Enhancing Entrepreneurial Orientation in Dynamic Environments: The Interplay between Top Management Team Advice-Seeking and Absorptive Capacity
Introduction
Entrepreneurial orientation (EO) entails the extent to which an organization’s top managers emphasize risk-taking, proactivity, and innovativeness in firm strategy (Covin et al, 2006, Lyon et al, 2000, Miller, 1983). EO is an important underpinning of the extent to which entrepreneurial behavior in the firm is encouraged, undertaken, and rewarded (Lumpkin and Dess, 1996), and evidence suggests that more entrepreneurially oriented firms tend to perform better, especially in dynamic environments (Rosenbusch et al, 2013, Wiklund, Shepherd, 2005). Considering these performance benefits and in line with an emerging emphasis on drivers of EO in literature, Ruiz-Ortega et al. (2013) recently explored whether firms operating in dynamic environments are indeed more entrepreneurially oriented. Although the expected benefits of EO in dynamic environments are well documented, and EO is instrumental for capturing emerging opportunities, top managers may struggle to foster EO due to the increased uncertainty inherent to dynamic environments. Uncertainty may instead trigger conservative responses through reliance on familiar routines (Muurlink et al., 2012) and attempts to improve efficiency (Chattopadhyay et al., 2001). Thus, the question remains: How can top managers enhance entrepreneurial orientation in dynamic environments?
In this study we examine the role of the top management team (TMT) in enhancing EO in dynamic environments. While previous studies have mainly investigated the relation between EO and firm performance, we draw on upper echelons theory and bolster the increasing emphasis on TMTs in EO scholarship (Miller, Le Breton-Miller, 2011, Van Doorn et al, 2013). Upper echelons theory proposes that strategic choices reflect the idiosyncrasies of decision makers and recent studies indeed have highlighted the impact of compositional attributes of top managers on EO (Boling et al, 2015, Miller, Le Breton-Miller, 2011, Sciascia et al, 2013, Wales et al, 2013). However, we argue that going beyond demographic attributes is an important next step in understanding EO from an upper echelons perspective.
We extend upper echelons based inquiries into EO by contending that it is important to take into account the tendency of the TMT to acquire external information to improve judgment accuracy on emerging opportunities in dynamic environments. We develop this premise by drawing on the emerging literature on TMT external advice-seeking, which suggests that top managers rely on advisors to inform their judgments under uncertainty (McMullen and Shepherd, 2006) (e.g., such as the uncertainty inherent to dynamic environments (Fredrickson, Mitchell, 1984, Heavey et al, 2009b). Given that entrepreneurial opportunities in dynamic environments require TMTs to process information that is relatively new to the firm, we additionally assess TMT absorptive capacity, i.e. their ability to filter, process, and assimilate new information (Zahra et al., 2009). TMTs may better capitalize on external insights that enable understanding of emerging and future opportunities in the environment when they have the absorptive capacity to adequately interpret these new insights and its implications for firm strategy (Goll et al., 2007).
We contribute to existing literature in several ways. First, this study applies an upper echelons lens and highlights how TMT behavioral attributes allow top managers to accommodate EO in dynamic environments (see Figure 1). This approach is timely and relevant, given recent studies that consider either environmental factors (Ruiz-Ortega et al., 2013) or top manager characteristics (Miller and Le Breton-Miller, 2011) as drivers of EO in isolation. Given the uncertainty inherent to dynamic environments, the information search dispositions of top managers and their ability to process new insights are essential for understanding how the TMT influences EO in dynamic environments.
Second, we advance literature on advice seeking by linking it to EO and arguing on its function in offering foreign judgments and recommendations for accommodating EO. Top managers have been shown to engage extra-organizational advisers as an important gateway for information to cope with non-routine decision making, a key activity in dynamic environments (McDonald and Westphal, 2003). Indeed, external advice seeking is seen as one of the basic practices in decision-making at the upper echelons level (Heavey et al, 2009a, Heyden et al, 2013, McDonald, Westphal, 2003) and provides senior managers with different perspectives and interpretations of the interface of the external environment and existing strategy (Budescu, Rantilla, 2000, McDonald et al, 2008). Advice can increase judgment accuracy and cultivates a better understanding of the urgency for entrepreneurial business solutions. Thus, we take the position that external advice-seeking may be an instrumental, yet underemphasized, boundary-spanning behavior through which executives can obtain insights to assist in navigating dynamic environments entrepreneurially.
Third, we assign boundary conditions to the utility of external advice and emphasize its important interrelation with absorptive capacity for evaluating the opportunities for enhancing EO in the face of environmental dynamism. Whereas external advice-seeking may increase a TMT’s judgment accuracy of emerging threats and opportunities in dynamic environments, we go beyond this premise to suggest that TMTs may vary in their ability to assimilate the information acquired through advice-seeking and connect it to the established knowledge base of the firm and its key officers. Thus, we also contribute by theorizing on TMT absorptive capacity, which we conceptualize as a TMTs ‘ability to value, assimilate, and apply new knowledge successfully to commercial ends’ (Szulanski, 1996, 31). The importance of absorptive capacity in dynamic environments has been highlighted in previous studies but primarily at the firm level and not specifically in relation to external advice in dynamic contexts (Engelen et al, 2014, Liao et al, 2003). Our approach is consistent with upper echelons theory, where TMTs have been described as knowledge processing entities that aim to integrate knowledge from different levels and locations in order to formulate comprehensive strategy (e.g., Alexiev et al, 2010, Cho, Hambrick, 2006). Following Zahra et al. (2009), we consider absorptive capacity at the TMT level and argue that absorptive capacity will facilitate utilization of external advice when navigating dynamic environments (Cohen and Levinthal, 1990).
Section snippets
Conceptual background and hypotheses
EO refers to the extent to which the top managers of the firm emphasize risk taking, innovativeness, and proactiveness (Miller, 1983). Innovativeness refers to the inclination to pursue new products and services (Lumpkin, Dess, 2001, Zahra, Covin, 1995), whereas proactiveness entails the tendency to take the initiative and achieve a first mover advantage (Covin et al., 2006). Risk taking in turn refers to the propensity to invest in ventures with an uncertain outcome (Lumpkin and Dess, 1996).
Research setting and data collection
For the purpose of this research, we randomly identified a sample of 9000 firms within the Netherlands from the REACH database. The survey was conducted in two instances. The independent and moderating variables have been measured in the 2008 survey. Our dependent variable was measured in the 2009 survey. The survey of 2008 resulted in an overall response rate of 10.8 percent. The survey in 2009 amongst the 970 firms that had responded to our survey in 2008 resulted in a response rate of 23.3
Results
In Table 1, we present the descriptive statistics and the correlation matrix for the variables included in the study. With respect to issues related with multicollinearity, we calculated the variance inflation factors (VIF) for each of the regressionequations. The maximum VIF we found was 3.69 which was assigned to one of the industry dummies, and the maximum VIF assigned to one of the main constructs was 1.98, both well below the cut-off point of 10 (Neter et al., 1990). We also checked for
Discussion and conclusion
In this study, we have examined how key TMT factors (i.e., TMT external advice-seeking and TMT absorptive capacity) influence the ability of firms to establish EO in dynamic environments. We have theorized that external advice-seeking is a key boundary spanning activity of TMTs that equips them with rich, novel, and up-to-date informational ammunition for enhancing EO in dynamic environments. However, we have taken care to argue that firms will be more enabled to absorb insights obtained
Sebastiaan van Doorn is Associate Professor of Strategic Entrepreneurship at Warwick Business School in the UK. He obtained his PhD in 2012 from the Rotterdam School of Management, Erasmus University in the Netherlands. He has also been a visiting professor at Singapore Management University in Singapore. His current research focuses on corporate entrepreneurship, social networks, top and middle management, and decision making. His work has appeared in outlets such as Journal of Product
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Sebastiaan van Doorn is Associate Professor of Strategic Entrepreneurship at Warwick Business School in the UK. He obtained his PhD in 2012 from the Rotterdam School of Management, Erasmus University in the Netherlands. He has also been a visiting professor at Singapore Management University in Singapore. His current research focuses on corporate entrepreneurship, social networks, top and middle management, and decision making. His work has appeared in outlets such as Journal of Product Innovation Management, Organization Studies, Human Resource Management, and Advances in Strategic Management.
Mariano L.M. Heyden is Assistant Professor of Strategy and Business Policy at the Newcastle Business School, Australia. He obtained his PhD in 2012 from the Rotterdam School of Management, Erasmus University in the Netherlands. His research focuses on the social, cognitive, and behavioral influences of strategic leaders across the hierarchy (e.g., boards, top management teams, CEOs, middle managers) on adaptive strategic change. His work has appeared, or is scheduled to appear, in outlets such as Journal of Management, Organization Studies, Human Resource Management, Global Strategy Journal, Advances in Strategic Management, and International Journal of Human Resource Management.
Henk W. Volberda is Professor of Strategic Management and Business Policy at the Rotterdam School of Management, Erasmus University in the Netherlands. He obtained his PhD, cum laude, in business administration at the University of Groningen. His research focuses on strategic renewal and innovation, strategic flexibility, hyper-competition and new organizational forms as well as co-evolution of firms and industries.