ARTICLE
4: PERSONAL CHARACTERISTICS AND STRATEGIC ORIENTATION: ENTREPRENEURS IN
CANADIAN MANUFACTURING COMPANIES
The
success of small businesses heavily depends on the human capital of their owner‐managers
(Jones et al., 2007). When an
entrepreneur starts a business, they bring a unique set of human capital to
their business as a part of resource endowment to the firm, including, but not
limited to, their skills, experience, and personality. As such, the business
becomes an extension of the entrepreneur as an individual (Hambrick and Mason, 1984).
The
resource‐based view of the firm (RBV) posits that
each organization is endowed with a finite amount of resources. Some of these
resources are rare, valuable, and difficult for competitors to copy, and
therefore provide the firm with opportunities to gain sustainable competitive
advantages (Peteraf,
1993; Barney, 1991; Hunt and Morgan, 1995; Penrose, 1959). Penrose (1959) maintains that
human capital, such as the entrepreneur's skills, experience, and other
personal characteristics, are key resource endowments. This paper investigates
how entrepreneurs utilize their skills and experiences to influence their
firm's performance. More specifically, we will demonstrate that the
entrepreneur's personal characteristics influence their strategic choices,
which in turn influence the firm's performance.
Many
researchers have investigated entrepreneurial characteristics by applying Hambrick and Mason's
(1984) upper echelon theory, which regards a firm as a
reflection and extension of its owner. Research has revealed, for example, the
firm's strategic choices, behaviors, and performances are to a large extent
influenced by the demographic characteristics of its owners or top managers (Smith et al., 1996), their social
connections (Geletkanycz
and Hambrick, 1997), their perceptions of the environment (Kiesler and Sproull,
1982), and their decision‐making styles (Eisenhardt, 1999).
Essentially, the upper echelon theory, a special case of RBV, enriches the
strategy formulation and resource allocation processes described by Child and Francis (1977) by considering
the influence of entrepreneurial characteristics. Recent empirical evidence supports
the view that entrepreneurs' and top managers' personal characteristics have a
substantial direct impact on firm performance (Switzer and Huang, 2007; Adams et al., 2005), and an indirect
impact on performance, mediated by decision‐making speed, decision
type, and strategy formulation (Karamiet al., 2006).
Seymour (2006) critiques
classic approaches in business research, arguing that making direct links
between factors such as resources and performance, or environment and strategy,
is overly objective and lacks subjectivity. Ketchen et al. (2007) argue that resource endowment
alone may not automatically lead to superior firm performance. Instead, they
propose that entrepreneurs and managers must deploy resources wisely to
maximize potential benefits. In other words, they argue that the resource‐performance
link is mediated by a firm's strategic choices. Macpherson and Holt (2007) further
highlight the complexity of interactions among human capital, organizational
systems, and firm growth.
Commenting
on knowledge utilization in organizations, Tsoukas (2002, p. 420) draws our
attention to “developing a distinctive way of utilizing resources” and the
“inherently creative potential of human action”. Evidence suggests that even
under seemingly similar external environmental conditions, some firms might opt
to place greater emphasis on understanding the market, while others might focus
on innovation (Atuahene‐Gima and Ko, 2001). Grinstein (2008) argues that
research should shift away from assessing the efficacy of a singular strategy
to examining strategic options and potentially combination strategies. In this
paper, we examine how entrepreneurs consider both market and entrepreneurial
orientations when developing strategic decisions.
According
to Ketchen et al.'s (2007) propositions,
the RBV should be extended to include strategic choices that mediate the
relationship between resource endowment and firm performance. Macpherson and Holt (2007) clearly favor
holistic studies, as well. For practical purposes, we have limited the scope of
our study to include a small number of variables in each category of constructs.
Considered as human capital resource endowment, we investigate a sample of
personal characteristics: internal locus of control, need for cognition, and
need for achievement. Considered as organizational strategic choices, we
examine whether the organization is more market‐oriented or
entrepreneurial‐oriented. For firm performance, we
consider a multitude of finance‐based indicators
including revenue, return on investment, and return on assets. In the course of
this paper, we review and summarize the literature on market orientation,
entrepreneurial orientation, and various relevant personal characteristics. We
then hypothesize their relationships and describe our empirical study designed
to test these relationships. Finally, we discuss the implications of our
findings.
1. Literature review
Considerable
effort has been invested in identifying the set of desirable personal
characteristics for starting or effectively managing businesses. For example,
researchers have identified that achievement motivation positively affects an
entrepreneur's speed of decision‐making (Kauer et al., 2007),
risk‐taking attitudes influence an
entrepreneur's strategic decisions whether to form alliances with other
businesses (Pansiri,
2007), professional experience and education are likely to lead and
enable an entrepreneur to develop formal strategic plans (Karami et al., 2006),
and intuition leads an entrepreneur to prefer a prospector strategy (Gallen, 2006).
Although
researchers have uncovered a host of personal characteristics that are critical
antecedents to firm performance, as Dobbs and Hamilton (2007) observe,
knowledge about the relationship among the characteristics of entrepreneurs,
their strategic decisions, and the performance of their firms is still
fragmented, and that no research to date has produced a coherent theory. The
following discussion elucidates these prior findings and attempts to join them
together.
1.1
Market orientation
Market
orientation (MO) is the organization‐wide concerted effort
in generating market intelligence pertaining to current and future customer
needs, disseminating intelligence across departments, and responding to such
intelligence (Kohli
and Jaworski, 1990). Market‐oriented firms embrace
a collection of special behaviors that place primary emphasis on customers. It has
also been argued that an organization's ability to respond to the market
depends on the extent of its knowledge of both customers and competitors (Narver and Slater, 1990).
That is, a market‐oriented firm must have an
organizational culture that encourages and facilitates all activities involved
in both acquiring information about customers and competitors in the target
market and disseminating the information throughout the business. Hence, MO is
a composite construct that encompasses three distinct components: customer
orientation, competitor orientation, and inter‐functional
coordination. Both Narver
and Slater's (1990) and Kohli and Jaworski's (1990)conceptualizations
of market orientation have been extensively employed in the stream of research
that followed their work. Empirical findings from both perspectives generally
converge to support the conclusion that MO has a robust positive influence on
firm performance (Kirca et al., 2005; Cano et al., 2004).
Notwithstanding
the solid impact of MO on performance, other strategic options are available
for managers to consider. For example,Sin et al. (2002) have shown that relationship
marketing orientation (RMO), which focuses on cultivating a mutually beneficial
long‐term relationship between buyers and
sellers, also has positive effects on firm performance. These researchers have
also demonstrated that, depending on industry and economic ideology, RMO may be
more effective than MO in some cases (Sin et al., 2005).
A
notable shortcoming of MO is its reliance on entities external to the firm
(e.g., customers and competitors) to guide its actions.Jaworski et al. (2000) have warned that
firms should avoid being market‐driven and, instead,
should attempt to drive the market. In order to achieve such goals, some have
identified innovation, proactivity, and risk‐taking as
complementary elements to MO. For example, Atuahene‐Gima and Ko (2001) demonstrate that
entrepreneurial orientation (EO) is an alternative to MO. When a firm aligns
both MO and EO it would have superior performance in the commercialization of
new products. Zhou et al. (2005) also consider EO
as an alternative strategic orientation to MO.
1.2
Entrepreneurial orientation
EO
relates to the processes, practices, and decision‐making activities that
lead to a new entry (Lumpkin and Dess, 1996). EO involves not
only the intentions but also the actions of key players in a dynamic generative
process aimed at new venture creation. The fundamental dimensions that
characterize EO, Lumpkin and Dess assert, include a propensity to act
autonomously, a willingness to innovate and take risks, a tendency to be
aggressive toward competitors, and proactively pursuing market
opportunities. Covin
and Slevin (1991) maintain that, in addition to influencing new
venture creation, EO also influences a firm's on‐going performance.
Therefore, EO is an important strategic orientation for existing firms as well.
Empirical evidence suggests that firms with a high level of EO are much more
likely to engage in innovation (Manimala, 1992) and enjoy better overall
organizational performance (Smart and Conant, 1994). The positive
influence of EO on performance is extensive, and the strength of this influence
increases over time. Therefore, researchers argue that investment in EO is
financially worthwhile as it will pay off over an extended period of time (Wiklund, 1999).
Atuahene‐Gima and Ko (2001) demonstrate that
firms adopt various combinations of strategic orientation. Some place their
emphasis more heavily on either MO or EO. Those that integrate both MO and EO,
however, achieve the strongest performances in the commercialization of
innovation. Zhang et al. (2007) further
demonstrate that, while both MO and EO have unique and significant positive
influences on firm performance, these two strategic orientations influence
performance via different paths. Entrepreneurial‐oriented firms are
more likely to concentrate on direct links to financial performance, whereas
market‐oriented firms are more likely to focus
on customers and gaining long‐term financial return
through improved satisfaction and loyalty.
Environmental
factors have typically been conceptualized as moderators for both MO (Kohli and Jaworski, 1990)
and EO (Lumpkin and Dess, 1996). Only a few studies
have examined the factors that lead managers to choose either strategic
orientation. Zhang et al. (2007) suggest that
certain market environmental factors, such as munificence, competitive
intensity, and market turbulence, might affect managers' selection of strategic
orientations. Kohli
and Jaworski (1990) have stipulated that the top manager's
emphasis is an important antecedent to MO. We suspect that it could also be the
case in EO. In the following subsection, we seek to identify what type of
entrepreneurs is more likely to adopt MO or EO.
1.3
Managerial characteristics in management literature
There
is a rich body of management literature that seeks to identify certain sets of
desirable personal characteristics for entrepreneurs starting new businesses
and for managers running companies effectively. A large number of managerial
characteristics have been examined in the management literature. For example,
prior research has shown that managers with higher levels of achievement
motivation make decisions faster (Kauer et al., 2007), owner‐manager's personal
visions correlate with above average annual sales levels (Mazzarol et al., 2009),
managers with higher levels of education are more likely to develop formal
strategic plans (Karami et al., 2006),
managerial cognition plays a vital role in managerial conduct and performance (Panagiotou, 2006),
and managers with an internal locus of control tend to be more innovative (Miller and Toulouse, 1986) and effective (Govindarajan, 1989).
Prior research has considered achievement motivation and internal locus of
control as critical characteristics of successful entrepreneurs (Littenen, 2000; Hansemark, 1998).
However, extant knowledge on this topic is fragmented (Dobbs and Hamilton, 2007). More research is
needed to provide a holistic picture of entrepreneurial behaviors (Macpherson and Holt, 2007).
In
our study, we take a resource‐based view and
consider the entrepreneur's personal characteristics as human capital resource
endowments, and examine them in the context of strategy and performance. In
terms of variables, we examine three frequently investigated personal
characteristics in the entrepreneurship research: need for achievement, need
for cognition, and internal locus of control.
Need
for achievement
The
need for achievement (NFA) construct has a long history in psychology. It
generally refers to a stable, learned characteristic in which satisfaction is
obtained by striving for and attaining higher levels of excellence (Feldman, 1999). Although NFA was
originally conceptualized as a stable personal trait, more recent studies have
demonstrated that it can evolve over time, particularly through the acquisition
of advanced education, such as an MBA programme. One study found that students
substantially increased their achievement needs after enrolling in an MBA
programme (Hansemark,
1998). Prior research also indicates that there is a positive
relationship between NFA and entrepreneurship (Johnson, 1990). Research also suggests that angel
investors typically have a higher NFA (Duxbury et al., 1996); entrepreneurs with
a higher NFA are more likely to be successful (Johnson and Ma, 1995). In some cases, NFA
is one of the selection criteria for entering entrepreneurship training
programmes (Gupta, 1989). There seems to be a
consensus on the positive relationship between managerial NFA and successful
performance.
Several
studies have examined NFA's influence on firm strategies. For example, it was
found that a CEO's NFA affects the rationality of the strategic decision‐making
processes by increasing organizational formalization and integration (Miller et al., 1988). When a CEO has a
high level of NFA, they are more likely to adopt broadly focused strategies and
be proactive (Miller and Toulouse,
1986).
Being proactive is one of the key elements of entrepreneurial orientation (Lumpkin and Dess, 1996). Therefore, we
suspect that entrepreneurs with higher levels of NFA are likely to adopt entrepreneurial‐oriented
strategies.
Lumpkin and Dess
(1996) have
also theorized a positive relationship between NFA and EO. They predict that
entrepreneurs and managers with higher levels of NFA are more likely to adopt
EO, which in turn contributes to superior firm performance. The literature,
however, is relatively silent on the relationship between NFA and MO. In
summary, extant literature supports the idea that entrepreneurs with higher
levels of NFA are more likely to cultivate an organizational culture that is
more competitive and proactive. We hypothesize that an entrepreneur's NFA has a
significant direct impact on the firm's strategy and an indirect on
performance:
H1. An entrepreneur
with a higher level of NFA is likely to adopt entrepreneurial orientation to
achieve superior firm performance.
Internal
locus of control
According
to Rotter (1966), internal locus of
control (ILOC) versus external locus of control conceptualizes how individuals
see their own actions affecting events that surround their lives. Individuals
with ILOC tend to believe that events are the results of their own actions (Rotter, 1966), while individuals
with external locus of control tend to attribute events to external
environmental factors, such as powerful others or chance (Levenson, 1973).
If
we put the concept of ILOC in the context of an entrepreneur running their
business in a competitive environment, we can imagine that an entrepreneur with
a strong ILOC would believe that they can make things happen, and that the
success or failure of their business is the result of their own actions. In
contrast, an entrepreneur with an external locus of control might consider that
the external environment is the main reason for their business success or
failure.
Market‐oriented
organizational culture requires that a firm be attuned to its customers, and
design and deliver products and services that fulfill customer needs and wants.
In other words, a market orientation assumes the customers as the locus of
control. An entrepreneur with a high level of ILOC may not be willing to
surrender the control of their organizations and seek directions from
customers, competitors, or other external entities. They would rather take
matters into their own hands and formulate a competitive organizational culture
that is internally driven by their own innovative and creative ideas.
ILOC
is a signature characteristic of angel investors and entrepreneurs (Johnson and Ma, 1995). Entrepreneurs with
high levels of ILOC tend to perceive themselves as having more managerial
discretion and power (Carpenter and Golden,
1997).
Managers and entrepreneurs with ILOC also tend to be more innovative (Miller and Toulouse, 1986) and effective (Govindarajan, 1989).
Prior research have also indicated that the positive impact of ILOC on firm
performance is mediated by the entrepreneur's risk‐taking
behaviors (Boone et al., 1996). The extant
literature clearly indicates a positive relationship between ILOC and
entrepreneurial behaviors. Consistent with prior findings, we hypothesize that
an entrepreneur's ILOC has direct and indirect positive impacts on the firm's
performance, and the entrepreneur with a high level of ILOC is more likely to
adopt EO:
H2. An entrepreneur
with a high level of ILOC is likely to adopt entrepreneurial orientation to
achieve superior firm performance.
Need
for cognition
A
need for cognition (NFC) is a tendency to engage in and enjoy
thinking (Cacioppo
and Petty, 1982). The psychology literature suggests that
individuals naturally differ in their levels of NFC (Cacioppo et al., 1996).
Those with higher levels of NFC possess positive attitudes toward complex stimuli
that require thinking (Cacioppo et al., 1986).
Individuals with higher levels of NFC also favor extensive information
searches, whereas those with lower levels of NFC prefer interpersonal sources
of information and are more likely to act upon perceptions and gut feelings (Mourali et al., 2005).
Although
the NFC construct was originally developed in psychology, it has been widely
applied in the marketing field, particularly in consumer behavior and
advertising research. For example, in the context of assessing the effects of
reference group opinions, it has been found that individuals with high levels
of NFC place greater emphasis on the logical evaluation of topic‐relevant
arguments, while individuals with low levels of NFC make their decisions based
on affective attitudes toward the information (Areni et al., 2000).Campbell and Kirmani (2000) have found that consumers
with higher levels of NFC and cognitive capacity are more capable of activating
their knowledge base. Those with higher levels of formal education are thought
to have more cognitive capacity and higher NFC, and are more likely to engage
in rational reasoning (Cacioppo et al., 1986).
In an advertising context, researchers have found that individuals with higher
levels of NFC are more capable of understanding complex advertisements (Putrevu et al., 2004).
While
NFC has not been extensively examined in the domains of strategic management
and entrepreneurship, evidence shows that managers and entrepreneurs with
higher NFC are more successful at adaptive decision‐making
(Levin et al., 2000). If individuals with
higher levels of NFC behave in certain patterns, it would be reasonable to
deduce that entrepreneurs with higher levels of NFC would behave similarly. We
would expect that an entrepreneur with a higher level of NFC would place
greater emphasis on logical arguments and make their strategic decisions based
on extensive market research rather than on intuition. MO encourages the
entrepreneur to generate extensive market intelligence. The market intelligence
can be complex, and it requires a high level of cognitive capacity to
effectively analyze and respond. We hypothesize, therefore, that an
entrepreneur's NFC has a significant impact on a firm's strategy and
performance, and the entrepreneur with a high level of NFC is likely to be
market‐oriented:
H3. An entrepreneur
with a higher level of NFC is likely to adopt market orientation to achieve
superior firm performance.
Essentially,
we propose a contextual model based on the extended resource‐based
view (Ketchen et al., 2007).
We believe an entrepreneur's personal characteristics will influence their
strategic orientations, which ultimately leads to business performance (seeFigure 1).
2.1
Procedure
We
have hypothesized several relationships among entrepreneurs' personal
characteristics, their firm's strategic orientations, and performances. A cross‐sectional
survey‐based method is suitable for testing the
study hypotheses because data on a large number of organizations can be
collected systematically via this method (Babbie, 1973). The survey method is the least
susceptible to researcher bias in data collection, analysis, and interpretation
(Busha and Harter,
1980).
A
mail survey was administered to small to medium sized enterprises (SMEs) in
Canadian manufacturing industry. A sample of 2,200 companies was selected from
approximately 100,000 Canadian companies listed in Profile Canada's database.
This selection was a compromise between a wide cross‐industry
sample and a focused sample. The companies in our sample are all in the manufacturing
industry but they produce a wide variety of products, including processed food,
clothing, furniture, and industrial equipments. A cross‐industry
sampling approach would allow broader generalization but errors may occur
because each industry has its unique competitive environment. A focused sample
would limit the influence of industry factors but limit the generalizability of
the findings. We have chosen to sample the highly populated and relatively
diverse manufacturing industry in order to allow our results to be generalized
to a larger population, yet at the same time keep the environmental factors
relatively comparable. Our sample does not include, for example, companies in
financial services or oil and gas sectors where competitive behaviors are
considerably different because of oligopoly and government regulations. The
manufacturing industry has been a favorite sample frame for many prior studies
of a similar nature (Pelham, 1999; Menguc and Auh, 2006; Matsuno and Mentzer,
2000; Knight, 2000;Avlonitis and Gounaris,
1999).
The
business owners or general managers of the selected companies were contacted by
mail, informed of the nature of our study, and asked to complete a survey
questionnaire. Follow‐up reminder postcards were sent two
weeks after the initial mail‐out. Of the 2,200
packets mailed, 198 were returned as undeliverable. One hundred and sixty‐three
respondents returned the completed survey questionnaires. Two of these were
deleted due to a large amount of missing data. The survey, therefore, yielded
161 usable responses, representing an 8 percent response rate.
The
descriptive statistics of the companies that responded to our survey are
reported in Table I. These companies, on average, have been
in business for 32 years, with 72 employees, and have approximately $27 million
dollars in annual revenue. These statistics will be used to As suggested
by Armstrong and Overton
(1977),
we conducted a t‐test to compare the
early respondents (those who responded within the first three weeks of mailing)
and the late respondents along a number of major variables, including MO and
EO. This did not reveal any statistically significant difference between the
two groups (see Table II).
We
know very little about the companies that did not respond to our survey except
for their approximate number of employees and estimated revenue. We were unable
to compare revenue between responding and non‐responding companies
because of a large percentage of missing data. Therefore, we compared
respondents' number of employees with that of the overall sample; no
significant difference was found. Hence, we believe that non‐response
bias is not a As a preventative measure to potential common method bias, which
refers to the artificially high correlation among constructs due to a single
measurement method (Podsakoff et al., 2003),
we rigorously followed the recommendations made by methodologists such as Busha and Harter (1980), Podsakoff et al.(2003),
and Klein (2007). For example, we used
previously published scales with demonstrated validity and reliability wherever
possible, and we did not mix the measurement items. We also inserted several
open‐ended questions and varied question
types among Likert scales and semantic differential scales. While these
techniques reduce common method bias, they do not eliminate it. We tested
common method bias post hoc using Harman's single‐factor test (Podsakoff and Organ,
1986). The test revealed 27 factors with Eigen values greater than
1.00, suggesting that common method bias is not a major concern in our data.
2.2
Construct measurement
Market
Orientation (MO)
Kohli et al. (1993) and Narver and Slater (1990) developed
two different measurement scales to capture the MO construct. Both scales have
been used extensively. Over the years, several scholars have extended,
shortened, and modified these scales to suit their respective research context
(Gainer and Padanyi,
2005; Mavondo et al., 2005; Hult et al., 2005; Zhou et al., 2005). Particularly,Matsuno et al. (2005) have
demonstrated that Narver and Slater's scale captures MO slightly better. Hence,
we used a 12‐item, seven‐point
Likert scale, originally developed by Narver and Slater, to capture each
respondent's perceptions of his/her company's customer orientation, competitor
orientation, and inter‐functional coordination (see the
Appendix (Figure A1) for items included in our
questionnaire). These 12 items demonstrated good reliability, with a Conbach's
alpha of 0.847. We averaged these 12 items to create a MO composite index.
Entrepreneurial
Orientation (EO)
This
was measured with a nine‐item, seven‐point
semantic differential scale based on the work of Naman and Slevin (1993).
The items were designed to capture a firm's innovativeness, pro‐activeness,
and risk‐taking behavior. These items also
demonstrated good reliability, with a Cronbach's alpha of 0.841. These items
were subsequently averaged into a single EO composite index.
Need
for Achievement (NFA)
The
NFA was measured with a five‐item, seven‐point
Likert scale. The items were selected from the need for achievement subscale of
Needs Assessment Questionnaire (Heckert et al., 1999). These items demonstrated good scale
reliability, with a Cronbach's alpha of 0.886. We averaged these five items to
create an index score for NFA.
Internal
Locus of Control (ILOC)
This
was measured with a seven‐item, seven‐point
Likert scale. Three items, measuring internal locus of control, were based on
the work of Rotter (1966), and the remaining
four, measuring external locus of control, were based on the work of Levenson (1973).
In order to test their loading, we conducted an exploratory factor analysis
with varimax rotation, which revealed that one single factor underlies the
seven items measured. Accordingly, we reverse‐coded the four items
that were designed to capture external locus of control. The resulting seven
items demonstrated good reliability, with a Cronbach's alpha of 0.801. We then
averaged these seven items into one ILOC composite index.
Need
for Cognition (NFC)
Cacioppo et al. (1984) developed two
versions of a scale to measure NFC: a 34‐item long scale and an
18‐item shorter version. A recent study
reported that NFC consists of four key components: enjoyment of cognitive
stimulation, preference for complexity, commitment of cognitive effort, and
desire for understanding
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