The literature existing on entrepreneurship implicitly assumes that
entrepreneurial orientation (EO) and growth orientation are positively
related with each other. However, few studies, whether theoretical or
empirical, analyze such relation in an explicit manner. Instead, most
previous works have focused on the EO-performance relation, even though
growth and profitability do not always correlate positively. This work
has been carried out on a sample of 434 SMEs, and contributes two
novelties with regard to previous research: (1) the analysis focuses on
the EO-growth relation; and (2) it uses a flexible method (Partial Least
Squares) which allows the study of several simultaneous relationships.
The results reveal the complexity of the relationships between EO,
strategy, environment, resources and growth.
Introduction
Recent years have brought an increased interest in better
understanding the phenomenon of firm growth (Brown, Davidsson, &
Wildund, 2001; Correa, Acosta, Gonzalez, & Medina, 2003; Littunen
& Tohmo, 2003; Delmar, Davidsson, & Gartner, 2003). There are
many reasons for this expanding interest. From the economic and social
point of view, there is the fact that firms that grow more are the ones
that generate more new jobs (Birch, Haggerty, & Parsons, 1994;
Littunen & Tohmo, 2003). Also, from the academic point of view,
growth constitutes one of the least studied dimensions of performance
within the field of management, as compared to other variables such as
profitability (Porter, 1980, 1985; Rumelt, 1991).
High growth tends to be associated with a firm's
entrepreneurial behavior (Brown et al., 2001; Stevenson & Jarillo,
1990). Thus, growth tends to be considered a logical consequence of
innovative, proactive and risk-taking behavior on the part of the firm,
as these are the dimensions which define an entrepreneurial orientation
(EO). The relationship between the EO of the firm and its performance
has been thoroughly investigated, from both a conceptual (Covin &
Slevin, 1991; Lumpkin & Dess, 1996) and an empirical point of view
(Covin & Slevin, 1989; Lumpkin & Dess, 2001; Wiklund &
Shepherd, 2005). However, many questions remain unanswered. The existing
literature has two important limitations.
First of all, the empirical research undertaken thus far has
examined the relationship between EO and firm performance, despite the
multidimensionality of the latter concept. The performance averages
combine indicators associated with profitability and growth, although
both of these dimensions are sometimes contradictory (Delmar et al.,
2002). Therefore, it is worthwhile to ask the following question: Is
there a positive relation between the firm's EO and its growth?
Second, most authors emphasize the complexity of the relations between
EO and performance (Wiklund & Shepherd, 2005). Such complexity
involves a confluence of direct, mediating, and moderating relations
among external and internal dimensions. Thus, the following question
arises: Which variables influence such relation? What kind of effect do
they have?
This study seeks to take an important step toward an overall
understanding of the influence of a firm's EO on its growth, making
progress in the two directions discussed earlier. The analysis
concentrates only on the study of growth and does not examine other
dimensions of firm performance. The design of the research project also
attempts to capture the complexity of the phenomenon being studied.
Instead of analysis methodologies based on regression, we have used a
structural-equations model of an exploratory nature. Said model attempts
to integrate, through causal relations, the influence of the
environment, firm resources, and firm strategy on the relation between
EO and the growth of the firm.
The article is structured as follows: After the introduction is a
section that summarizes the most relevant literature upon which the
conceptual model and hypotheses are based. Then comes a description of
the methodology used in the empirical research. In the following
section, the main findings are set forth, with the discussion of such
results being left for the sixth section. The article ends with a brief
sketch of the implications for scholars and practitioners, the
limitations and future lines of research and final conclusions.
Review of Literature, Conceptual Model, and Hypotheses
EO and Firm Growth
The literature on the relation between the EO of a firm and
performance, although quite extensive, is dominated by two types of
work. On the one hand, there are studies that set forth general models
describing the nature of said relation, identifying the moderating and
mediating variables and attempting to establish wide-reaching
propositions (Covin & Slevin, 1991; Dess, Lumpkin, & McGee,
1999; Lumpkin & Dess, 1996). On the other hand, a broad range of
studies have attempted to empirically verify partial models of said
relation. This line of work incorporates, in an isolated and independent
manner, some of the moderating variables, those related either to the
environment (Lumpkin & Dess, 2001) or to the firm's internal
dimensions (Wiklund & Shepherd, 2005).
Parting from an analysis of both of these lines of research, our
work takes on the analysis framework set forth in Figure 1. Such a
model, which is of configurational orientation, understands the growth
of a firm to be derived from a certain strategic behavior, which is
influenced by the degree to which the firm maintains an entrepreneurial
style of management. This process of relations is moderated by both
external and internal factors.
[FIGURE 1 OMITTED]
Strategy and Firm Growth
The few projects undertaken on the role strategy plays in the
relation between EO and firm performance have produced quite a confusing
situation. This confusion can be attributed to different aspects: (1)
the strategy typology used and (2) the type of influence the strategy
has on the relation between the EO and performance.
Types of Strategy and Growth. Regarding the first aspect, no
consensus exists as to which of the numerous strategy typologies found
in the literature is the most appropriate for influencing the
relationship between the two dimensions. Thus, various studies use the
Porter (1980) typology, which distinguishes between leadership in costs
and leadership in differentiation (Dess, Lumpkin, & Covin, 1997;
Baum, Locke, & Smith, 2001). However, Durand and Coeurderoy (2001)
prefer to use the Miller (1986) typology, a variation of Porter's
strategies, which distinguishes between the strategies of
differentiation in marketing and differentiation in innovation. But,
along with these authors, others working in this field consider
entrepreneurial behavior itself to be a strategy (Botch, Huse, &
Senneseth, 1999; Covin & Slevin, 1989). In our opinion these
typologies are not the most suitable for the case at hand, for the
following reasons.
First, the well-known strategies of Porter (1980) and Miller (1986)
are business-level strategies and not corporate-level strategies, while
decision making on questions of growth is mainly situated at the
corporate level. Second, the strategies of leadership in cost and
differentiation are strategies that seek to obtain a sustainable
competitive advantage, which will allow the business unit to obtain
exceptional levels of profitability. In other words, they are strategies
more oriented toward the objective of profitability than toward that of
growth.
Compared to these strategy typologies, two others seem to us to be
more suited to the objective set for this study. We are referring to the
strategic patterns of Miles and Snow (1978) and to the growth strategies
of Ansoff (1965). The typology of the former is based upon Child's
(1972) vision of strategic choices (the strategic-choice approach),
according to which the main decisions made by the directors define the
relationship of the organization with its environment. This type of
approach can be fully integrated in the literature on the subject of the
relationship between EO and performance (Lumpkin & Dess, 1996).
Miles and Snow (1978, p. 29) differentiate among four strategic
patterns: (1) prospector strategy; (2) defender strategy; (3) analyzer
strategy; and (4) reactor strategy.
The other relevant typology, given the aim of this study, is that
established by Igor Ansoff (1965), who proposes various types of
corporate-level strategies aimed at explaining the growth of the firm.
Ansoff (1965) understands corporate strategy to be the set of rules and
guidelines for decision making that are concerned with guiding the
expansion of the enterprise. Although corporate strategy typically
refers to diversification, mergers and acquisitions, alliances, joint
ventures, and so forth, it is also associated with the sort of strategic
decision that most organizations face when considering the widening of a
range of products or services or a move in geographical area (Johnson
& Scholles, 1984, p. 9). Corporate strategy is not only applicable
to large conglomerates, but it is also useful, when appropriate, to
describe the expansion processes in the case of small and medium
enterprises (Burgelman, 1984; Gibbons & O'Connor, 2005; Miller
& Toulouse, 1986; Mitchell, 1988). Such strategies are based on two
different dimensions Ansoff (1965): (1) growth through new products or
new technologies; and (2) growth through attention to new needs or new
markets.
Type of Influence the Strategy has on The EO-Growth Relation. The
second question upon which existing studies do not coincide is the type
of influence that the strategy has on the relation between EO and
performance. Two alternatives are defended. The first posits that the
strategy is a moderating variable (Dess et al., 1997). The second posits
that the strategy is a mediating variable (Borch et al., 1999). Our
opinion is closer to the second alternative. That is, we believe that
the strategy of the firm is an intermediate variable between EO and
performance, in the sense that firms with a greater entrepreneurial
orientation will tend to develop certain types of strategies and this
type of strategy will lead to different rates of growth.
With regard to the strategies of Miles and Snow (1978), we must
observe the degree to which each of the four strategic patterns is aimed
more at growth as opposed to efficiency (whether this be through
profitability, productivity, etc.). Only the prospector strategy is seen
to be totally and explicitly devoted to innovation, the search for
opportunities and growth, even at the expense of losing efficiency. Next
to this strategy is the analyzer strategy, which offers one aspect aimed
at efficiency and another at growth. Unlike these two strategies, the
defender strategy is absolutely centered on the optimization of
resources in a stable environment. Finally, the reactor strategy does
not aim at a defined objective, it being difficult to identify any
connection whatsoever between it and performance. Thus prospector firms
are the only ones that pursue growth in a direct way.
The work of Ansoff (1965) suggests that strategies involving the
development of new products or technological processes and/or those
aimed at the satisfaction of new needs and markets are more risk-taking
than the others, so the strategy of market penetration becomes the
safest option as compared to diversification, the most risk-taking
alternative. Therefore, firms that want to grow at an exceptional rate
(higher than the average growth of the firms of the same sector) will
tend to escape or broaden the traditional product--market sphere,
through expansion via development of new products--technologies or via
attending to new needs--markets, or both at the same time
(diversification). We propose the following hypothesis:
Hypothesis 1: There will be a relation between the growth of the
firm and the type of strategy used. This hypothesis can be divided into
three subhypotheses:
Hypothesis 1a: The growth of the firm will be greater when the
dominant strategic pattern is prospector.
Hypothesis 1b: The growth of the firm will be greater when the
degree of development of new products--technologies is greater.
Hypothesis 1c: The growth of the firm will be greater when the
degree of attention to new needs--markets is greater.
But if we want to complete the relations among the variables set
forth, we cannot ignore the relation between the strategic patterns
proposed by Miles and Snow (1978) and the growth strategies of Ansoff
(1965). On this matter, Miles and Snow (1978) state that prospector
firms will tend to grow through product-development and
market-development strategies, defender firms will prefer to grow
through the strategy of market penetration and, finally, analyzer firms
will tend to balance both types of growth strategies. To summarize:
Hypothesis 2a: The degree of expansion through the launching of new
products--technologies will be very high in the case of prospector
firms, moderate in the case of analyzer firms, and low in the case of
defender firms.
Hypothesis 2b: The degree of expansion through the attention to new
needs--markets will be very high in the case of prospector firms,
moderate in the case of analyzer firms, and low in the case of defender
firms.
EO, Strategy and Firm Growth
Covin and Slevin (1991) describe entrepreneurial firms as firms
with strategies oriented toward innovation and growth through their
capacity to assume relevant risks. But it is the studies based on the
work of Stevenson (1983) that have most supported this thesis. Indeed,
in later studies, Stevenson connects orientation toward growth to the
entrepreneurial culture of the firm (Stevenson & Jarillo, 1986,
1990). More recently, Brown et al. (2001) propose that one of the
defining dimensions of a firm' s entrepreneurial management is
precisely its orientation toward growth. According to this conception,
then, the search for rapid growth is another dimension of
entrepreneurial behavior (Brown et al., 2001), or is closely linked to
the other dimensions (Borch et al., 1999; Covin & Slevin, 1991).
Following this reasoning, we propose:
Hypothesis 3: There will be a positive relation between the
entrepreneurial orientation of the firm and the firm's rate of
growth.
However, most of the theoretical and empirical proposals tend to
consider the relation between the two dimensions mentioned to be
indirect (Baum et al., 2001; Covin & Slevin, 1989; Lumpkin &
Dess, 1996). Thus, the positive relation between EO and growth can be
mediated by the strategic behavior of the firm (Borch et al., 1999). The
more entrepreneurial firms will tend to engage in strategies oriented
toward growing, while nonentrepreneurial firms will opt for strategies
more focused on the maximization of efficiency in their operations
(Stevenson & Jarillo, 1990); Brown et al., 2001).
Miller (1983) views an entrepreneurial firm as one that
"engages in product-market innovation, undertakes somewhat risky
ventures and is first to come up with proactive innovations, beating
competitors to the punch" (Miller, 1983, p. 771). These
conceptualizations of entrepreneurship are close to the definition of
Miles and Snow in relation to the prospector strategic pattern (Miles
& Snow, 1978). These firms are oriented toward change; they create
new environments and generate uncertainty (Miles & Snow, 1978).
With regard to Ansoff's (1965) strategies, Lumpkin and Dess
(1996) propose that entrepreneurial firms are quick to identify
opportunities derived from technological development and, if we add
proactiveness to this propensity for innovation, they will also be
likely to exploit this type of opportunity through the design and
marketing of new products, even though this behavior involves a certain
degree of risk. Different empirical studies have underlined the
importance of innovativeness in the area of marketing when it comes to
correctly understanding the nature of entrepreneurial behavior (Smart
& Conant, 1994). Similarly, Miles and Arnold (1991) found a positive
correlation between market orientation and entrepreneurial orientation.
Therefore:
Hypothesis 4: There will be a relationship between the
entrepreneurial orientation of the firm and the type of strategy used.
This hypothesis can be divided into three subhypotheses:
Hypothesis 4a: The greater the firm's entrepreneurial
orientation, the more likely it will be to engage in a prospector
strategy.
Hypothesis 4b: The greater the firm's entrepreneurial
orientation, the greater will be the degree of launching of new
products-technologies.
Hypothesis 4e: The greater the firm's entrepreneurial
orientation, the greater will be the degree of attention to new
needs--markets.
The Influence of The Environment
Most of the research suggests that the environment moderates the
relation between EO and firm performance. Two dimensions are commonly
used (Zahra and Garvis, 2000; Lumpkin & Dess, 2001; Wildund &
Shepherd, 2005): dynamism and hostility.
As for the dynamism of the environment, the most usual argument is
that the influence of EO on performance becomes more intense when the
firm acts in a dynamic environment. Lumpkin and Dess (2001) show that in
this type of environment, firms that behave more proactively and
aggressively will achieve better performance. In the case of hostility,
various studies argue that entrepreneurial behavior constitutes a good
alternative for small and medium enterprises when they face hostile
environments (Covin & Slevin, 1989; Miller & Friesen, 1983;
Miller, 1983). Summing up the arguments set forth we can make the
following hypothesis:
Hypothesis 5: The dynamism and hostility of the environment will
moderate the relation between entrepreneurial orientation and the growth
of the firm, in such a way that the firm's entrepreneurial
orientation will have a more intense influence on growth when the firm
moves in a dynamic and/or hostile environment.
Wiklund and Shepherd (2005) defend the idea that the dimensions of
the environment will also influence the relations between the
firm's strategy and growth. This is a matter of maintaining the
contingent or configurational logic according to which the environment
is a moderating variable between strategy and performance (Eisenhardt,
1989; Hough & White, 2003). Thus, with regard to the strategic
patterns of Miles and Snow (1978), better performance can be expected
from those firms that decide to use a prospector strategy when they are
acting in dynamic and hostile environments. Similarly, in stable and
benign sectors, where it is easy to predict the competitive dynamics,
technological development, consumption patterns, and so on, a prospector
strategy has fewer chances of being successful. In stable and benign
environments, defender and analyzer strategies seem to be more
appropriate, in order to maximize efficiency in operations and to obtain
gradual growth. On the other hand, in dynamic and hostile environments,
the opportunities that can be derived from the development of new
products and technologies and from access to new markets are much
greater. This type of environment makes a good framework for carrying
out radical and strategic innovations, in accordance with the life-cycle
models of the sectors (Porter, 1985). Summing up these suggestions, we
propose the following general hypothesis:
Hypothesis 6: The dynamism and hostility of the environment will
moderate the relationship between strategy and firm growth. This
hypothesis can be divided into three subhypotheses:
Hypothesis 6a: The use of a prospector strategy will have a more
intense influence on growth when the environment is more dynamic and
hostile.
Hypothesis 6b: The development of new products--technologies will
have a more intense influence on growth when the environment is more
dynamic and hostile.
Hypothesis 6c: The attention to new needs--markets will have a more
intense influence on growth when the environment is more dynamic and
hostile.
Finally, we must incorporate the possible direct and independent
influence of the environment on firm growth. Lumpkin and Dess (1996)
highlight the existence of this type of influence, without
underestimating the moderating influence described earlier. Baum et al.
(2001) propose that firm growth will tend to be greater when the firm
moves in stable, simple, and benign environments. For this reason we
believe the corresponding hypothesis should be set forth as follows:
Hypothesis 7: There will be a negative relation between the
dynamism and hostility of the environment in which the firm moves and
its rate of growth in a certain period of time.
The Availability of Resources
The configuration of the resources existing at a given time affects
the perceptions of managers and the speed of growth (Wernerfelt, 1984).
The quantity and type of resources, assets, capabilities, routines, and
knowledge controlled by a firm become an essential factor explaining
firm growth (Barney, 1991). Recent studies have updated and revitalized
the original approach of Penrose (Borch et al., 1999; Pettus, 2001; Baum
et al., 2001).
According to Penrose (1959), firm growth is a result of the
existence of idle resources, those not used by the firm. These resources
exist mainly because it is impossible to acquire them in the exact
amount needed, given their indivisibility. Some recent studies on the
relation between EO and performance or on the phenomenon of firm growth,
have incorporated, albeit in a sporadic and isolated fashion, variables
to represent resources and capabilities. Thus, in connection with
resources, Borch et al. (1999) incorporate various types of resources as
explanatory variables, along with entrepreneurial and strategic behavior
and the firm's results. Finally, the recent study published by
Wiklund and Shepherd (2005) is perhaps the first that specifically
introduces access to financial resources as a moderating variable
relevant to the relation between EO and results. In our model, the
availability of resources will act as a moderator of three different
relations: (1) the relations between EO and firm strategies; (2) the
relations between strategies and growth; and (3) the relation between EO
and growth.
Covin and Slevin (1991) affirm that entrepreneurial behavior
requires the consumption of large quantities of resources, so having
access to these resources should facilitate the use of strategies
derived from entrepreneurial behavior (Wiklund & Shepherd, 2005). In
addition, the availability of resources will increase the likelihood
that said strategies will be put into practice in better conditions.
That is, the success of a certain strategy will also depend on the
amount of unused resources available to the organization (Covin &
Slevin, 1991).
In short, we can summarize the arguments set forth earlier by
saying that the availability of financial resources will moderate the
relations between entrepreneurial orientation and growth, between
entrepreneurial orientation and strategy, and between strategy and
growth. With this idea as a starting point, we propose the following
three hypotheses:
Hypothesis 8a: The availability of resources will moderate the
EO--firm strategies relation, in such a way that the availability of
resources will allow the most entrepreneurial firms to make more intense
use of a prospector strategy, of strategies involving the development of
new products--technologies, and of the strategy of attending to new
needs--markets.
Hypothesis 8b: The availability of resources will moderate the
strategy--firm growth relation, in such a way that it will allow firms
engaged in a prospector strategy and in strategies aimed at the
development of new products--technologies and at attending to new
needs--markets to obtain higher growth rates.
Hypothesis 8c: The availability of resources will moderate the
EO--firm growth relation, in such a way that the availability of
resources will allow the most entrepreneurial firms to obtain higher
growth rates.
Methodology
Sample
The sample was obtained from a public database--Centra--that
includes the economic and financial information of more than 4,735
Spanish firms throughout the last 4 years (1998-2001). This database was
previously refined in order to make data more homogeneous. In the
refinement process firms were eliminated if there was a lack of
information relevant to the study (sales volume during the period, name
of general director, address, etc.). Also, we excluded firms that could
be considered large. (1) This source is the largest database of
companies in Andalusia (the "Central de Balances de
Andalucia"), that it is a database developed by the regional
government and contains financial and economic information on both
public and private companies; the vast majority of which are unquoted,
private companies. The information held in the Central de Balances is
taken from the registers in which all companies are obliged to enter
their annual accounts every year.
After this process the number of firms was 4.330. Once the database
was refined, a postal questionnaire was sent to the highest-ranking
director of the firm. A total of 446 questionnaires were received, which
represents a response rate of 10.3% and is a typical figure for this
type of research (Baum et al., 2001); Zahra and Garvis, 2000; Wiklund
and Shepherd, 2005). Subsequently, 12 questionnaires were eliminated
because they were not complete, so the final sample being thus comprised
of 434 firms. (2) Table 1 summarizes the main characteristics of the
firms surveyed. It uses enterprises with an average of 30.5 employees
and an average age of 15.9 years, and the average annual growth rate is
15.7%. Finally, we note that the sample is balanced by sector, with a
slight predominance of enterprises belonging to the service sector.
Variables
Firm Growth. To measure firm growth we have used two different
indicators, combining subjective and objective measures, according to
the recommendation of Weinzimmer et al. (1998). The first of these
(Grow-Sub), measures growth by considering the perceptions of the
firm's director and is thus a subjective indicator. We asked the
director of the firm what the firm's rate of growth had been during
the last 4 years compared to other firms in the sector, using a
seven-point Likert-scale. Along with this variable, we have used a
second indicator (Grow-Ind), objective in this case, using information
from the firms' annual accounts. This indicator has been measured
first by calculating the percentage of growth in sales for each company
between 1998 and 2001, in accordance with previous studies (Delmar et
al., 2003). (3) We have calculated the difference between the rate of
growth in sales experienced by the firm in the past 4 years and the
median of growth in its respective sector. This second indicator has
been called "Grow-Obj". Both indicators--Grow-Sub and
Grow-Obj--are a formative part of the final endogenous construct of the
(Growth) model. Finally, in order to homogenize the scales, the latter
variable has been recoded in an interval scale with seven levels.
Entrepreneurial Orientation of the Firm. With respect to
entrepreneurial orientation, we have utilized a questionnaire used in
various previous research projects (Lumpkin & Dess, 2001; Lumpkin,
1998). The EO dimensions of innovativeness, risk taking and
proactiveness were measured using a scale developed by Lumpkin (1998)
based on the scales developed and tested for reliability by Khandwalla
(1977), Miller and Friesen (1983), Covin and Slevin (1989), and Covin
and Covin (1990). Lumpkin adds four new items to these earlier scales:
two innovativeness items, one risk-taking item, and one proactiveness
item. These new items are as follows: Innov4: "my firm prefers to
design its own unique new processes and methods of production,"
versus "my firm prefers to adapt for our own use methods and
techniques that others have developed and proven"; Innov5: "in
general, the top managers of my firms favor experimentation and original
approaches to problem solving," versus "imitating methods
other firms have used for solving their problems"; Rsk3: "in
general, the top managers of my firm prefer to study a problem
thoroughly before deploying resources to solve it," versus
"are quick to spend money on potential solutions if problems are
holding us back"; and Prc3: "the top managers of my firm have
a strong tendency to 'follow the leader' in introducing new
products or ideas," versus "a strong tendency to be ahead of
other competitors in introducing novel ideas or products." Like
other questionnaires used in similar studies (Mustakallio & Autio,
2002; Wiklund & Shepherd, 2005; Wiklund, 1999), the method of
semantic differentials was used in the questions. In other words, the
persons surveyed were offered two opposite phrases, and they rated their
orientation on the matter on a Likert scale from 1 to 7.
Strategy of the Firm. In connection with Miles and Snow's
(1978) strategic patterns, we used "paragraph" type
descriptions of each of the four strategies--defender, prospector,
analyzer, and reactor--and asked the director to classify the firm
according to the similarity of the description and the firm's
behavior (Snow and Hrebiniak, 1980; Segev, 1987; Zahra, 1987). The
responses of the persons surveyed were tabulated using three dummy
variables.
As for Ansoff's (1965) growth strategies, two strategies, not
mutually exclusive, have been considered, corresponding to the two axes
of the growth matrix. The first dimension consists of expansion through
the development of new products and technologies. This strategy was
measured by means of three indicators measured in a Likert scale with 7
points. Each of them measures the degree to which the firm has engaged
in recent years in three types of behaviors: GrowPrdl (development and
launching of new products/ services); GrowPrd2 (development of new