer, in effect, to “err” on the side of parsimony.

The paper is divided into four major sections. Drawing on prior research and theory, the next section advances hypotheses suggesting the independence of these two EO dimensions and performance relationships. Then, the field research methodology, instrumentation, and analysis are discussed. The final two sections present the findings and discuss the practical and theoretical implications of the research.

Section snippets

Theory development and hypotheses

The concept of an EO to explain the mindset of firms engaged in pursuing new ventures provides a useful framework for researching entrepreneurial activity. Recently, Lumpkin and Dess (1996) noted a distinction between entrepreneurial orientation and entrepreneurship by suggesting that EO represents key entrepreneurial processes that answer the question of how new ventures are undertaken, whereas the term entrepreneurship refers to the content of entrepreneurial decisions by addressing what is

Method

To test these propositions, a field study using mailed questionnaires was conducted. This approach is useful for accessing organizational processes in the settings where they naturally occur with minimal intrusiveness by the researcher (McGrath 1982). The data are cross-sectional and factor analysis and regression analysis techniques were used to test the hypothesized relationships.

Results

Hypothesis 1 explored whether proactiveness and competitive aggressiveness were distinct dimensions of an entrepreneurial orientation. Table 1 shows the rotated principal components solution. Ten of the eleven EO items had significant factor loadings (≥ ± 0.50) on one of the four factors. Such loadings are consistent with a conservative criterion (Kim and Mueller 1978). The factors of interest to this study—proactiveness (Factor 1) and competitive aggressiveness (Factor 4)—loaded on separate

Discussion

This research explored the dimensionality of proactiveness and competitive aggressiveness and how these dimensions might be related to each other and to performance. The results from the factor analysis suggest that competitive aggressiveness and proactiveness are distinct dimensions of an entrepreneurial orientation. This finding supports our claim that these constructs represent two different modes by which firms view and act on the business environment. Proactiveness refers to a firm's

Acknowledgements

We thank Darold Barnum, Dave Harrison, Jay Janney, Maria Kramer, and Rod Shrader for their helpful comments on earlier drafts of this article. We gratefully acknowledge the funding that was provided for this research by the Center for Entrepreneurial Leadership, Inc. at the Ewing Marion Kauffman Foundation. An early version of this paper was presented at the 1997 Babson-Kauffman Entrepreneurship Research Conference.

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