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Entrepreneurial orientation: An applied perspective
Business Horizons (2009) 52, 319—324
www.elsevier.com/locate/bushor
EXECUTIVE DIGEST
Entrepreneurial orientation: An applied perspective S. Trevis Certo a,*, Todd W. Moss b, Jeremy C. Short b a b
W. P. Carey School of Business, Arizona State University, Tempe, AZ 85287-4006, U.S.A. Rawls College of Business Administration, Texas Tech University, Lubbock, TX 79409-2101, U.S.A.
1. The foundations of entrepreneurship When asked to think of an entrepreneur, people typically respond with examples like Richard Branson, Michael Dell, Henry Ford, or Bill Gates–—individuals who have started their own successful businesses from the bottom up, generating a lasting impact on society. That is certainly one way to look at entrepreneurs. But are entrepreneurs limited to those who begin in their garage with a new idea, financed by family members and/or personal savings? What about those in larger organizations who are filled with passion for a new idea, spend time championing it, work with key players in the organization to build a constituency, and then find ways to acquire the needed resources to bring the idea to fruition? Alternatively, what about companies–—like IBM–—that overhaul their strategies so as to change the structures of their respective industries? Too, what about enterprising individuals who successfully navigate through the environments of their respective organizations and maximize their own career prospects by identifying and seizing new opportunities? In the 1730s, Richard Cantillon used the French term entrepreneur–—or, literally, ‘‘undertaker’’–—to * Corresponding author. E-mail addresses: [email protected] (S.T. Certo), [email protected] (T.W. Moss), [email protected] (J.C. Short).
refer to those who undertake self-employment while also accepting an uncertain return. In subsequent years, entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at Facebook). What underlies these conceptions of entrepreneurs is a foundation of doing something new, and a sense that these individuals can make something of opportunities that others cannot. Of course, being an entrepreneur is easier said than done. And doing is a key theme running throughout the academic literature in entrepreneurship. Venkataraman (1997) has said that entrepreneurship as a field of study may be described as understanding ‘‘how opportunities to bring into existence ‘future’ goods and services are discovered, created, and exploited, by whom, and with what consequence’’ (p. 120). Implicitly, this definition indicates that entrepreneurship applies to individuals in a variety of contexts. In this article, we summarize the key ideas behind an entrepreneurial orientation (EO), which refers to the strategic practices that organizations use to identify and launch new businesses (Dess & Lumpkin, 2005; Lumpkin & Dess, 1996). We begin by describing the five dimensions of EO. Firms displaying actions consistent with these dimensions are associated with higher levels of performance in a number of areas,
0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.02.001
320 including bottom-line, firm-level outcomes (Lumpkin & Dess, 1996). We close by providing a number of suggestions for how employees, entrepreneurs, and executives of established corporations can develop and apply these five different dimensions.
2. What makes up an entrepreneurial orientation? The idea of possessing an EO is based on the strategic choice perspective in strategic management which asserts that strategic actions–—and not just industry membership–—create organizational opportunities (Child, 1972). Lumpkin and Dess (1996) define EO as the processes, practices, and decision-making styles of firms that act entrepreneurially. An EO is enacted through the five dimensions of autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking. One view suggests that the EO dimensions work in combination, rather than any one dimension individually, to enable the entrepreneurial behavior of a firm (Covin & Slevin, 1989). An alternate perspective is that these dimensions are based on firm characteristics that may vary independently of each other, contingent on influences that are both internal and external to a firm (Lumpkin & Dess, 1996). Whether individually or in combination, these dimensions play an important role in enabling firms to act in an entrepreneurial manner, an underlying theme accepted by both camps. Further, the differences among firms imply that EO dimensions may be combined in unique ways that vary from one firm to the next (Morris & Sexton, 1996). Next, we discuss each of the EO dimensions to illustrate how they may impact organizational actions and outcomes.
2.1. Autonomy Autonomy in an entrepreneurial sense is the independent action by a team or individual to bring forth a vision or idea and then see it through to completion (Lumpkin & Dess, 1996). Autonomy is consistent with the view of entrepreneurial independence required to bring a new idea to completion, unfettered by the shackles of corporate bureaucracy. Prior research also supports this view as autonomy has been found to encourage innovation, increase the competitiveness and effectiveness of a firm, and promote the launching of new ventures (e.g., Brock, 2003). When individuals or teams are unhindered by organizational traditions or strategic norms, they are able to more effectively investigate opportunities for entrepreneurial action and champion new venture concepts (Burgelman, 1983).
EXECUTIVE DIGEST In larger organizations, one common method of promoting autonomy involves spinning-off a division, which provides these new units with their own budgets, employees, and so forth. One example of such autonomy is Sony’s Playstation, which was created by COO Ken Kutaragi largely independent of the Sony bureaucracy. In time, the Playstation business was responsible for nearly all of Sony’s net profit. Kutaragi was tapped to transform Sony’s core consumer electronics business into a Playstation clone (Tchong, 2004). These types of spinoffs may subsequently become their own publicly-traded enterprise, such as when Motorola spun its successful semiconductor product sector to create Freescale.
2.2. Competitive aggressiveness Competitive aggressiveness has been defined as a firm’s tendency to intensely and directly challenge its competitors in order to outperform rivals in the marketplace (Lumpkin & Dess, 1996). New firms are more likely to fail than established ones, so new firms tend to take a more aggressive posture in order to gain a foothold in the market. Conversely, established firms may be aggressive competitors as they seek to protect their market share and combat trends that place their own survival in jeopardy (Smith, Ferrier, & Grimm, 2001). Firm behaviors that reflect this aspect of an EO include, for example, price cutting and sacrificing profitability, or increased spending on marketing, quality, or production capacity (MacMillan & Day, 1987; Venkatraman, 1989). However, competitive aggressiveness may have its limits. Excessive aggressiveness can be harmful to smaller firms attempting to confront established rivals (Lumpkin & Dess, 2001). Establishing a reputation for competitive aggressiveness may also damage long-run collaborative efforts such as joint ventures and alliances. In some industries, such as Biotechnology, collaborative efforts are vital because the knowledge required to develop and deliver new products tends to be broadly dispersed (Maurer & Ebers, 2006). Competitive actions that destroy opportunities for future collaboration thus have longterm consequences of which firms must be aware. An example of competitive aggressiveness can be found in Ben & Jerry’s marketing campaigns of the mid-1980s, when Pillsbury’s Haagen-Dazs attempted to limit distribution of Ben & Jerry’s products in certain markets. In response, Ben & Jerry’s launched its ‘‘What’s the Doughboy Afraid Of?’’ advertising campaign to challenge Pillsbury’s actions. The company also coupled this marketing action with a series of lawsuits that demonstrated competitive aggressiveness from both marketing and legal perspectives.
EXECUTIVE DIGEST
2.3. Innovativeness Innovativeness is the proclivity of a firm to engage in and support novelty, new ideas, creative processes, and experimentation which lead to new products, services, or technological processes (Lumpkin & Dess, 1996). The foundation for this concept can be traced back to the writings of entrepreneurship scholar Joseph Schumpeter (1942), who postulated that the entry of innovative new combinations into a marketplace enabled societal progress. Innovative entry disrupts existing market conditions and stimulates new demand, enacting Schumpeter’s process of ‘‘creative destruction.’’ Innovations may be incremental or radical, meaning that they may either build off of existing skills to create incremental improvements, or rather require brand new skills to develop new ideas and–—in the process–—destroy existing skills and competencies. Either way, innovativeness is aimed at developing new products, services, and processes, and firms that are successful in their innovation efforts stand to profit more than their competitors. There exists an additional distinction between innovativeness and inventiveness. Inventiveness addresses the first portion of the innovativeness definition above–—the proclivity of a firm to engage in and support novelty, new ideas, creative processes, and experimentation. Inventiveness is a necessary but not sufficient condition for innovativeness. Inventions may lead to innovations, or they may gather dust if there are no current opportunities for internal application or external commercialization (Hitt, Hoskisson, & Nixon, 1993). It is therefore not enough for a firm to focus its innovative efforts at patenting for the sake of patenting. Inventing products that have a low chance of application or commercialization because they do not focus on satisfying customer needs will short-circuit a firm’s innovation efforts. Examples of innovative companies abound. Known for its efficient and ubiquitous service, FedEx has introduced the Smart Package, which allows both shippers and recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs. How do firms generate these types of new ideas that meet latent customer needs? Perennial innovators 3M and Google have found a few possible answers. 3M sends 9,000 of its technical personnel in 34 countries into customers’ workplaces to experience first-hand the kinds of problems customers encounter each day, and allows technical employees to use 15% of their work time on projects of their own choosing with the goal of creating new innovations for the company.
321 Google’s two most popular features of its Gmail, thread sorting and unlimited email archiving, were first suggested by an engineer who was fed up with his own email woes (Fisher, 2008).
2.4. Proactiveness The fourth dimension of an EO, proactiveness, is the process of anticipating and acting on future needs by ‘‘seeking new opportunities which may or may not be related to the present line of operations, introduction of new products and brands ahead of competition, strategically eliminating operations which are in the mature or declining stages of [the] life cycle’’ (Venkatraman, 1989, p. 949). It suggests an opportunity-seeking perspective possessed by a firm that allows it to act in anticipation of shifting market demand. As pioneers, proactive firms are often the first firms to enter new markets. Alternatively, proactive firms are sometimes fast followers that improve upon the initial efforts of first movers. Consider Proactive Communications (PC), an aptly-named small firm located in Killeen, Texas. From its beginnings in 2001, PC has provided communications in hostile environments, such as Iraq and areas impacted by Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep outdoors–—activities often avoided by other telecommunications firms. As a result, information that once took days to reach Iraqi government offices is now delivered instantaneously. With annual growth of 18%, PC has been successful in other areas–—Africa, South America, and Eastern Europe, for example–—where infrastructure deficiencies have prompted governments to leapfrog into satellite and wireless communication. By possessing the capability of being a first responder, PC has carved a niche that may be sustainable in a world that is technologically, environmentally, and politically turbulent. As this example illustrates, proactive preparation enables opportunity exploitation (Choi, 2008).
2.5. Risk taking Typical notions of risk taking are associated with the risk-return tradeoff common in financial analysis. Heavy borrowing, committing a large portion of one’s assets to a course of action, or action in the face of uncertainty have also been suggested as elements of risk taking (Baird & Thomas, 1985). In an EO context, however, risk taking refers to a firm’s tendency to engage in high-risk projects and managerial preferences for bold versus cautious actions in order to achieve firm objectives (Miller, 1983). While a common defining perception of en-
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EXECUTIVE DIGEST
trepreneurs is that they are chronic risk takers, research suggests that entrepreneurs themselves do not perceive their actions as risky (Simon, Houghton, & Aquino, 2000), and most take action Table 1.
only after using planning and forecasting to reduce uncertainty (Bhide, 2000). We are quick to point out differences between uncertainty and risk. Economist Frank Knight (1921)
Applying an entrepreneurial orientation
Entrepreneurial Application for individuals/ Application for startups/ employees founders/entrepreneurs Orientation (EO) element
Application for established corporations/top management teams/ boards
Autonomy
Show an ability to develop Create processes and systems that independent thought and allow employees to develop independent thinking. not require step-by-step instructions.
Allow individuals and teams freedom to champion new ideas.
Question: How do we develop a Question: Do I include detailed recommendations compensation system to encourage independent thinking? and implications when bringing problems to management attention?
Key measures to monitor: Employee satisfaction, employee turnover, employee compensation
Competitive Develop proposals that aggressiveness specifically react to, or anticipate the actions of, competitors.
Question: How adaptive are we to challenges from competitors?
Key measures to monitor: Market share, price, and quality relative to competitors
Identify how new combinations of current products and services can serve new markets.
Be willing to cannibalize existing products, services, or processes and venture beyond current limits.
Question: How many new ideas or processes do I submit to management?
Question: How willingly do we discard old beliefs and explore new alternatives regarding how we value and reward experimentation?
Key measures to monitor: R&D-to-Sales ratio, number of new product/service introductions per year, frequency of product/ service changes
Demonstrate an ability to think ahead, and anticipate future organizational needs.
Be a first mover or a fast follower in new or existing markets.
Influence market trends and create demand.
Question: Do I actively anticipate the needs of management and frame my work accordingly?
Question: To what degree will our business shape our competitive environment in the future?
Key measures to monitor: Growth resulting from new products/services
Question: How does my proposal show its projected impact on our competitors? Innovativeness Highlight how you can provide new and creative ideas or processes.
Proactiveness
Risk taking
Establish a culture of unconventional Engage in aggressive marketing, quality tactics rather than head-to-head improvements, and value competition with incumbents. compared to competitors.
Incur debt or take other risks in Recommend proposals that have more attractive order to seize an opportunity. returns although they may have a lower probability of success. Question: Am I demonstrating an ability to seek out new responsibilities with uncertain outcomes?
Question: Do we allow our own risk aversion to cloud objective opportunity assessments for our firm?
Commit significant resources to a project to ensure high returns.
Key measures to monitor: Debt-Equity ratio, percentage of resources (human, capital, etc.) allocated to a specific ‘high-risk’ project
EXECUTIVE DIGEST suggested that uncertainty refers to situations in which the probability of a future outcome cannot be determined in advance. Risk, on the other hand, refers to situations in which probability distributions can be assigned to potential outcomes. When risk and uncertainty are thus differentiated, individuals and firms acting entrepreneurially may be more specifically thought of as effective uncertainty reducers, rather than reckless risk takers. They see probabilities in uncertainty where others perceive none. An article published in the March-April 2008 issue of Business Horizons stated that Jeroen van der Veer, CEO of Royal Dutch Shell PLC, took the plunge into risky deals in Russia’s Far East, an area rich in both natural gas and crude oil reserves (Certo, Connelly, & Tihanyi, 2008). At the time, it was reported that van der Veer himself conceded it was still too early to know if the move would be successful. Just 6 months later, however, customers in Japan, Korea, and the U.S. had purchased all of the natural gas produced there for more than the next 20 years. Investments in 2008 included the construction of two platforms to complement the one that already existed, as well as a 500-mile long pipeline to bring the natural gas and oil to a port which can remain open during the harsh Russian winters. If Russian political instabilities and challenges in pipeline construction do not dampen returns, Shell stands to post a hefty profit from its 27.5% stake in the venture (Associated Press, 2008).
3. Why is an entrepreneurial orientation important? These five dimensions of an EO, along with examples that illustrate their application, indicate that they are useful perspectives through which to view entrepreneurial processes. These characteristics are certainly needed in large corporations, but their applicability transcends to new ventures, as well as individuals trying to differentiate themselves in an increasingly competitive job market. Table 1 illustrates the importance of EO for three groups of individuals: employees, entrepreneurs, and top executives of established firms. For entrepreneurs, it is important to design organizational systems and policies to reflect the five dimensions of EO. As an example, entrepreneurs should consider how the compensation systems they utilize help to reinforce these dimensions. Does the compensation reward autonomy? Does the compensation system penalize risk taking? Other organizational characteristics such as corporate debt level may influence
323 EO. Do corporate debt levels help or impede innovativeness? Is debt structured in such a way as to encourage risk taking? These are questions for entrepreneurs to consider. Similarly, the employees themselves will want to consider whether their attitudes and behaviors are consistent with the five dimensions of EO. Is the employee making decisions that focus on competitors? Does the employee provide management with new ideas for products or processes that would create value for the organization? Is the employee making proactive, as opposed to reactive, decisions? Each of these questions will aid employees in understanding how they help to support EO within their organizations. Finally, Table 1 provides a number of measures that top executives can monitor to assess how the company is performing relative to the five dimensions. To understand how the organization develops and reinforces autonomy, for example, top executives can administer employee satisfaction surveys and monitor employee turnover rates. Organizations that effectively develop autonomy should foster a work environment with high levels of employee satisfaction and low levels of turnover. As another example, multiple measures may help top executives to understand their firm’s level of innovativeness. How many new products or services has the organization developed in the last year? How many patents has the firm obtained? How much money is spent on R&D? These are all important questions that can help executives to focus on their company’s level of innovativeness. We have highlighted just a few examples of how the various dimensions of EO influence employees, entrepreneurs, and top executives. Table 1 provides a more complete understanding of how the five dimensions of EO influence these three groups of individuals.
4. Concluding comment Today’s ever-changing marketplace is ideally suited for individuals and firms that are willing to engage in the entrepreneurial process. The five EO dimensions of autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking offer concrete guidelines for how individuals and firms can be more successful in this artful task. Who needs an entrepreneurial orientation? In short, anyone who is interested in improved performance for their personal careers, as well as for the nonprofit, startup, and established firms they may work in on a daily basis.
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References Associated Press. (2008). Quest for energy off Russia’s Far East Sakhalin Island overcomes obstacles. Retrieved October 8, 2008, from http://www.iht.com/articles/ap/2007/11/20/ asia/AS-FEA-FIN-Russia-Sakhalin-Oil.php Baird, I. S., & Thomas, H. (1985). Toward a contingency model of strategic risk taking. Academy of Management Review, 10(2), 230—243. Bhide, A. V. (2000). The origin and evolution of new businesses. New York: Oxford University Press. Brock, D. M. (2003). Autonomy of individuals and organizations: Towards a strategy research agenda. International Journal of Business and Economics, 2(1), 57—73. Burgelman, R. A. (1983). A process model of internal corporate venturing in the diversified major firm. Administrative Science Quarterly, 28(2), 223—244. Certo, S. T., Connelly, B., & Tihanyi, L. (2008). Managers and their not-so rational decisions. Business Horizons, 51(2), 113— 119. Child, J. (1972). Organization structure, environment, and performance: The role of strategic choice. Sociology, 6(1), 1—22. Choi, A. S. (2008). PCI builds telecommunications in Iraq. Retrieved October 8, 2008, from http://www.businessweek. com/magazine/content/08_64/s0804065916656.htm Covin, J. G., & Slevin, D. P. (1989). Strategic management of small firms in hostile and benign environments. Strategic Management Journal, 10(1), 75—87. Dess, G. G., & Lumpkin, G. T. (2005). The role of entrepreneurial orientation in stimulating effective corporate entrepreneurship. Academy of Management Executive, 19(1), 147—156. Fisher, A. (2008). Innovation rules. Retrieved October 8, 2008, from http://money.cnn.com/2008/02/29/news/companies/ fisher_amac.fortune/index.htm Hitt, M. A., Hoskisson, R. E., & Nixon, R. D. (1993). A midrange theory of interfunctional integration, its antecedents, and outcomes. Journal of Engineering and Technology Management, 10(1—2), 161—185.
EXECUTIVE DIGEST Knight, F. H. (1921). Risk, uncertainty, and profit. Boston: Houghton Mifflin. Lumpkin, G. T., & Dess, G. G. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review, 21(1), 135—172. Lumpkin, G. T., & Dess, G. G. (2001). Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle. Journal of Business Venturing, 16(5), 429—451. MacMillan, I. C., & Day, D. L. (1987). Corporate ventures into industrial markets: Dynamics of aggressive entry. Journal of Business Venturing, 2(1), 29—39. Maurer, I., & Ebers, R. (2006). Dynamics of social capital and their performance implications: Lessons from biotechnology start-ups. Administrative Science Quarterly, 51(2), 262— 292. Miller, D. (1983). The correlates of entrepreneurship in three types of firms. Management Science, 29(7), 770—791. Morris, M. H., & Sexton, D. L. (1996). The concept of entrepreneurial intensity: Implications for company performance. Journal of Business Research, 36(1), 5—13. Schumpeter, J. A. (1942). Capitalism, socialism, and democracy. New York: Harper & Brothers. Simon, M., Houghton, S. M., & Aquino, K. (2000). Cognitive biases, risk perception, and venture formation: How individuals decide to start companies. Journal of Business Venturing, 15(2), 113—134. Smith, K., Ferrier, W., & Grimm, C. (2001). King of the hill: Dethroning the industry leader. Academy of Management Executive, 15(2), 59—70. Tchong, M. (2004). Inventing from the inside out. Retrieved October 8, 2008, from http://www.fastcompany.com/resources/ innovation/tchong/111504.html Venkataraman, S. (1997). The distinctive domain of entrepreneurship research. In Katz, J., & Brockhaus, R. Eds. Advances in entrepreneurship, firm emergence, and growth. Vol. 3 (pp.119—138). Greenwich, CT: JAI Press. Venkatraman, N. (1989). Strategic orientation of business enterprises: The construct, dimensionality, and measurement. Management Science, 35(8), 942—962.
www.elsevier.com/locate/bushor
EXECUTIVE DIGEST
Entrepreneurial orientation: An applied perspective S. Trevis Certo a,*, Todd W. Moss b, Jeremy C. Short b a b
W. P. Carey School of Business, Arizona State University, Tempe, AZ 85287-4006, U.S.A. Rawls College of Business Administration, Texas Tech University, Lubbock, TX 79409-2101, U.S.A.
1. The foundations of entrepreneurship When asked to think of an entrepreneur, people typically respond with examples like Richard Branson, Michael Dell, Henry Ford, or Bill Gates–—individuals who have started their own successful businesses from the bottom up, generating a lasting impact on society. That is certainly one way to look at entrepreneurs. But are entrepreneurs limited to those who begin in their garage with a new idea, financed by family members and/or personal savings? What about those in larger organizations who are filled with passion for a new idea, spend time championing it, work with key players in the organization to build a constituency, and then find ways to acquire the needed resources to bring the idea to fruition? Alternatively, what about companies–—like IBM–—that overhaul their strategies so as to change the structures of their respective industries? Too, what about enterprising individuals who successfully navigate through the environments of their respective organizations and maximize their own career prospects by identifying and seizing new opportunities? In the 1730s, Richard Cantillon used the French term entrepreneur–—or, literally, ‘‘undertaker’’–—to * Corresponding author. E-mail addresses: [email protected] (S.T. Certo), [email protected] (T.W. Moss), [email protected] (J.C. Short).
refer to those who undertake self-employment while also accepting an uncertain return. In subsequent years, entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at Facebook). What underlies these conceptions of entrepreneurs is a foundation of doing something new, and a sense that these individuals can make something of opportunities that others cannot. Of course, being an entrepreneur is easier said than done. And doing is a key theme running throughout the academic literature in entrepreneurship. Venkataraman (1997) has said that entrepreneurship as a field of study may be described as understanding ‘‘how opportunities to bring into existence ‘future’ goods and services are discovered, created, and exploited, by whom, and with what consequence’’ (p. 120). Implicitly, this definition indicates that entrepreneurship applies to individuals in a variety of contexts. In this article, we summarize the key ideas behind an entrepreneurial orientation (EO), which refers to the strategic practices that organizations use to identify and launch new businesses (Dess & Lumpkin, 2005; Lumpkin & Dess, 1996). We begin by describing the five dimensions of EO. Firms displaying actions consistent with these dimensions are associated with higher levels of performance in a number of areas,
0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.02.001
320 including bottom-line, firm-level outcomes (Lumpkin & Dess, 1996). We close by providing a number of suggestions for how employees, entrepreneurs, and executives of established corporations can develop and apply these five different dimensions.
2. What makes up an entrepreneurial orientation? The idea of possessing an EO is based on the strategic choice perspective in strategic management which asserts that strategic actions–—and not just industry membership–—create organizational opportunities (Child, 1972). Lumpkin and Dess (1996) define EO as the processes, practices, and decision-making styles of firms that act entrepreneurially. An EO is enacted through the five dimensions of autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking. One view suggests that the EO dimensions work in combination, rather than any one dimension individually, to enable the entrepreneurial behavior of a firm (Covin & Slevin, 1989). An alternate perspective is that these dimensions are based on firm characteristics that may vary independently of each other, contingent on influences that are both internal and external to a firm (Lumpkin & Dess, 1996). Whether individually or in combination, these dimensions play an important role in enabling firms to act in an entrepreneurial manner, an underlying theme accepted by both camps. Further, the differences among firms imply that EO dimensions may be combined in unique ways that vary from one firm to the next (Morris & Sexton, 1996). Next, we discuss each of the EO dimensions to illustrate how they may impact organizational actions and outcomes.
2.1. Autonomy Autonomy in an entrepreneurial sense is the independent action by a team or individual to bring forth a vision or idea and then see it through to completion (Lumpkin & Dess, 1996). Autonomy is consistent with the view of entrepreneurial independence required to bring a new idea to completion, unfettered by the shackles of corporate bureaucracy. Prior research also supports this view as autonomy has been found to encourage innovation, increase the competitiveness and effectiveness of a firm, and promote the launching of new ventures (e.g., Brock, 2003). When individuals or teams are unhindered by organizational traditions or strategic norms, they are able to more effectively investigate opportunities for entrepreneurial action and champion new venture concepts (Burgelman, 1983).
EXECUTIVE DIGEST In larger organizations, one common method of promoting autonomy involves spinning-off a division, which provides these new units with their own budgets, employees, and so forth. One example of such autonomy is Sony’s Playstation, which was created by COO Ken Kutaragi largely independent of the Sony bureaucracy. In time, the Playstation business was responsible for nearly all of Sony’s net profit. Kutaragi was tapped to transform Sony’s core consumer electronics business into a Playstation clone (Tchong, 2004). These types of spinoffs may subsequently become their own publicly-traded enterprise, such as when Motorola spun its successful semiconductor product sector to create Freescale.
2.2. Competitive aggressiveness Competitive aggressiveness has been defined as a firm’s tendency to intensely and directly challenge its competitors in order to outperform rivals in the marketplace (Lumpkin & Dess, 1996). New firms are more likely to fail than established ones, so new firms tend to take a more aggressive posture in order to gain a foothold in the market. Conversely, established firms may be aggressive competitors as they seek to protect their market share and combat trends that place their own survival in jeopardy (Smith, Ferrier, & Grimm, 2001). Firm behaviors that reflect this aspect of an EO include, for example, price cutting and sacrificing profitability, or increased spending on marketing, quality, or production capacity (MacMillan & Day, 1987; Venkatraman, 1989). However, competitive aggressiveness may have its limits. Excessive aggressiveness can be harmful to smaller firms attempting to confront established rivals (Lumpkin & Dess, 2001). Establishing a reputation for competitive aggressiveness may also damage long-run collaborative efforts such as joint ventures and alliances. In some industries, such as Biotechnology, collaborative efforts are vital because the knowledge required to develop and deliver new products tends to be broadly dispersed (Maurer & Ebers, 2006). Competitive actions that destroy opportunities for future collaboration thus have longterm consequences of which firms must be aware. An example of competitive aggressiveness can be found in Ben & Jerry’s marketing campaigns of the mid-1980s, when Pillsbury’s Haagen-Dazs attempted to limit distribution of Ben & Jerry’s products in certain markets. In response, Ben & Jerry’s launched its ‘‘What’s the Doughboy Afraid Of?’’ advertising campaign to challenge Pillsbury’s actions. The company also coupled this marketing action with a series of lawsuits that demonstrated competitive aggressiveness from both marketing and legal perspectives.
EXECUTIVE DIGEST
2.3. Innovativeness Innovativeness is the proclivity of a firm to engage in and support novelty, new ideas, creative processes, and experimentation which lead to new products, services, or technological processes (Lumpkin & Dess, 1996). The foundation for this concept can be traced back to the writings of entrepreneurship scholar Joseph Schumpeter (1942), who postulated that the entry of innovative new combinations into a marketplace enabled societal progress. Innovative entry disrupts existing market conditions and stimulates new demand, enacting Schumpeter’s process of ‘‘creative destruction.’’ Innovations may be incremental or radical, meaning that they may either build off of existing skills to create incremental improvements, or rather require brand new skills to develop new ideas and–—in the process–—destroy existing skills and competencies. Either way, innovativeness is aimed at developing new products, services, and processes, and firms that are successful in their innovation efforts stand to profit more than their competitors. There exists an additional distinction between innovativeness and inventiveness. Inventiveness addresses the first portion of the innovativeness definition above–—the proclivity of a firm to engage in and support novelty, new ideas, creative processes, and experimentation. Inventiveness is a necessary but not sufficient condition for innovativeness. Inventions may lead to innovations, or they may gather dust if there are no current opportunities for internal application or external commercialization (Hitt, Hoskisson, & Nixon, 1993). It is therefore not enough for a firm to focus its innovative efforts at patenting for the sake of patenting. Inventing products that have a low chance of application or commercialization because they do not focus on satisfying customer needs will short-circuit a firm’s innovation efforts. Examples of innovative companies abound. Known for its efficient and ubiquitous service, FedEx has introduced the Smart Package, which allows both shippers and recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs. How do firms generate these types of new ideas that meet latent customer needs? Perennial innovators 3M and Google have found a few possible answers. 3M sends 9,000 of its technical personnel in 34 countries into customers’ workplaces to experience first-hand the kinds of problems customers encounter each day, and allows technical employees to use 15% of their work time on projects of their own choosing with the goal of creating new innovations for the company.
321 Google’s two most popular features of its Gmail, thread sorting and unlimited email archiving, were first suggested by an engineer who was fed up with his own email woes (Fisher, 2008).
2.4. Proactiveness The fourth dimension of an EO, proactiveness, is the process of anticipating and acting on future needs by ‘‘seeking new opportunities which may or may not be related to the present line of operations, introduction of new products and brands ahead of competition, strategically eliminating operations which are in the mature or declining stages of [the] life cycle’’ (Venkatraman, 1989, p. 949). It suggests an opportunity-seeking perspective possessed by a firm that allows it to act in anticipation of shifting market demand. As pioneers, proactive firms are often the first firms to enter new markets. Alternatively, proactive firms are sometimes fast followers that improve upon the initial efforts of first movers. Consider Proactive Communications (PC), an aptly-named small firm located in Killeen, Texas. From its beginnings in 2001, PC has provided communications in hostile environments, such as Iraq and areas impacted by Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep outdoors–—activities often avoided by other telecommunications firms. As a result, information that once took days to reach Iraqi government offices is now delivered instantaneously. With annual growth of 18%, PC has been successful in other areas–—Africa, South America, and Eastern Europe, for example–—where infrastructure deficiencies have prompted governments to leapfrog into satellite and wireless communication. By possessing the capability of being a first responder, PC has carved a niche that may be sustainable in a world that is technologically, environmentally, and politically turbulent. As this example illustrates, proactive preparation enables opportunity exploitation (Choi, 2008).
2.5. Risk taking Typical notions of risk taking are associated with the risk-return tradeoff common in financial analysis. Heavy borrowing, committing a large portion of one’s assets to a course of action, or action in the face of uncertainty have also been suggested as elements of risk taking (Baird & Thomas, 1985). In an EO context, however, risk taking refers to a firm’s tendency to engage in high-risk projects and managerial preferences for bold versus cautious actions in order to achieve firm objectives (Miller, 1983). While a common defining perception of en-
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trepreneurs is that they are chronic risk takers, research suggests that entrepreneurs themselves do not perceive their actions as risky (Simon, Houghton, & Aquino, 2000), and most take action Table 1.
only after using planning and forecasting to reduce uncertainty (Bhide, 2000). We are quick to point out differences between uncertainty and risk. Economist Frank Knight (1921)
Applying an entrepreneurial orientation
Entrepreneurial Application for individuals/ Application for startups/ employees founders/entrepreneurs Orientation (EO) element
Application for established corporations/top management teams/ boards
Autonomy
Show an ability to develop Create processes and systems that independent thought and allow employees to develop independent thinking. not require step-by-step instructions.
Allow individuals and teams freedom to champion new ideas.
Question: How do we develop a Question: Do I include detailed recommendations compensation system to encourage independent thinking? and implications when bringing problems to management attention?
Key measures to monitor: Employee satisfaction, employee turnover, employee compensation
Competitive Develop proposals that aggressiveness specifically react to, or anticipate the actions of, competitors.
Question: How adaptive are we to challenges from competitors?
Key measures to monitor: Market share, price, and quality relative to competitors
Identify how new combinations of current products and services can serve new markets.
Be willing to cannibalize existing products, services, or processes and venture beyond current limits.
Question: How many new ideas or processes do I submit to management?
Question: How willingly do we discard old beliefs and explore new alternatives regarding how we value and reward experimentation?
Key measures to monitor: R&D-to-Sales ratio, number of new product/service introductions per year, frequency of product/ service changes
Demonstrate an ability to think ahead, and anticipate future organizational needs.
Be a first mover or a fast follower in new or existing markets.
Influence market trends and create demand.
Question: Do I actively anticipate the needs of management and frame my work accordingly?
Question: To what degree will our business shape our competitive environment in the future?
Key measures to monitor: Growth resulting from new products/services
Question: How does my proposal show its projected impact on our competitors? Innovativeness Highlight how you can provide new and creative ideas or processes.
Proactiveness
Risk taking
Establish a culture of unconventional Engage in aggressive marketing, quality tactics rather than head-to-head improvements, and value competition with incumbents. compared to competitors.
Incur debt or take other risks in Recommend proposals that have more attractive order to seize an opportunity. returns although they may have a lower probability of success. Question: Am I demonstrating an ability to seek out new responsibilities with uncertain outcomes?
Question: Do we allow our own risk aversion to cloud objective opportunity assessments for our firm?
Commit significant resources to a project to ensure high returns.
Key measures to monitor: Debt-Equity ratio, percentage of resources (human, capital, etc.) allocated to a specific ‘high-risk’ project
EXECUTIVE DIGEST suggested that uncertainty refers to situations in which the probability of a future outcome cannot be determined in advance. Risk, on the other hand, refers to situations in which probability distributions can be assigned to potential outcomes. When risk and uncertainty are thus differentiated, individuals and firms acting entrepreneurially may be more specifically thought of as effective uncertainty reducers, rather than reckless risk takers. They see probabilities in uncertainty where others perceive none. An article published in the March-April 2008 issue of Business Horizons stated that Jeroen van der Veer, CEO of Royal Dutch Shell PLC, took the plunge into risky deals in Russia’s Far East, an area rich in both natural gas and crude oil reserves (Certo, Connelly, & Tihanyi, 2008). At the time, it was reported that van der Veer himself conceded it was still too early to know if the move would be successful. Just 6 months later, however, customers in Japan, Korea, and the U.S. had purchased all of the natural gas produced there for more than the next 20 years. Investments in 2008 included the construction of two platforms to complement the one that already existed, as well as a 500-mile long pipeline to bring the natural gas and oil to a port which can remain open during the harsh Russian winters. If Russian political instabilities and challenges in pipeline construction do not dampen returns, Shell stands to post a hefty profit from its 27.5% stake in the venture (Associated Press, 2008).
3. Why is an entrepreneurial orientation important? These five dimensions of an EO, along with examples that illustrate their application, indicate that they are useful perspectives through which to view entrepreneurial processes. These characteristics are certainly needed in large corporations, but their applicability transcends to new ventures, as well as individuals trying to differentiate themselves in an increasingly competitive job market. Table 1 illustrates the importance of EO for three groups of individuals: employees, entrepreneurs, and top executives of established firms. For entrepreneurs, it is important to design organizational systems and policies to reflect the five dimensions of EO. As an example, entrepreneurs should consider how the compensation systems they utilize help to reinforce these dimensions. Does the compensation reward autonomy? Does the compensation system penalize risk taking? Other organizational characteristics such as corporate debt level may influence
323 EO. Do corporate debt levels help or impede innovativeness? Is debt structured in such a way as to encourage risk taking? These are questions for entrepreneurs to consider. Similarly, the employees themselves will want to consider whether their attitudes and behaviors are consistent with the five dimensions of EO. Is the employee making decisions that focus on competitors? Does the employee provide management with new ideas for products or processes that would create value for the organization? Is the employee making proactive, as opposed to reactive, decisions? Each of these questions will aid employees in understanding how they help to support EO within their organizations. Finally, Table 1 provides a number of measures that top executives can monitor to assess how the company is performing relative to the five dimensions. To understand how the organization develops and reinforces autonomy, for example, top executives can administer employee satisfaction surveys and monitor employee turnover rates. Organizations that effectively develop autonomy should foster a work environment with high levels of employee satisfaction and low levels of turnover. As another example, multiple measures may help top executives to understand their firm’s level of innovativeness. How many new products or services has the organization developed in the last year? How many patents has the firm obtained? How much money is spent on R&D? These are all important questions that can help executives to focus on their company’s level of innovativeness. We have highlighted just a few examples of how the various dimensions of EO influence employees, entrepreneurs, and top executives. Table 1 provides a more complete understanding of how the five dimensions of EO influence these three groups of individuals.
4. Concluding comment Today’s ever-changing marketplace is ideally suited for individuals and firms that are willing to engage in the entrepreneurial process. The five EO dimensions of autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking offer concrete guidelines for how individuals and firms can be more successful in this artful task. Who needs an entrepreneurial orientation? In short, anyone who is interested in improved performance for their personal careers, as well as for the nonprofit, startup, and established firms they may work in on a daily basis.
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