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Linking Entrepreneurial Orientation and

Opportunity Identification to performance

Gabriel Linton WORKING PAPER

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1. Introduction

The two themes of Entrepreneurial Orientation (EO) and opportunity recognition have gained much interest recently in the entrepreneurship field. The former, EO, has become a key foundation of the firm-level entrepreneurship research with an abundant amount of empirical work. This research has been conducted for over 30 years and in a recent review of research concerning EO Wales et al. (2013) identified over 150 empirical articles. EO can be described as a firm posture that depicts processes, practices and activities by which firms create value (Lumpkin & Dess, 1996). An entrepreneurial posture has in many studies been linked with high performance. This connection has been confirmed by Rauch et al.’s (2009) meta-analysis that found that EO has a moderately large correlation with performance. Since high performance is a sought after outcome and that EO has a moderately large correlation, EO can be seen as one important aspect that can help firms reach higher performance. Another central theme in the entrepreneurship literature is the identification of new markets and opportunities. In contrast to EO, much research on opportunity identification has been of conceptual type (e.g. Alvarez & Barney, 2007; Companys & McMullen, 2007; De Carolis & Saparito, 2006; Eckhardt & Shane, 2003). According to Eckhardt and Shane (2003) the prevailing theory in entrepreneurship focuses on the role of opportunity recognition in entrepreneurial activities. This stream of research has emphasized not only the importance of new business but also the identification and quest of new entrepreneurial opportunities (De Carolis & Saparito, 2006).

Considering the large empirical amount of research of EO and that opportunity identification is a central theory in entrepreneurship, it is surprising that the connection between EO and opportunity identification remains more or less unexplored. By investigating EO in relations to opportunity identification we can advance the field and get an understanding of how an EO posture (or a conservative posture) affects the firm’s ability to identify opportunities and its performance.

2. Theory and literature review

2.1 Entrepreneurial Orientation

The roots of EO can be traced back to the works of Mintzberg (1973) and Khandwalla (1977) who suggested that strategic choice, organizational attributes, and the environmental features formed gestalts. One such gestalt was entrepreneurial in nature which was proactive and willing to take risk (Khandwalla, 1977). Later, Miller (1983) clarified the entrepreneurial gestalt by suggesting that innovation, proactiveness and risk-taking were qualities of an entrepreneurial firm. Building on Miller’s (1983) work, Covin and Slevin (1989) proposed that there is a continuum that ranges from conservative to entrepreneurial, where the entrepreneurial end is supported by innovativeness, proactiveness, and risk-taking. Alternative conceptualizations have appeared1, nonetheless, the Miller/Covin and Slevin

conceptualization remains the dominant perspective in the literature (Rauch et al., 2009; Wales et al., 2013). Most studies have found a positive relationship between EO and performance (Rauch et al., 2009), although some studies have reported low correlations (e.g. Lumpkin & Dess, 2001; Zahra, 1991) while a few have not found any correlation (e.g. Jeffrey G. Covin, Slevin, & Schultz, 1994). Still, most studies have found a positive correlation between EO and performance (Rauch et al., 2009). Contingency fit could possibly explain why EO does not always explain performance in a linear fashion, for further reading (e.g. Gerdin & Linton, 2015; Kask & Linton, 2011; Linton, 2014, 2016).

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2 H1 EO is positively associated to performance

2.2 Opportunity identification

In entrepreneurship research there are two prominent schools of thought, the neoclassical equilibrium theory and Austrian Theory (Wang, Ellinger, & Wu, 2013). Within the neoclassical school of thought it is assumed that everyone can identify opportunities but that it is the risk-propensity that decides why some firms act entrepreneurial (Kihlstrom & Laffont, 1979). Nonetheless, the neoclassical equilibrium theory fails to explain the framework of entrepreneurial opportunity (Eckhardt & Shane, 2003; Wang et al., 2013). On the contrary, Austrian theory assumes that firms cannot identify all opportunities and highlights that the market is imperfect. Information is not evenly distributed and do not occur in well packaged and structured form (Venkataraman, 1997). Kirzner (1997) suggests that the distribution of information in society affects the identification of opportunity recognition as well as the ability or capacity to recognize opportunities. This ability of identifying opportunities depends on willingness and alertness to, for example, environmental changes that can lead to the identification of opportunities (Stevenson & Gumpert, 1985). The firms that are able to recognize the existence of opportunity and value them can act upon them and profit from them (Shane & Venkataraman, 2000). This leads us to hypothesis two:

H2. Opportunity identification is positively associated with firm performance

2.3 EO and Opportunity identification

The traditional assumption is that EO leads to high performance (e.g. Rauch et al., 2009). In this paper I propose that this relationship is incomplete. Instead I propose that the EO disposition of risk-taking, innovativeness and proactiveness does not directly lead to performance, but is mediated by the ability to identify opportunities. Firms that are entrepreneurial will be able to identify more and better opportunities than conservative firms. The ability to identify more and better opportunities then leads to higher performance than firms not being able identify as many and high quality opportunities. This can be connected to e.g. exploration and exploitation in organization learning theory (March, 1991), where entrepreneurial firms associated with exploration and conservative firms with exploitation (Kask & Linton, 2013). Exploration is connected with activities such as

experimenting and entering into new product markets while exploitation is connected with activities such as refining and improving existing product markets (Wiklund & Shepherd, 2011). The nature of entrepreneurial and exploration firms are therefore connected more to opportunity recognition, while exploitation and conservative firms will focus less on opportunity recognition. This leads us to hypothesis three:

H3. Entrepreneurial Orientation is positively related to opportunity identification

2.4 Environment

As mentioned above, EO has mainly been seen as having a positive correlation with performance. However, some studies have found low correlation or no correlation. One reason for these mixed results could be that context specific factors are not taken into account. The basic premise of

contingency fit is that there is no universally best way of organizing or executing entrepreneurship,

rather, high organizational performance stems from a proper fit (alignment) with different contextual factors such as environment (Antoncic & Hisrich, 2001; Zahra & Garvis, 2000), strategy (Edelman, Brush, & Manolova, 2005; Hill & Birkinshaw, 2008), and/or industry life cycle (J.G. Covin & Slevin, 1990; Lumpkin & Dess, 2001). In this paper I will focus on the environmental factor.

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3 Earlier research has shown that EO is beneficial in dynamic and fast changing environments (Jeffrey G. Covin & Slevin, 1989). This relationship should also hold in regards to opportunity identification and performance. When markets are rapidly changing an organizational mindset of risk-taking, proactiveness and innovativeness will be beneficial for identifying new entrepreneurial

opportunities. However, when markets are steady an EO is not beneficial (Kask & Linton, 2013). This is because there are fewer opportunities available in a slowly changing market at the same time as EO is a resource costly approach (Parida, 2010). Therefore, to be conservative will be overall better in stable environments because it is more resource efficient.

H4A The EO and opportunity identification relationship is moderated by the environment. More

specifically, in a turbulent environment EO is positively associated with opportunity identification, whereas in stable environments a conservative EO is positively associated with low opportunity identification.

H4B The opportunity identification and performance relationship is moderated by the environment.

More specifically, in a turbulent environment opportunity identification is positively associated with performance, whereas in stable environments low opportunity identification is positively associated with performance.

H4C The EO and performance relationship is moderated by the environment. More specifically, in a

turbulent environment EO is positively associated with performance, whereas in stable environments a conservative EO is positively associated with high performance.

EO

Environment

Opportunity

identification Performance

Figure 1. The theoretical research model

2.5 Research model

The complete research model can be seen in figure 1. I use a moderated mediated model as suggested by Baron and Kenny (1986). Mediation speaks to why specific actions take place while moderation addresses when certain activities will take place (Edelman et al., 2005). More specifically, mediation tests the existence of a significant intervening mechanism (e.g. opportunity identification) between an antecedent variable (e.g. EO) and the outcome variable (e.g. performance). Mediation can be full or partial. In full mediation the mediator is necessary for a significant outcome, whereas partial mediation

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4 allows for part direct relationship and part mediated relationship. In regards to the model above, partial mediation is expected as opportunity identification alone does not intervene in the relationship between EO and performance.

Environment is modeled as a moderator which helps us understand when something will occur (Baron & Kenny, 1986). The moderator affects the relationship between an independent variable and outcome variable. A moderator (e.g. environment) should not have any significant relationship with the independent variable (e.g. EO) or the outcome variable (e.g. performance) (Venkatraman, 1989). It is unlikely that a firms EO can affect the environment significantly, therefore I am able to model it as a moderator, explaining what effects EO and opportunity recognition will have in different environments.

3. Method

3.1 Data collection

Data collection can be completed from a specific industry segments and a specific size of firms, e.g. SMEs. For me, it would be most interesting in startups or innovative firms (e.g. technology sector) similar type of firms as in my previous studies (e.g. Hasche & Linton, 2016; Hasche, Linton, & Öberg, 2017; Hasche, Linton, & Prenkert, 2016; Linton, Klaassen, & Öberg, 2016).

Entrepreneurial orientation. In order to portray the magnitude of each firm’s orientation to

entrepreneurship, this construct employed three attributes of entrepreneurial orientation: innovativeness, proactiveness and risk-taking. Each attribute is represented by three items, each measured on a seven-point Likert-type scale. Although, I acknowledge that e.g. Lumpkin and Dess (1996) have developed an alternative measurement scale of EO which includes two additional attributes (competitive aggressiveness and autonomy), I use the original Covin and Slevin (1989) scale that has been widely accepted as the standard scale. Recent discussions have pointed toward the usefulness of keeping the original three attributes of EO (George and Marino, 2011) but see also other views (Linton, 2015).

Opportunity recognition. In order to portray the firm’s ability to recognize opportunities Ozgen and

Baron’s (2007) three-item scale was used with slight modification to measure firm level instead of individual level opportunity identification.

Environment. In order to interpret the environment that the firm is operating in I used Zahra’s (1993)

construct that measures technological opportunities, industry growth and importance of new products.

3.2 Analysis

To establish construct validity for each measure I would first run an exploratory factor analysis. This would reveal any problems with the factors in the constructs. To test the hypothesis the data would be analyzed with Structural Equations modeling. Another option would be to perform the analysis with qualitative comparison analysis (QCA) (see e.g. Kask & Linton, 2013; Linton, 2016; Linton & Kask, 2017).

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Appendix

Measurement construct

Opportunity recognition (Ozgen & Baron, 2007)

1. While going about routine day-to-day activities, I see potential new venture ideas all around me 2. I have a special “alertness” or sensitivity toward new venture opportunities

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