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Entrepreneurial Orientation in Small Businesses Report

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Updated: Nov 24th, 2020

Introduction

Small businesses play an important role in the local economy. They add to the enhancement responsibility of the local supply chain and local supplier development task that was given to governmental entities. To strengthen the economy and create jobs, regardless of the type or age of industry, all require a continuous support and follow up whether under governmental or big business supervision. Based on a manufacturing background, as this study will be focusing mainly on that industry, there are certain elements or characteristics the small business owners are lacking. This study will be looking into those weaknesses in alignment or concerning the science of entrepreneurial orientation and its impacts on business performance.

A firm that adopts within its organizational structure an entrepreneurial orientation involves certain behaviors. The 3 dimensions to be looked at are the following: Risk-taking, innovativeness, and pro-activeness. To tell how well a firm is performing all 3 dimensions have to be considered and assessed with a tool called the configurational approach. This study will look at the possible causes of the low performance of the small businesses contributing to the manufacturing industry by assessing 2- and 3-way interactions between the EO, capital, and dynamic environment.

EO Dimensions

Studies in EO-Performance have shown that firms that implement a lot of the EO perform always better. It tells that the EO-Performance relationship is high. On the other hand, the firm’s ability to learn from its mistakes, failures, and successes pro-actively gives it a sustainable competitive advantage over the other firms within the same industry. This is the main part of the learning orientation strategy implemented in a firm, which is somehow different from the entrepreneurial orientation.

With regards to the 3 dimensions to the entrepreneurial orientation, starting with the risk-taking, it is associated with a willingness to commit more resources to projects where the cost of failure may be high. It also implies committing resources to projects where the outcomes are unknown. After the observation done on the local small business owners in the manufacturing industry, the risk factor varies from one firm to another. Some variables drive the decision whether to take a risk in increasing the headcounts in the line to serve an unknown predicted to come project. A lot of the decisions come based on very close connections of the small firm’s owners to the potential customer in addition to the strong technical knowledge of the industry in the term of technology updates and new ways of manufacturing and be creative of how to implement based on needs of the client. There is a lack of interest to take risk by some firms as well due to the unstable and unpredicted behavior of some of the customers in future orders. It’s difficult to have a trend that will help in forecasting the need (especially quantities) from the client that will let the small firm take a risk in buying more equipment or hiring more technicians to be prepared for an expected order.

The second dimension is the innovativeness, which reflects a tendency to engage in and support new ideas, novelty, experimentation, and creative processes, thereby departing from established practices and technologies. There’s a big gap in the manufacturing industry when it comes to innovativeness as the capabilities are expensive for a small firm to own to do R&D that can support big companies. Also, it requires a lot of experience and knowledge in the military sector which can’t be found currently within a small firm. This dimension requires a lot of spending which a small firm can’t afford. Having the brain isn’t enough of real lab equipment isn’t provided which as an overall affects the ability to innovate.

The third dimension is the pro-activeness, which refers to a posture of anticipating and acting on future wants and needs in the marketplace, thereby creating a first-mover advantage vis-a-vis competitors. This cannot be achieved if the small firm doesn’t feel transparency or a trend in the client’s behavior that could lead to being proactive, also, it requires strong connections with the client to have an advantage over the competitors to get the information before it is communicated formally. What small firms also lack for the industry, is the ability to adopt major changes in requirements whether in the quality of quantity. Small firms were able to be proactive to minor changes in the requirements that will have smaller investments to be made and with manageable lead time. Besides, they don’t have sufficient expertise to provide a proposal that will highlight all impacts that might be a result of the new requirements of the market. Especially when there isn’t an existing solution worldwide, where the small firm needs to propose a whole new concept to satisfy the wants and needs of the client.

Benefits of EO

Most importantly, EO involves taking risks to try out new products and services; hence, it brings about novelty, receptiveness, and an increased degree of self-assurance in small and medium-sized enterprises (SMEs). These ventures operate in a rapidly changing environment that is characterized by relatively short lifecycles for products and business models. As a result, the profitability of SMEs in uncertain business conditions compels them to seek new opportunities. Entrepreneurial orientation helps such firms to take recurrent innovation risks in areas such as production and marketing strategies. In this way, the determinations to meet various demands places their products and services in better market positions, which brings about increased performance. This underpinning reveals that significantly improves performance in small business enterprises. According to Kantur (2016), firms with integrated EO interventions into their business practices perform better as compared to ones without.

Another benefit of EO is that it brings about willingness to innovate to gain market offering. EO leads a firm to the recognition of potential opportunities in the market. It serves as a change agent since it incorporates various arts and skills into a business, which helps create new economic enterprises.

Lastly, EO helps organizations to become more proactive than competitors towards new market opportunities. Companies who capture the market first can charge high prices, skimming it ahead of competitors. Pro-activeness increases the competitive ability of a company since it stands a position to recognize and seize markets before competitors. EO helps such organizations to enjoy cost and differentiation advantages. Through this approach, a firm can detect changes in political, economic, socio-cultural, and technological (PEST) factors that affect its peripheral setting (Kantur 2016). Changes occurring in these factors can pave the way for new market opportunities that can be tapped by the firm to gain more competitive power than its rivals. The firm can also improve these factors in its operational environment to achieve cost differentiation, which underpins unique competencies through ground-breaking developments.

Controls of a Firm Size

Wiklund and Shepherd (2005) reveal several functions such as production and provision of services control the size of a firm. The function adopted by a particular firm is directly linked to its performance since the markets vary greatly for products and services. Besides, the age of the firm also influences performance (Wiklund & Shepherd, 2005). Older organizations have gained worthwhile experience of shifting consumer demands and market trends; hence, they have devised proper EO strategies that enable them to sail through the waves of unpredictability. The number of employees including owners and part-timers working in the firm is a reflection of the anticipated performance since the workforce is the baseline of production or service delivery. Thus, firms with a larger workforce stand a chance of growing bigger than ones with comparatively fewer employees owing to increased performance.

Configurational Approach

The configurational approach entails a range of concurrent and common deliberation of business strategies and environmental characteristics. Lechner and Gudmundsson (2014) define it as the instantaneous and combined consideration of strategic, organizational, and environmental features with a view of improving the overall performance of a firm. A study that was conducted across 413 firms in Sweden using a longitudinal design revealed that entrepreneurs cannot explicitly depend on the influence of EO performance to explain the success of SMEs. Further understanding of the success of SMEs can be achieved by examining numerous aspects such as entrepreneurial orientation, availability of funds, and 3-way interaction strategies. (Lechner and Gudmundsson, 2014). The configuration approach provides a better understanding of the connection between entrepreneurial orientation and performance. The nature of configurations implies that high EO can help firms address challenges that arise from unstable business situations.

The Link between EO and Performance

The link between strategic orientation and performance can be explicated using the configurational approach. According to Wiklund (2006), superior EO enables businesses to learn novel opportunities that can distinguish them from competitors. It increases their competitiveness, especially in dynamic markets. Through entrepreneurial orientation and possession of adequate capital, small business enterprises can develop changing PEST factors in its operational environment with a view of manipulating the new opportunities (Wiklund, 2006). Various studies have shown that innovativeness is an important aspect of business performance. Wiklund (2006) defines innovation as the business’s inclination to integrate fresh ideas, research, and resourceful developments in the production and marketing processes. The intended innovation strategies can entail research or development of alternative manufacturing technologies. EO can also assume innovative marketing, promotional, and advertising strategies for the company’s existing products (Wiklund, 2006). The innovative processes are designed in a way that attracts new customers and markets with a view of improving the overall performance of the firm.

Through EO, the firm undergoes various reformations and upgrades that create a rejuvenated reputation for the firm. Thus, innovative strategies elevate the competitive position of the company above that of its rivals (Lechner & Gudmundsson, 2014). The differentiating quality of innovativeness results in improved business performance as the firm enters new markets. It can be concluded that EO has a positive relationship with business performance.

Models of Configurational Approach that have a Direct Impact on Performance

There are two models of the configurational approach that have a direct relationship with the performance of a firm. They include;

2-Way Interaction

A 2-way interaction is a contingent model that entails the capital dynamics of the firm’s internal environment. It provides significant awareness of performance objectives that can be accomplished through examining factors and integrative mechanisms that bring about complementarity among various operational aspects of a business (Kantur, 2016). The two-way interaction model underpins a configurational strategy that entails the concurrent and joint account of both organizational and environmental features and mechanisms that play an important role in the improvement of business performance (Kantur, 2016). Under this approach, companies that implement superior EO strategies stand a higher chance of success as compared to those that do not. In relation characteristics of the internal environment, the capability of the firm to gain access to capital requirements forms a strong framework for conducting carrying out tests within the firm. On the contrary, the insufficiency of capital is linked to the internal management of constrained resources, which may repress commercial functionality (Kantur, 2016). In the modern business environment, SMEs should indulge in research on the determination of specific situations in which an EO brings about increased performance.

3-Way Interaction

A 3-way interaction involves the entrepreneurial orientation dynamics of the external business environment. Factors outside the operational environment of a firm such as competition, social, legal, and technological changes among others have a significant effect on its performance. To manage the strengths of the internal environment, companies ought to identify prospective opportunities and pressures outside its operations. The interdependence of these factors determines the success of the firm; hence, entrepreneurs ought to understand the external environment in which their business thrives. EO provides a great background for understanding PEST factors, which have been proven to have a direct effect on business performance (Kantur, 2016).

Capital

The success of an enterprise primarily depends on its capital resources. Entrepreneurial orientation is an activity that involves the utilization of business possessions (Kantur, 2016). Its implementation demands access to more capital to facilitate its effectiveness. Thus, access to funds is paramount to the promotion of performance in SMEs. Indeed, Kantur (2016) unveils that financial capital is a generic resource that can transform into other types of assets. Large financial capital gives small firms extraordinary potential to realize their would-be short-term and long-term performance goals.

Small firms that have innovation and strive for high performance require financial funds. Thus, they should seek opportunities by experimenting with alternative approaches and ground-breaking projects that cannot be tested in a resource-constrained environment. However, access to funds should be governed by the functionality of the EO approach in a dynamic environment. In a competitive environment, additional financial capital enables firms to conduct tests on alternative products, marketing strategies, and innovative projects that are difficult to achieve in a setting with inadequate resources (Wiklund & Shepherd, 2005; Kantur, 2016).

Small firms should also seek untested skills or bring fresh products to the market with a view of obtaining potentially high returns by tapping opportunities (Wiklund & Shepherd, 2005). However, boundless access to capital resources can instigate investment in risky ventures that may lead to huge losses for small firms. The modern world is characterized by aggressiveness and the urge to accomplish goals faster. Entrepreneurs should make sound decisions on the implementation of EO strategies. In a proactive system of operations, the firm is expected to withdraw resources once a project reaches its maturity stage in its development. This move allows the company to invest in new projects, introduce alternative products, and/or implement more supple strategies (Kantur, 2016). Kantur (2016) unveils that the fruitful execution of entrepreneurial orientation demands access to substantial funding.

Dynamic Environment

A dynamic environment is characterized by changing political, economic, social, and technological (PEST) factors. Lechner and Gudmundsson (2014) posit that EO strategies are likely to increase business performance in situations where they address innovativeness and provision of distinctive products and services to customers. This assertion underpins the requirements of a dynamic business environment. According to Wiklund (2006), the interaction of the EO and dynamic environment involves the impulsiveness of consumers and constant variation in market trends. This state of affairs generates a constant shift in product and service demand, which creates more opportunities. Firms that have aligned entrepreneurial orientation and the dynamic environment stand a better position to tap such opportunities ahead of competitors. On the contrary, companies that are confined within their current operations infrequently benefit from the dynamics occurring in the external business environment (Wiklund, 2006).

Research that was conducted by Lechner and Gudmundsson (2014) indicated that there was a positive correlation between EO and performance amongst organizations in dynamic environments. However, such a correlation was negative amongst companies confined in inert and underprivileged business settings (Lechner & Gudmundsson, 2014). Consequently, small and medium-sized enterprises should align strategic orientation with dynamic business environments to benefit from plentiful opportunities that can help them improve performance. This approach should be supported by the innovative abilities of the firm that help it to recognize the unpredictability of customers and changing market trends (Lechner & Gudmundsson, 2014). It can be concluded that the association between entrepreneurial orientation and business performance is leveraged by environmental dynamism. As a result, the performance of small and medium-sized businesses is seen to improve with EO at a relatively faster pace in a dynamic environment as compared to inert and impoverished settings (Lechner & Gudmundsson, 2014). The above interventions in the dynamic environment provide new opportunities for overall growth and performance is taken seriously.

Performance Measure

The measurement of performance is one of the most challenging areas of strategic management whether in a business or governmental organization. According to Lechner and Gudmundsson (2014), performance measures are “quantitative tools that gauge an organization’s performance about a specific goal or an expected outcome” (p. 39). The development of small to medium-sized enterprises is a progressive process that involves the alleviation of insufficiency, improvement of democratic societies, and realization of economic success. In the development and sustainability of small firms in competitive business environments, there is a need to measure organizational functionality. Consideration should be made to combine various measures of financial performance and growth. Performance is deemed a multidimensional activity; hence, it is expedient to incorporate aspects of financial development in organizational growth.

Measurement of Financial Performance

Wiklund and Shepherd (2005) reveal various methods for measuring financial performance. Mostly, many small firms use testify measures of cash flows, gross margin, and profitability in comparison to those of other players in the same industry. This method involves the assessment of the profits and sales of the previous year to determine the gross margin.

Gross Margin

Measurement of Growth

The measurement of sales and employee growth can be determined by analyzing changes in surveys conducted every year. A Likert scale or Cronbach’s index can help measure sales and employee growth. A five-point Likert scale with anchors namely “much less than our rivals” and “much more than our rivals” can be used to accomplish this objective.

Conclusion

This report has delved into the science of entrepreneurial orientation and its impacts on business performance. The role of small businesses cannot be underestimated in the development of a country’s economy in a constantly globalizing world. Nevertheless, their success depends on the formulation of proper decisions on OE strategies that underpin increased performance. A more complete understanding sprouts from the use of a configurational approach to ensure alignment of strategic orientation, availability of funds, and changes in the external environment with the performance objectives of the firm. It has been revealed that the association between entrepreneurial orientation and the success of small businesses is leveraged by the recognition and sound reactions to environmental dynamism. The success of small firms in a dynamic environment improves with the implemented strategic orientation applied. From this analysis, it can be deduced that small business owners in the UAE have lagged behind performance due to the lack of knowledge in such a relationship.

References

Kantur, D. (2016). Strategic entrepreneurship: mediating the entrepreneurial orientation-performance link. Management Decision, 54(1), 24-43.

Lechner, C., & Gudmundsson, S. V. (2014). Entrepreneurial orientation, firm strategy and small firm performance. International Small Business Journal, 32(1), 36-60.

Wiklund, J. (2006). The sustainability of the entrepreneurial orientation–performance relationship. Entrepreneurship and the Growth of Firms, 7(3), 141-155.

Wiklund, J., & Shepherd, D. (2005). Entrepreneurial orientation and small business performance: a configurational approach. Journal of Business Venturing, 20(1), 71-91.

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