Entrepreneurial Orientation and Firm Performance - Giorgio Tomassetti

8/4/2019 Entrepreneurial Orientation and Firm Performance - Giorgio Tomassetti

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UNIVERSIT CARLO CATTANEO LIUCFACOLT DI ECONOMIA

Corso di Laurea in Economia Aziendale

Entrepreneurial

Orientation and FirmPerformance

TUTOR: Salvatore Sciascia

Paper di:

Giorgio TomassettiMatr. 11854

Anno Accademico 2010/2011


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ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE 1

Contents

Acknowledgment .......................... .......................... ........................... .......................... ........ 3

Abstract ............................................................................................................................... 4

Introduction ......................................................................................................................... 5

1. Entrepreneurship ............................ .......................... .......................... ......................... 6

1.1. The Entrepreneurial Mindset ....................... .......................... .......................... .... 6

1.2. Entrepreneurship at the Corporate Level: Corporate Entrepreneurship ................. 7

1.3. Entrepreneurial Orientation (EO) ........................... .......................... .................... 9

1.4. The Role of the Management in creating an Entrepreneurial Organization ......... 15

1.5. The Relationship between EO and Financial Performance ................................. 16

2. Research Design ............................ .......................... .......................... ....................... 18

2.1. Method ............................................................................................................. 18

2.2. Content Analysis ............................. .......................... .......................... .............. 19

2.3. Financial Performance .............................. .......................... .......................... ..... 24

3. Analysis ........................... .......................... .......................... .......................... ........... 25

3.1. EO ROI ............................... .......................... .......................... ....................... 26

3.2. EO ROE .............................. .......................... .......................... ....................... 28

3.3. EO ROS .............................. .......................... .......................... ....................... 30

4. Discussion ................................................................................................................ 32


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4.1. Results .............................................................................................................. 32

4.2. Conclusion ............................. .......................... .......................... ....................... 35

4.3. Further Research ............................. .......................... .......................... .............. 35

Bibliography ............................. .......................... .......................... .......................... ........... 38

Index of Figures

Figure 1: The five dimensions of EO ............................................. .......................... ........... 10

Figure 2: Ranking of companies based on their EO Index score .......................................... 23

Figure 3: EO Index - ROI ............................ .......................... .......................... ................... 26

Figure 4: EO dimensions ROI................................. ............................... .......................... 27

Figure 5: EO Index - ROE ........................... .......................... .......................... ................... 28

Figure 6: EO dimensions ROE .......................... .......................... .......................... .......... 29

Figure 7: EO Index ROS ............................... .......................... .......................... .............. 30

Figure 8: EO dimensions ROS ........................... .......................... .......................... .......... 31

Figure 9: Autonomy - ROI ............................... .......................... .......................... .............. 34

Index of Tables

Table 1: Word list for EO dimensions............................................ .......................... ........... 21

Table 2: Means and Standard Deviations ........................... .......................... ....................... 22

Table 3: Correlations between dimensions of EO and performance measures ...................... 25


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Acknowledgment

First and foremost, I would like to thank my family for their support and encouragement.

They have always believed in the importance of my education and for this I will always be grateful.

I would like to express my deep and sincere gratitude to Prof. Salvatore Sciascia for being my

mentor and advisor for this research project. His guidance and assistance have been essential during

the research and writing of this thesis.

Also, special thanks to Joseph R. Erba, professor at the University of North Carolina at

Greensboro (UNCG), for introducing me to the subject of Corporate Entrepreneurship and

providing me with valuable advice. I find his ability to inspire and motivate people extremely

impressive. Finally, I have to thank Dennis P. Leyden, professor at the University of North Carolina

at Greensboro (UNCG), who taught me how to properly write a research paper. Most importantly, I

have to thank Mr. Leyden for his invaluable insights on the art of Critical Thinking.

Prima di tutto, vorrei ringraziare la mia famiglia per il loro supporto e incoraggiamento. A loro sar

sempre grato per aver creduto nellimportanza della mia educazione.

Vorrei inoltre esprimere la mia pi sincera gratitudine a Salvatore Sciascia per aver svolto il ruolo di

tutore. I suoi consigli e il suo aiuto sono stati fondamentali durante il periodo di ricerca e di stesura della

tesi.

Un ringraziamento speciale va a Joseph R. Erba, professore presso University of North Carolina a

Greensboro (UNCG), per avermi introdotto allo studio della Corporate Entrepreneurship e per avermi dato

sempre consigli preziosi. La sua abilit a ispirare e motivare le persone mi ha colpito molto. In conclusione,

devo ringraziare anche Dennis P. Leyden, professore presso University of North Carolina a Greensboro

(UNCG), per avermi insegnato ad affrontare un progetto di ricerca. In particolare, devo ringraziare il

professor Leyden per le sue preziose lezioni sullarte del Pensiero Critico.


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Abstract

The primary objective of this thesis is to determine whether firms who have a greater

entrepreneurial orientation tend also to be more successful in terms of performance. In particular, I

want to answer the following research question: What is the relationship between the

entrepreneurial orientation and the performance of a firm?. This thesis is the result of a research

project conducted on a set of 49 companies in the Consumer Goods sector listed on Borsa Italiana

(the Italian Stock Exchange) during the year 2010.

The paper is composed of four parts. In the first chapter I introduce the subject of

entrepreneurship. In particular, I describe the main findings and points of view on the topic of

corporate entrepreneurship and entrepreneurial orientation. The research background in the first

chapter allows the reader to gain a better understanding of the second chapter. Indeed, in the second

chapter I describe the tools and the method used in this research project to gather the necessary data.

In the third chapter, I explain the analysis I conducted on the information previously collected.

Finally, the fourth chapter is about the results of my research. In this part of the paper I conclude

that there is a moderate positive correlation between the level of entrepreneurial orientation and a

firms performance and this result is coherent with previous research in the field of corporate

entrepreneurship.


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Introduction

On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. In the

following days it became clear how fast the world was moving. Suddenly, organizations all over the

globe were experiencing serious financial difficulties and in a matter of hours the U.S. financial

system, as well as the world financial system, were under severe risk of collapsing.

Although this paper is not about the recent financial crisis, it is important to realize that

todays business world has gone through some major changes in recent years. The effects of

Lehmans bankruptcy are just an example that helps us realize how fast the world is moving today

and how complex it has become. Indeed, companies need to learn how to successfully deal with a

constantly changing external environment that forces them to continually work on their strategy to

align the internal environment with the external environment.

Many organizations are fully aware of their need to change. Nevertheless, many are unwilling

to do so. As research shows, individuals tend to be risk-adverse and tend to stick with the status quo

(Samuelson & Zeckhauser, 1988). Therefore organizations need to develop strategies that allow

them to embrace change by making it a vital part of their culture. By doing so they reduce the

resistance to change and the whole process becomes easier. As a matter of fact, we have seen many

companies taking actions to exploit opportunities by fostering entrepreneurship (Sathe, 1988;

Russell, 1999). Indeed, as you will read in this thesis, by having an entrepreneurial orientation

companies are able to quickly react to changes happening in the external environment and

ultimately improve their performance.


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1.EntrepreneurshipIn this first chapter I introduce the reader to concept of entrepreneurial behavior and its main

characteristics. Then I describe the meaning of Corporate Entrepreneurship (CE) and in particular I

expand on the concept of entrepreneurial orientation (EO) and its dimensions, which are a central

element of this paper. Also, in this chapter, I analyze the role of the management in creating an

entrepreneurial organization. Finally, I describe similar research projects that previously tried to

determine the type of relationship that exists between the entrepreneurial orientation of a firm and

its performance.

1.1.The Entrepreneurial MindsetThe entrepreneurial mindset can be described as a way of conducting business operations that

involves a constant risk-taking in order to seize opportunities. Indeed, entrepreneurship has been

proved to be an important wealth creation tool that facilitates innovation, value creation and

renewal (Hitt, Ireland, Camp, & Sexton, 2001). Throughout history many definitions of the word

entrepreneurhave been given. According to Schumpeter, for example, the entrepreneur is a major

agent of economic development, while Kirzner defines the entrepreneur as the one who identifies

potential opportunities that are unexploited and allocates efficiently the resources available on the

market (Sciascia & De Vita, 2004). These definitions help us understand what it really means to be

entrepreneurial.

Although every entrepreneurial organization is different from another, we are still able to

identify some common traits that characterize them. For instance, entrepreneurial organizations

have a high acceptance of failure, which ultimately provides a unique way of approaching

innovation. As Tim Campos, Facebook CIO, recently said, Failure is the critical ingredient to


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creating an innovative culture (Wall, 2011). The acceptance of failure needs to be promoted by the

management and in particular the so called failure-tolerant leaders need to focus their attention on

promoting a culture of intelligent risk taking by assuming a non-judgmental analytical posture and

admitting their own mistakes.

Another common trait of entrepreneurial cultures is the high level of engagement among the

workers and in particular between the leaders and their teams. Engagement can be achieved, for

example, by encouraging collaboration, showing interest and being supportive to others. It is

interesting to notice that a recent study shows that praising people can actually reduce their

performance, while only a genuine interest in an employees work has positive effects on

performance (Farson & Keyes, 2002).

Finally, it is important to understand that entrepreneurship is both a way of thinking

(cognition) and a way of acting (behavior) (Morris, Kuratko, & Covin, 2010), and for an

entrepreneurial culture to work, a constant flow of relevant information across all levels have to

occur.

After this short introduction to entrepreneurship we can now explore the application of

entrepreneurial principles in the corporate world.

1.2.Entrepreneurship at the Corporate Level: CorporateEntrepreneurship

Entrepreneurship is often associated with small companies and start-ups, but in recent years

we have seen many corporations embrace the principles of entrepreneurship inside their own

organizations. This phenomenon has been labeled Corporate Entrepreneurship (CE) and it has been

defined as the process by which individuals inside organizations pursue opportunities without

regard to the resources they currently control (Stevenson, Roberts, & Grousbeck, 1999) . For


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instance, successful companies like 3M, Google and IBM strongly encourage their employees to be

entrepreneurial. 3M allows its employees to spend 15% of their time on side project. Similarly

Googles employees can spend 20% of their time pursuing their own projects; products such as

Gmail and Google News are a direct result of this policy. Instead IBM organizes the so called

jams, which are brainstorming sessions that more than 300,000 employees attend. These

initiatives have been very successful (and also profitable) for the companies that have implemented

them (Howe, 2010).

CE can be better understood by describing the three types of concepts in which it can be

expressed (Guth, & Ginsberg, 1990; Covin, & Miles, 1999):

1. The creation of new businesses within an established organization (i.e. corporate venturingor internal innovation)

2. The transformation of organizations through strategic renewal3. Entrepreneurial Orientation (EO)

The firstconcept (corporate venturing or internal innovation) is defined as an activity which

seeks to generate new businesses for the corporation in which it resides through the establishment

of external or internal corporate ventures (Von Hippel, 1977, p. 163). The second concept,

strategic renewal, is the revitalization of the companys operations by changing the scope of its

business, its competitive approach, or both (Zahra, 1996, p. 1715). Finally, the third concept,

entrepreneurial orientation, has been defined by Covin and Miles (1999, p. 48) as an

entrepreneurial philosophy that permeates an entire organizations outlook and operations. In the

literature we find that entrepreneurial orientation is also referred as entrepreneurial management

(Brown, Davidsson, & Wiklund, 2001; Stevenson, & Jarillo, 1990) or entrepreneurial posture

(Covin & Slevin, 1991).


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In this paper I will focus my attention on this last one of the three concepts described above,

Entrepreneurial Orientation (EO), and I will study the correlation between the EO of an

organization and its financial results. In particular, I will look at a set of companies in the Consumer

Goods sector listed on Borsa Italiana (the Italian Stock Exchange) and analyze their Managements

Discussion and Analysis (MD&A).

The MD&A can be found inside the annual report of a public company and it is supposed to

address the performance of the firm for that year, as well as the significant events, trends,

conditions and contingencies that can affect the future of the firms operations. It should also

include the financial statements, systems and controls, compliance with laws and regulations, and

actions taken or planned to address problems (Federal Accounting Standards Advisory Board,

1999).

1.3.Entrepreneurial Orientation (EO)Entrepreneurial orientation has now become a central concept in entrepreneurship and

research on this subject is increasing because it is now recognized by managers and scholars as a

critical success factor (Kaya & Aca, 2009). It is possible to define Entrepreneurial Orientation

(EO) as the set of processes, practices, and decision-making styles of firms that act in an

entrepreneurial way (Lumpkin & Dess, 1996).

A firm can be considered entrepreneurial if it exhibits the following five entrepreneurial

behaviors: autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking.


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Figure 1: The five dimensions of EO

These dimensions are considered to be the key dimensions of EO (Short, Payne, Brigham,

Lumpkin, & Broberg, 2009) and they are essential if an organization wants to engage in successful

CE. Below I will describe each one of the five dimensions to gain a better understanding on what it

really means to have an entrepreneurial orientation. Also, the following five dimensions are used in

this research project to measure the level of EO in each company.

Autonomy

Autonomy refers to the independent actions taken by individuals or teams in order to develop

new opportunities from the idea stage to completion (Lumpkin & Dess, 1996). The ability to freely

think and share opinions is, for instance, a key trait of an entrepreneurial organization. This mindset

Entrepreneurial

OrientationAutonomyCompetitive

aggressiveness

Innovativeness

Proactiveness

Risk taking


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ultimately translates in a sense of empowerment, which helps employees take an active, rather than

passive, role in the company.

Although the concept of autonomy seems simple to implement, encouraging independent

actions can pose several threats to the organizations if the process is not well managed. It is

therefore extremely important that these autonomous teams/individuals are well coordinated to

reduce the possible waste of resources and the creation of other forms of inefficiencies, such as the

duplication of effort.

Practical actions that can be taken to foster autonomy are:

sunkworks1; management structure that supports and empowers employees, so that they can actively

contribute to the success of the company;

organizational structures that support independent actions.In conclusions, companies need to empower their employees by giving them a sense of

autonomy that should stimulate their creativity and innovativeness while, at the same time, making

sure that these individuals are well coordinated, in order to reduce the possible inefficiencies that a

greater degree of autonomy might cause (Dess, Lumpkin, & Eisner, 2010).

Competitive Aggressiveness

This entrepreneurial behavior refers to the aggressive competitive attitude that some firms

implement to outperform their competitors or to maintain and/or improve their competitive position

in the marketplace. For instance, some companies preannounce their products to discourage

1Sunkworks are groups inside an organization that have a high level of autonomy and typically engage

in creative problem solving.


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competitors from engaging in similar activities. Competitive aggressiveness can lead to competitive

advantages only if it is used with moderation. As a matter of fact, some companies have seriously

damaged their reputation with their extremely aggressive attitude (Dess, Lumpkin, & Eisner, 2010).

Actions associated with this behavior are for example:

cutting prices; sacrificing profitability to gain market share (Venkatraman, 1989); aggressive spending on marketing, quality, or manufacturing capacity (MacMillan & Day,

1987).

Innovativeness

Innovativeness refers to the willingness to creatively find novel solutions and opportunities

that ultimately lead to the creation of new or improved products/processes.

This dimension of EO is critical in a constantly changing environment. Innovation is indeed a

way for companies to understand the needs and the wants of the market and translate them into

actions that can be taken inside established organizations. The ability to innovate can and should

result in the creation of sustainable competitive advantages. In particular, research shows that

innovations that lead to sustainable competitive advantages usually share four common traits

(Lengnick-Hall, 1992).

They are:

hard to imitate; reflect market realities; allow a firm to exploit the timing characteristics of the industry;


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rely on readily accessible technologies and capabilities.Although investing in innovation has many potential benefits, it is important to be aware of

the possible pitfalls as well. For instance, R&D expenses might result in a waste of resources,

innovation might not be appropriately protected or competing firms might find a better use of the

technology that your company has developed.

There are several ways to foster innovativeness inside an organization. Few examples are:

encouraging creativity and experimentation with the help of corporate resources;

making a constant investment in R&D to produce new technology and improve existing

products/processes.

In conclusion, an innovative environment has the potential to generate true competitive

advantages and future growth, but it also involves a great deal of risk associated with the fact that

the investments made by the company might not pay off (Dess, Lumpkin, & Eisner, 2010). This is a

compromise that an entrepreneurial organization has to accept.

Proactiveness

Proactiveness can be defined as the ability to anticipate changes in the marketplace or future

needs and problems (Short, Payne, Brigham, Lumpkin, & Broberg, 2009). In other words, it is the

ability to pursue new opportunities. Proactive firms are able to be ahead of their competitors by

constantly monitoring the external environment to spot new trends and needs but, most importantly,

they take action. Also, by being proactive many firms are able to gain what is called first mover

advantage. First movers can usually charge higher prices and quickly gain and maintain a good

market share.


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Typical ways to express a proactive culture are:

introducing new products or technological capabilities before the competition; constantly seek out new products/services (Dess, Lumpkin, & Eisner, 2010).

However, it is correct to note that first movers are not always successful because they can

encounter resistance from the marketplace or the new product/service might not respond to a real

customer need. Therefore a proactive attitude needs to be sustained by the last one of the five

entrepreneurial behaviors; risk taking.

Risk Taking

Risk taking refers to the willingness to act boldly without knowing the consequences (Dess,

Lumpkin, & Eisner, 2010). As I stated earlier, the ability to take risk to seize opportunities is a

fundamental trait of entrepreneurs that must be embraced by those organizations that pursue an

entrepreneurial orientation. It is possible to distinguish between three types of risk:

business risk: it is related to the decision to invest in new markets or to use new

technologies without knowing the probability of success;

financial risk: is present whenever growth is achieved through heavy borrowing or arelatively big commitment of resources;

personal risk: is taken by an executive when he or she decides to take a stand in favor of aspecific strategic decision.

When talking about risk taking it is important to specify that taking risk should not be

confused with gambling. Indeed, companies should approach risk taking by carefully managing the

level of risk associated with their actions. For instance, decisions should be made with a sufficient


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level of research and planning with the objective of reducing or at least better defining the level of

risk of a specific course of action.

In conclusion, firms can internalize the principles of entrepreneurial orientation inside their

own organization and this cultural change allows them respond more easily and quickly to the

changes that take place in the external environment. In other words, corporate entrepreneurship

serves as an adaptation mechanism, as Lumpkin and Dess (1996) suggested.

1.4.The Role of the Management in creating an EntrepreneurialOrganization

The implementation of an entrepreneurial orientation inside an established organization can

pose several challenges. In most cases, companies decide to initiate an organizational reorientation

only after a performance crisis that forces them that to take action, especially on their management

team that does not show signs or willingness to make changes. Although this is the most common

behavior in todays marketplace, it is not however the most correct. In fact, the most successful

reorientations occurred when the management initiated the necessary changes before the crisis has

started (Tushman, Newman, & Romanelli, 1986). Therefore we can conclude that, in order for this

implementation to be successful, the role played by the management is critical. Indeed, research

shows that innovative managerial behavior must be displayed and reinforced constantly inside an

organization (Kuratko, Ireland, & Hornsby, 2004). Managers must be able to empower employees

and inspire them on the value of the company so that their performance is maximized. In particular,

managers can:

create an organization that stimulates the creation of entrepreneurial initiatives; provide an entrepreneurial vision that can guide innovation;


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make sure that promising projects do not lack the necessary resources (Ramachandran,Devarajan, & Ray, 2006).

An entrepreneurial organization needs therefore to make of innovation an accepted and

appropriate way to solve problems, and a firm can do this successfully by creating a shared sense of

purpose in the organization (Roberts, 1984).

Given the critical role played by the management in implementing a culture of

entrepreneurship inside a company, the research that I have conducted has been based on the

analysis of the Managements Discussion and Analysis (MD&A) found inside the annual report that

each company has published for the year 2010. This report is written by the management to give

public notice of how a company is being operated.

1.5.The Relationship between EO and Financial PerformanceIn this section I would like review what has already been written on the relationship between

EO and performance and describe the main findings of this growing field of research. As previously

stated, in this paper I will explore the relationship between the level of EO and the financial results

of a set of Italian public companies.

Previous research has demonstrated that EO may improve performance because it helps

organizations identify promising opportunities, obtaining first mover advantages and targeting

premium market segments (Lumpkin & Dess, 1996). Also, the benefits that EO provides are being

recognized across firm types and managerial levels (Covin, Ireland, & Kuratko, 2003). Corporate

entrepreneurship more in general can improve the growth and the profitability of a company by

increasing the level of proactiveness and willingness to take risk that allows the development of


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new businesses, as well as new products/services and processes (Ramachandran, Devarajan, & Ray,

2006).

A positive relationship between CE and performance has also been observed by Zahra and

Covin (1995) in their study in which they examined the longitudinal impact of CE on a financial

performance index that took into consideration both growth and profitability information.

However, researchers such as Covin and Slevin (1989), as well as Smart & Conant (1994),

were not able to find a positive relationship between these two elements. In particular, they found

that under certain circumstances EO is less related or even negatively correlated with performance.

This result has been observed in firms that operate in benign environments (Covin & Slevin, 1989).

In conclusion, we can state that it is still debatable whether there is a positive correlation

between EO and performance or not. However, the number of researchers that found a positive

correlation between the two is greater than the number of those who did not find it.


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2.Research DesignIn this second chapter I describe how I conducted this research project. In particular, I explain

the method used to collect the necessary information and the techniques that allowed me to

elaborate the data in my possession and reach meaningful results.

2.1.MethodAfter researching and studying the existing relevant material on the subject of entrepreneurial

orientation, I had to decide how to conduct some exploratory research to determine the most reliable

and feasible way to reach a meaningful result that would allow me to correctly answer the following

research question:

What is the relationship between the entrepreneurial orientation and the

performance of a firm?

In this preliminary part of my research, the first task I had to perform was finding a method to

determine the level of EO of a firm. In previous research projects on this subject, mainly two

different types of tools have been used to solve this issue. Most researchers have used surveys to

question people inside organizations on their entrepreneurial attitude (Covin & Slevin, 1989), while

other researchers have used content analysis (Short, Payne, Brigham, Lumpkin, & Broberg, 2009).

For this research project I decided to use the content analysis, and I explain the reasons for this

decision later in the paper.

Second, I had to decide on which type of document I could conduct a content analysis. I

looked at a series of annual reports of public Italian companies, and I decided to perform my

research on the Managements Discussion and Analysis (MD&A), mainly for two reasons. First,

MD&As are present in all annual reports of Italian public companies; second, they are written by


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the management and they indirectly reflect the attitude of the firm and possibly its entrepreneurial

spirit.

For this research I decided to focus on a set of 49 companies of the Consumer Goods sector

listed on Borsa Italiana (the Italian Stock Exchange) during 2010, which is the year I choose for my

research. The sector was formed by 50 companies but I had to exclude one (Aicon Spa) due to the

unavailability of its annual report for 2010.

Finally, to answer the research question, I had to gather some data on performance for the

chosen set of companies. Performance can be expressed with various indicators, both financial and

non-financial. In this research I collected financial measures of performance because they have been

used more widely and they have resulted more appropriate when performance measures were

compared to EO measures (Rauch, Wiklund, Lumpkin, & Frese, 2009). Also, to avoid misleading

results that often self-report data presents, the financial data used in this research is based on

archival data collected from secondary sources.

2.2.Content Analysis

In this section I describe how I conducted the content analysis for this paper, and I explain

the reasoning behind the decision of using this method of research.

As previously stated, the level of entrepreneurial orientation of each firm was found by

performing a content analysis on the MD&As available in the 2010 annual reports. Content analysis

of a narrative text has helped researchers define key strategic decision-making processes (Short &

Palmer, 2003), discover differences among communicators (Weber, 1990) and obtain information

otherwise unavailable. In addition, the use of content analysis has displayed greater reliability and

replicability compared to other techniques (Finkelstein & Hambrick, 1996) and recall biases are


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avoided (Barr, Stimpert, & Huff, 1992). These are some of the benefits that content analysis can

offer that ultimately led me to choose this tool over other ones available. Most importantly, content

analysis has also been successful in determining the perceptions and beliefs of the authors of a

narrative text (DAveni & MacMillan, 1990). As a matter of fact, one of the main scopes of this

project is being able to determine how entrepreneurial a firm is from the analysis of its MD&A. In

this document the top management gives a description of their view on both the external and the

internal environment, and they also write on the decisions taken, the strategic plans put in place to

meet future goals and the results achieved throughout the year.

In conducting the content analysis for this paper, I build a world list of semantically related

words for each one of the five dimensions of EO described earlier (autonomy, competitive

aggressiveness, innovativeness, proactiveness, and risk taking). In performing this task, I decided to

start from an already existing word list that was first created to conduct a similar research project on

family firms. The original word list can be found in the article Family Firms and Entrepreneurial

Orientation in Publicly Traded Firms: A Comparative Analysis of the S&P 500 (Short, Payne,

Brigham, Lumpkin, & Broberg, 2009). The following reasons led me to use of this word list:

the word list has been based on the EO Lumpkin and Dess definition of EO (1996), fromwhich the five dimensions that I use in this paper are derived;

it was created using on The Synonym Finder, which has been previously used to conductsemiotic analysis;

the words are mutually exclusive and each word is associated with a single EO dimension; the validation process was conducted by using multiple steps to ensure the reliability of the

word list.


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Finally, I carefully translated the word list from English to Italian with the assistance of

multiple dictionaries. In some cases, due to the ambiguous meaning of some expressions, I had to

add or delete words that otherwise would have created misleading results from the content analysis.

Here is the word list I used:

Table 1: Word list for EO dimensions

Word Lists for EO Dimensions

Dimension Words

Autonomy autogoverno, autonomia, autonomo, autorit, autorizzazione, deregulation, disconnessa,

disconnesso, emancipazione, indipendente, indipendenza, ingovernato, liberalizzazione, libero,libert, non forzato, non governato, non controllato, permesso, permettersi, possibilit, sconfinata,sconfinato, senza affiliazioni, senza governo, senza regole, separato, separata, sovranit, sovrano,

sovrana

Competitive

aggressiveness

aggressivo, aggressivo, ambizione, ambiziosa, ambizioso, antagonista, antagonistico, aspirante,

asta, avversaria, avversario, battaglia, capitalizzare, challenge, combattente, combattere,

combattimento, combattivo, combattivo, competere, competitivo, competitiva, competitor,

competizione, compimento, concorrente, conflitti, conflitto, conquista, contendere, difende,difendere, difendiamo, feroce, gara, gare, gareggiare, giocare, impegnarsi, impegnati, impegnato,

intensificato, intenso, lotta, lotte, lottare, nemici, nemico, opporre, opporsi, opposizione, polemica,

polemici, polemico, pronto a combattere, remare contro, risultati, risultato, rivale, rivali, sfidante,

sfidanti, sforzare, sforzarsi, sfruttare, successi, successo, tornei, torneo

Innovativeness abile, abilit, architettare, brevetti, brevetto, cambiamento, cambiare, cervello, concepire, crea,

creare, creativit, creatore, creazione, creiamo, dotato, esperti, esperto, evocare, fare, formare,formulare, formulazione, genesi, geni, genio, idea, ideare, ideatore, immaginare, immaginati,

immaginativo, immaginato, immaginazione, improvvisare, improvvisati, improvvisato,

ingegnosit, ingegnoso, iniziamo, iniziare, iniziativa, iniziato, iniziatore, iniziatori, innovare,

innovazione, intelligente, intelligenti, intelligenza, inventare, inventato, inventivo, inventore,

invenzione, ispirato, ispirazione, macchinazione, marchi, marchio, nuova, nuove, nuovi, novit,nuovo, originale, originalit, , origine, pensare, pensatore, pensiero, pieno di risorse, prevedere,

progettare, provenire, radicale, riformulare, riprogettare, rivoluzionare, scoperta, scoprire, sognare,

sogno, strutturare, talenti, talento, trasformarsi, trasformata, trasformazione, vision, visionario,

visione, visualizzare

Proactiveness anticipatore, anticipatori, aspettarsi, controllare, controlli, controllo, domanda, domandare,

domande, esplorare, esplorativi, esplorativo, esplorazione, esplorazioni, inchiesta, inchieste,indagine, indagini, investigare, investigazione, opportunit, prevedere, prevediamo, proattiva,

proattivi, proattivo, pronosticare, prospettiva, ricerca, ricerche, sondaggi, sondaggio, sorveglianza,

studi, studio, verifica, verifiche, visionari, visionario

Risk taking audace, audaci, avventarsi, avventata, avventati, avventato, avventura, avventure, avventurosa,

avventurosi, avventurosi, avventuroso, avventuroso, azzardare, azzardati, azzardato, azzardo,

coraggiosa, coraggiosi, coraggioso, impavidi, impavido, imprudenza, incauta, incauti, incauto,incerta, incerti, incerto, intraprendente, osare, pericoli, pericolo, pericoloso, precipitosamente,

probabilit, rischi, rischiare, rischio, rischiosi, rischioso, scommessa, scommesse, scommettere,

senza paura, sfida, sfide, spavalda, spavaldi, spavaldo, temerari, temeraria, temerariet, temerario,

tuffarsi


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Each MD&A was then scanned to determine the density of each one of the words above. The

quantitative analysis software ATLAS.ti has been used to determine word usage. Computer-aided

content analysis allows us to analyze documents at a faster pace, as well as increase the level of

reliability. In this research the relative frequency of words was determined for each firm in each one

of the five dimensions. Indeed, the presence or the absence of some words, as well as the frequency

with which they appear in a text, allows us to determine the authors mental models (Carley, 1997).

After collecting the data for each dimension, a cumulative score (EO Index) was calculated

for each firm. The EO Index allowed me to compare the general level of entrepreneurial orientation

among the different firms of my set. Indeed, according to Covin and Slevin (1989) EO is a

unidimensional construct and most studies have summed across all dimensions of EO to create a

single variable (Rauch, Wiklund, Lumpkin, & Frese, 2009, p. 22). Finally, as I later explain, this

piece of information was compared to the measures of performance to determine the type of

correlation between the two.

The following table (Table 2) shows the means and the standard deviations for the data

collected during the content analysis on the dimensions of EO.

Table 2: Means and Standard Deviations

Dimension MAX MIN M SD

Autonomy 0.430 0.000 0.087 0.079

Competitive

aggressiveness0.705 0.055 0.282 0.126

Innovativeness 1.109 0.036 0.436 0.229

Proactiveness 0.690 0.000 0.304 0.156

Risk taking 0.963 0.037 0.342 0.230

EO Index 2.140 0.619 1.450 0.395


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In conclusion, the content analysis allowed me to assign a score, reflective and proportional

to the level of EO, to each one of the 49 companies analyzed. With the resulting scores I then

ranked the firms by their level of entrepreneurial orientation. The following graph shows the

complete ranking:

Figure 2: Ranking of companies based on their EO Index score

While Pirelli and C. Spa and Safilo Group Spa resulted the most entrepreneurial, Le Buone

Societ Spa and Arena Spa turned out to be the least entrepreneurial ones.


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2.3.Financial PerformanceAs I wrote earlier, I decided to use financial measures of performance available on archival

data. In particular, I used the annual reports for the year 2010 found in each companys website.

Previous studies on EO have usually relied on either growth measures or accounting-based criteria.

When using account-based criteria, financial ratios such as Return on Assets (ROA) and Return on

Investment (ROI) were utilized (Rauch, Wiklund, Lumpkin, & Frese, 2009). To ensure a more

complete set of data, during my research I decided to collect the following financial information:

assets, liabilities, equity, sales, EBIT, net income, net capital invested. Although annual reports and

financial websites often have a list of ratios already calculated, I made the decision to calculate

them myself to ensure consistency and avoid possible errors due to slightly different data and

formulas available.

As I previously explained, I obtained the necessary financial data from the annual reports

available in each companys website. Only in a few cases in which the annual report did not

indicate some needed financial information (i.e. Net Capital Invested), I had to gather the missing

data from financial websites, such as Morningstar.it and Reuters.com. I then calculated the

following financial ratios2:

ROI (Return on Investment) = EBIT / Net Capital Invested ROE (Return on Equity) = Net Income / Equity ROS (Return on Sales) = EBIT / Sales

After determining the financial ratios for each one of the 49 companies selected for this

study, I analyzed the results. The description of the analysis I conduced can be found in the next

chapter.

2Source for the financial ratios formulas: (Cortesi, Furlan, & Tettamanzi, 2008)


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3.AnalysisThis chapter explores the results of my analysis on the relationship between the measures of

entrepreneurial orientation and the financial performance of the companies selected for this study.

Once all the necessary data was gathered, a correlation analysis was conducted on a series of

dimensions to detect the existing relationships between variables. In particular, in this research I

analyzed the correlation between each one of the five EO dimensions (autonomy, competitive

aggressiveness, innovativeness, proactiveness, and risk taking), including also the EO Index3, and a

measure of financial performance. As previously stated, the measures of financial performance used

in this study are ROI, ROE and ROS.

The following sections of this chapter are dedicated to the presentation of the results of the

correlation analyses that I conducted4. The graphical and numerical results will then be evaluated.

Table 3: Correlations between dimensions of EO and performance measures

Dimension ROI ROE ROS

Autonomy -.104 .102 -.380

Competitive

aggressiveness.171 .058 .343

Innovativeness .139 .162 .242

Proactiveness .246 .168 .104

Risk taking .042 .060 .185

EO Index .236 .235 .323

3EO Index is a cumulative score that reflects the level of entrepreneurial orientation inside an

organization. It is calculated as the sum of the individual scores for each one of the five dimensions of EO.

More information is available on chapter 2.2.4

The software Tableau Public was used to create the graphs and calculate the statistical information

presented in this following pages.


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3.1.EO ROIThe following graph shows the correlation between the entrepreneurial orientation of a firm

and its Return on Investment (ROI).

Figure 3: EO Index - ROI

Number of observations: 49DF (degrees of freedom): 2Residual DF: 47

SSE (sum squared error): 0.0007059MSE (mean squared error): < 0.0001

R-Squared: 0.0557311Standard error: 0.0038754p (significance): 0.102462

Individual trend lines:Pane(r,c) p Equation

(1,1) 0.102462 EO INDEX = 0.00608314*ROI + 0.0140291


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Figure 4: EO dimensions ROI


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3.2.EO ROEThe following graph shows the correlation between the entrepreneurial orientation of a firm

and its Return on Equity (ROE).

Figure 5: EO Index - ROE

Number of observations: 49DF (degrees of freedom): 2Residual DF: 47SSE (sum squared error): 0.0007064

MSE (mean squared error): < 0.0001



(1,1) 0.10444 EO INDEX = 0.00179466*ROE + 0.0146985


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Figure 6: EO dimensions ROE


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3.3.EO ROSThe following graph shows the correlation between the entrepreneurial orientation of a firm

and its Return on Sales (ROS).

Figure 7: EO Index ROS

Number of observations: 49DF (degrees of freedom): 2Residual DF: 47SSE (sum squared error): 0.0006697MSE (mean squared error): < 0.0001



(1,1) 0.0236827 EO INDEX = 0.00331811*ROS + 0.0145408


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Figure 8: EO dimensions ROS


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4.Discussion4.1.Results

In this chapter I will discuss the results displayed in the previous chapter and answer the

research question.

Regarding the relationship between the level of entrepreneurial orientation (EO Index) and

the Return on Investment (ROI), my research found a positive correlation between the two (EO

INDEX = 0.00608314*ROI+0.0140291). This correlation has displayed an R-Squared equal to

0.0557311 and a (significance) of 0.102462. A positive correlation can also be found when

correlating the EO index and both the Return on Equity (ROE) and the Return on Sales (ROS). In

particular, the following equation describes the relationship between the Return on Equity and the

EO Index: EO INDEX = 0.00179466*ROE+0.0146985. In this second case, an R-Squared of

0.0551137 with a of 0.10444 were found. Finally, EO INDEX = 0.00331811*ROS+0.0145408 is

the equation that describes the correlation between the level of entrepreneurial orientation of a firm

and its Return on Sales. This relationship has shown an R-Squared of 0.104203 and a

(significance) of 0.0236827.

It is now important to understand how the findings of this study can be evaluated based on

past research. Although the literature available on the relationship between entrepreneurial

orientation and performance has been growing recently (Knight, 1997; Lyon, Lumpkin, & Dess

2000), to my knowledge a study that was conducted using the same method that I implemented in

this research project has not yet been published. Indeed, most researchers have used surveys to

directly question the top management of the firms on their level of EO (Covin & Slevin, 1989).


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Therefore, this study cannot be easily compared with previous ones because of the different

methods used.

However, we can discuss previous findings on the general relationship between EO and

performance. For instance, a recent study analyzed 14,259 firms and found the correlation between

EO and performance to be .242 (Rauch, Wiklund, Lumpkin, & Frese, 2009). The authors of the

study considered this finding to indicate a moderately large correlation.

My research found lowers levels of correlation, compared to those described above. Indeed,

the values for the correlation were in the 0.002-0.006 range, while R ranged between 0.055-0.100.

Having mentioned the differences in the methodology of research, we can affirm that according to

the research I conducted a moderate positive relationship exists between the level of entrepreneurial

orientation and the performance of a firm.

In addition to the general EO Index, I also verified the type and intensity of the correlation

between performance and each one of the five dimensions with which I measured the level of EO

(autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking.). However,

in this case, a positive correlation was not always found.

In particular, a negative correlation was found when analyzing the relationship between the

level of autonomy and the ROI and ROS. The information in my possession does not allow me to

determine the reasons for the negative relationship and future research should be conducted to

understand this result. Indeed, existing research only proves the existing positive correlation

between performance and the following EO dimensions: innovativeness, risk taking, and

proactiveness (Rauch, Wiklund, Lumpkin, & Frese, 2009).


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Figure 9: Autonomy - ROI

Furthermore, it is important to acknowledge that the fact that different measures of

entrepreneurial orientation display a different degree of correlation cannot lead us to the conclusion

that some of these dimensions are more correlated than others to performance. Indeed, statistically

these differences appear to be rather small and insignificant (Rauch, Wiklund, Lumpkin, & Frese,

2009).

The study I conducted was based on a set of Italian public companies. However, research

shows that the level of entrepreneurial orientation or some of its specific dimensions may change in

intensity across different countries (Knight, 1997). Also, factors such as the type of industry and the

size of the business are likely to affect the results. Moreover, research shows that companies that

have an experimental approach to corporate entrepreneurship are more likely to achieve less

meaningful results, while firms that fully embrace the principles of corporate entrepreneurship tend

to see financial and non-financial improvements inside the organization (Morris, Kuratko, & Covin,

2010, p. 323).


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4.2.ConclusionThe purpose of this research is to determine whether incentivizing an entrepreneurial

behavior inside established organizations can help achieve better financial results.

In particular, the research question I wanted to answer was the following:

What is the relationship between the entrepreneurial orientation and the

performance of a firm?

After gathering the financial information on performance for the year 2010 of a set of 49

Italian companies in the Consumers Good sector and analyzing their MD&As through the use of the

content analysis, I concluded that a moderate positive relationship exists between the level of

entrepreneurial orientation and the performance of a firm. Although the method used in this

research project differs from previous studies, as I explained earlier, this finding is still coherent

with the existing literature.

Therefore, we can conclude that companies can benefit in terms of performance if they

embrace the principles of corporate entrepreneurship, and in particular if they adopt an

entrepreneurial orientation inside their established organization. Organizations can enhance

entrepreneurial behavior by focusing on the development of the following five dimensions:

autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking.

4.3.Further ResearchFurther research should be conducted to determine if the findings of this research are

supported across different industries and different countries. Furthermore, the method described

earlier can be improved and other statistical tools can be used to reduce the uncertainty and improve

the quality of results from the content analysis. For instance, the use of control variables such as


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age, size and industry should improve the quality of the results. Also, the correlation analyses

conducted on the measures of performance and the dimensions of EO could be improved in further

research by determining other useful statistical information, such as the significance of the data for

each one of the correlations addressed.

Regarding the type of data used in this research, several decisions have been made. For

instance, this research project gathered data from the annual reports of 2010. Although this is a

valid solution that allows us to answer the research question, alternative methods could be

considered for further research. Data from multiple years could be gathered and the number of

companies included in the set could be expanded. Also, similar future studies should focus on

different sectors to determine whether or not they affect the results.

Finally, I would like to suggest a new method that could be used in future research to

determine the degree of EO of an organization. As I mentioned earlier, most of the existing research

in this field has been based on the use of surveys to assess the level of entrepreneurial orientation.

These surveys were sent to the top management of the firms, which was then supposed to evaluate

its own behavior and sometimes its own performance as well. However, the use of surveys is

always subject to a certain degree of error due to the fact that the data collected are self-reported

and therefore they are subject to bias. Indeed, social desirability and memory decay are two

examples of factors that influence the results of studies that use surveys (Rauch, Wiklund,

Lumpkin, & Frese, 2009).

Therefore, what I am proposing is a slightly different method that I believe could be able to

increase the accuracy of the measurements of EO. According to this method of research, to

determine the EO of a company, two different types of surveys should be designed and sent to each

companys management. The first one should be used by the management to assess their own level


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of EO, while in the second one they would be asked to name one or more competitors and assess

their level of EO. This method would allow the researchers to have both an internal and external

perspective of a company, and in my opinion the reliability of the data collected should increase.

However, only the implementation of this method in future research can either confirm or reject my

hypothesis.


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Entrepreneurial Orientation and Firm Performance - Giorgio Tomassetti

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