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In this information about strategic entrepreneurship and performance of small and medium enterprises in south africa.
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Strategic Entrepreneurship and
Performance of Small and Medium
Enterprises in South Africa
Moshe Mohutsiwa
A research report submitted to the Faculty of Commerce, Law and
Management, University of the Witwatersrand, in partial fulfilment of the
requirements for the degree of Master of Management in Entrepreneurship
and New Venture Creation
Johannesburg
(February, 2012)
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ABSTRACT
The aim of this paper is to investigate the link between strategic
entrepreneurship and company performance. For the purpose of this study,
strategic entrepreneurship is divided into two sections; entrepreneurial
orientation and planning flexibility. The entrepreneurial orientation factors used
are proactiveness, risk-taking and innovativeness.
A survey was conducted on 133 SMEs’ representatives on a purposive and
convenience basis. The results of the study indicate that, in the South African
context, SMEs need to be proactive, take risks and be innovative to influence
their own performance. The study further indicates that flexibility in planning is
vital for the improved performance of SMEs. The external environment
influences the relationship between entrepreneurial orientation, planning
flexibility and a firm’s performance. These results correlate with the existing
literature on the entrepreneurial orientation, flexibility in planning and
performance of SMEs.
The findings of this survey and this research paper should serve to benefit
entrepreneurs and SME owners and managers and encourage them to develop
entrepreneurial orientation and planning flexibility programmes.
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DECLARATION
I, Moshe Mohutsiwa, declare that this research report is my own work except as
indicated in the references and acknowledgements. It is submitted in partial
fulfilment of the requirements for the degree of Master of Management in
Entrepreneurship and New Venture Creation in the University of the
Witwatersrand, Johannesburg. It has not been submitted before for any degree
or examination in this or any other university.
…………………………………………
Moshe Mohutsiwa
Signed at ……………………………………………………
On the …………………………….. day of ………………………… 2012
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DEDICATION
This dissertation is dedicated to my father, Maseng Mohutsiwa, the first
entrepreneur I got to know. Papa ke a leboga.
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ACKNOWLEDGEMENTS
I wish to extend my grateful thanks to all those who assisted me in the
preparation of this research report.
In particular, I would like to thank my supervisor, Dr Jose Barreira, for his
guidance and supervision.
I would also like to thank Merle Werbeloff for her advice and assistance, and, in
particular, for her valuable guidance in the analysis of the statistical results
contained in this report.
I would also like to express my gratitude to Anglo Zimele for giving me access
to its database of entrepreneurs.
To my wife Samu who has supported me through my Masters studies, thank
you .
And lastly, I would like to thank my brother, sister, nieces and nephews for their
support and prayers.
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TABLE OF CONTENTS
ABSTRACT ..................................................................................... 2
DECLARATION ............................................................................... 3
DEDICATION .................................................................................. 4
ACKNOWLEDGEMENTS ................................................................ 5
LIST OF TABLES ............................................................................ 9
LIST OF FIGURES .......................................................................... 9
LIST OF APPENDICES ................................................................. 10
CHAPTER 1: INTRODUCTION ................................................... 11
1.1 PURPOSE OF THE STUDY ........................................................................... 11
1.2 CONTEXT OF THE STUDY ........................................................................... 11
1.3 PROBLEM STATEMENT............................................................................... 12
1.4 PURPOSE STATEMENT/OBJECTIVE ............................................................. 13
1.5 HYPOTHESES ........................................................................................... 13
1.4 SIGNIFICANCE OF THE STUDY ..................................................................... 14
1.5 DELIMITATIONS OF THE STUDY ................................................................... 14
1.6 DEFINITION OF TERMS ............................................................................... 15
1.7 ASSUMPTIONS .......................................................................................... 17
CHAPTER 2: LITERATURE REVIEW ........................................... 18
2.1 INTRODUCTION ......................................................................................... 18
2.2 ENTREPRENEURSHIP ................................................................................. 18
2.2.1 ENTREPRENEURSHIP AND ECONOMIC GROWTH ..................................................... 21
2.3 ENTREPRENEURIAL ORIENTATION .............................................................. 26
2.3.1 INNOVATIVENESS.................................................................................................. 27
2.3.2 MEASURES OF INNOVATION .................................................................................. 31
2.3.3 PROACTIVENESS .................................................................................................. 32
2.3.4 MEASURES OF PROACTIVENESS............................................................................ 33
2.3.5 RISK-TAKING ........................................................................................................ 34
2.3.6 MEASURES OF RISK TAKING ................................................................................. 36
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2.4 STRATEGIC MANAGEMENT ......................................................................... 36
2.5 STRATEGIC PLANNING PROCESS ................................................................ 38
2.6 STRATEGIC ENTREPRENEURSHIP ............................................................... 41
2.7 EXTERNAL ENVIRONMENT .......................................................................... 43
2.8 FIRM PERFORMANCE ................................................................................. 45
2.8.1 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE .................................. 46
2.8.2 INNOVATIVENESS AND FIRM PERFORMANCE .......................................................... 47
2.8.3 PROACTIVENESS AND FIRM PERFORMANCE ........................................................... 48
2.8.4 RISK-TAKING AND FIRM PERFORMANCE .................................................................... 48
CHAPTER 3: RESEARCH METHODOLOGY ............................... 49
3.1 RESEARCH METHODOLOGY ....................................................................... 50
3.2 RESEARCH DESIGN ................................................................................... 50
3.3 POPULATION AND SAMPLE ........................................................................ 51
3.3.1 POPULATION ....................................................................................................... 51
3.4 THE RESEARCH INSTRUMENT ..................................................................... 51
3.4.1 SAMPLE ............................................................................................................... 52
3.4.2 ENTREPRENEURIAL ORIENTATION SCALE .............................................................. 53
3.4.3 PLANNING FLEXIBILITY SCALE ............................................................................... 53
3.4.4 EXTERNAL ENVIRONMENT SCALE .......................................................................... 54
3.4.5 FIRM PERFORMANCE SCALE ................................................................................. 54
3.4.6 DEMOGRAPHICS ................................................................................................... 55
3.6 PROCEDURE FOR DATA COLLECTION .......................................................... 56
3.7 LIMITATIONS OF THE STUDY ....................................................................... 56
3.8 VALIDITY AND RELIABILITY ......................................................................... 57
3.8.1 EXTERNAL VALIDITY ............................................................................................. 57
3.8.2 INTERNAL VALIDITY .............................................................................................. 57
3.9 RELIABILITY .............................................................................................. 58
CHAPTER 4: PRESENTATION OF RESULTS ........................... 58
4.1 INTRODUCTION ......................................................................................... 58
4.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................ 59
4.2.1 GENDER .................................................................................................................. 59
4.2.2 FIRM AGE ................................................................................................................ 60
4.2.3 BUSINESS SECTOR .................................................................................................. 61
4.2.4 NUMBER OF EMPLOYEES .......................................................................................... 62
4.2.5 NET ANNUAL INCOME ............................................................................................... 63
4.2.6 DESCRIPTION OF INDUSTRY AND FIRM ...................................................................... 63
4.2.7 EDUCATIONAL LEVEL OF RESPONDENTS ................................................................... 64
4.3.1 RELIABILITY ANALYSIS ............................................................................................. 64
4.3 RESULTS PERTAINING TO HYPOTHESIS 1 .................................................... 66
4.3 RESULTS PERTAINING TO HYPOTHESIS 2 .................................................... 67
4.4 RESULTS PERTAINING TO HYPOTHESIS 3A .................................................. 68
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4.5 SUMMARY OF RESULTS .................................................................................. 71
CHAPTER 5: DISCUSSION OF THE RESULTS ........................... 71
5.1 INTRODUCTION ......................................................................................... 71
5.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................ 71
5.3 DISCUSSION PERTAINING TO HYPOTHESIS 1 ............................................... 73
5.4 DISCUSSIONS PERTAINING TO HYPOTHESIS 2 .............................................. 74
5.5 DISCUSSION PERTAINING TO HYPOTHESIS 3A .............................................. 75
5.5 DISCUSSION PERTAINING TO HYPOTHESIS 3B .............................................. 76
5.6 CONCLUSION ............................................................................................ 77
CHAPTER 6: CONCLUSIONS AND ECOMMENDATIONS .......... 78
6.1 INTRODUCTION ......................................................................................... 78
6.2 CONCLUSIONS OF THE STUDY .................................................................... 78
6.3 RECOMMENDATIONS ................................................................................. 79
6.4 SUGGESTIONS FOR FURTHER RESEARCH ................................................... 80
REFERENCES .............................................................................. 81
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LIST OF TABLES
Table 1.1: Schedule of size standards for the definitions of SMEs in South
Africa
Table 3.1: Literature support for scales
Table 4.1: Business sectors within which respondents operate
Table 4.2: Education level
Table 4.3: Correlation matrix
Table 4.4: Regression summary for the dependent variable: performance
Table 4.5: Regression summary for the dependent variable: performance
Table 4.6: Regression summary for the dependent variable: performance
Table 4.7: Regression summary for the dependent variable: performance
Table 4.8: Regression summary for the dependent variable: performance
LIST OF FIGURES
Figure 2.1: The Wennekers and Thurik Model
Figure 2.2: The GEM Conceptual Model
Figure 4.1: The gender distribution of the respondents
Figure 4.2: Years in business of the respondents
Figure 4.3: Number of employees
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Figure 4.4: Scatterplot of Performance against Proactiveness
Figure 4.5: Scatterplot of performance and planning flexibility
LIST OF APPENDICES
Appendix A: Questionnaire
Appendix B: Cover letter
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CHAPTER 1: INTRODUCTION
1.1 Purpose of the study
The purpose of this dissertation is to add to the research literature in the area of
strategic entrepreneurship and SME performance in South Africa. This will be
achieved by an assessment of the level of entrepreneurial orientation and
strategic planning within SMEs and linking these factors to the firms’
performance. Strategic entrepreneurship is the combination of opportunity-
seeking actions and advantage-seeking actions to design and implement
entrepreneurial strategies that create wealth.
Strategic planning is defined as “a tool for organising the present on the basis of
the projection of the desired future” (O'Regan and Ghobadian, 2002). Shane
and Venkataraman (2000) describe strategic planning as “an approach by
management to devise strategy on the basis of complete analysis of the of the
firm’s environment.”
1.2 Context of the Study
This aim of this study, Strategic Entrepreneurship and Performance of SMEs in
South Africa, is to assess the use of strategic entrepreneurship within South
African SMEs and the link between these factors and a firm’s performance. This
study was inspired by the findings of Olawale and Garwe (2010); namely that
the failure rate of South African SMEs is one of the highest in the world, and
currently stands at 75%. Improving the performance of South African SMEs will
contribute positively to their success, which will, as a result, contribute to
national job creation objectives in the country. The South African Government
has put in place several measures, such as tax relief for SMEs, incubation
programmes and Khula Enterprise Finance to encourage and support SME
activity, sustainability and success in the country.
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However, despite the support programmes implemented by the Government,
SMEs are not achieving the Government’s desired performance and growth rate
of 5% per annum (Olawale and Garwe, 2010). Failure of SMEs to reach the
desired performance levels has motivated this study to examine other areas of
SME management and operation that could, potentially, stimulate higher
performance. Although many studies have been conducted on the SME sector
in South Africa, this is the first study that attempts to show the correlation
between strategic entrepreneurship and performance in this sector.
According to Robinson (1982), small business owners and managers in South
Africa do not engage in systematic planning. Studies conducted (Trombetta,
1976; Shane and Venkataraman, 2000) show that a thorough planning effort
and adoption of the strategic plans result in increased sales. The business gap
identified in the South African SME sector is the empirical study that links
strategic planning, entrepreneurial orientation and performance. The results of
the studies, and the recommendations resulting from them, can be used to
encourage small business owners and managers to engage in strategic
planning and entrepreneurial activities, and advice on the best methods to do
so.
1.3 Problem Statement
The creation and sustainability of SMEs are critical to the economic prosperity
of South Africa. However, the reality is that SMEs have an extremely high
failure rate in South Africa. Indeed, the probability rate of a new SME surviving
beyond 42 months in South Africa is the lowest of any GEM-sampled country. In
the current competitive business environment, to succeed, firms are required, or
even forced, through their products and services, to remain competitive both
locally and globally, regardless of their size and resources.
The competitive global business environment forces firms to assess their own
internal framework. They are required to identify opportunities to develop
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capabilities and competencies that allow them to be innovative, proactive and
willing to take risks to improve performance and gain, or maintain a competitive
advantage. SMEs need to improve performance by identifying and
implementing strategic planning and management processes, innovation
programmes and entrepreneurial orientation. In addition, they must continuously
assess the external business environment within which they operate, to be in a
position to react to changes in the environment rapidly and effectively to
maintain a competitive edge.
Planning is a vital aspect of strategic entrepreneurship because it offers firms
flexibility in strategy implementation. With strategic entrepreneurship, firms are
able table their development and growth options, look deeply into to their
opportunities and strategically plan to fully exploit the opportunities presented. It
is problematic that SMEs utilise more of operational planning rather than
strategic planning. This element needs to be considered when assessing the
correlation between strategic entrepreneurship and the performance of SMEs.
Currently, there is a knowledge gap in understanding the link between strategic
entrepreneurship and firm performance in South Africa that this report serves to
address.
1.4 Purpose Statement/Objective
The proposed research will contribute, on both a theoretical and empirical level,
to the enhanced understanding of the correlation between the implementation of
strategic entrepreneurship and SME performance.
1.5 Hypotheses
The following hypotheses are tested in this research:
H1: There is a positive relationship between the entrepreneurial orientation of a
firm and its performance.
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H2: There is a positive relationship between the planning flexibility of a firm and
its performance.
H3a: The external environment will moderate the relationship between
entrepreneurial orientation and performance with the effect that the relationship
is more positive when the environment is dynamic than when it is static (Ensley,
Pearce and Hmieleski, 2006).
H3b: The external environment will moderate the relationship between planning
flexibility and performance with the effect that the relationship is more positive
when the environment is dynamic than when it is static (Ensley, Pearce and
Hmieleski, 2006).
1.4 Significance of the Study
This study attempts to provide clarity on the relationship between the
implementation of strategic entrepreneurship and company performance. The
study also aims to highlight aspects of strategic planning and entrepreneurship
that can assist SMEs in improving performance, creating wealth and achieving
a sustainable competitive advantage.
In a country like South Africa, in which the Government is under significant
pressure to create jobs, the formation of new SMEs and the improvement of
existing SMEs will contribute to alleviating this pressure.
1.5 Delimitations of the Study
This study had several delimitations. It was delimited to strategic
entrepreneurship and the performance of SMEs in South Africa, as opposed to
SMEs across all over Africa. Strategic entrepreneurship is delimited to strategic
management, strategic planning and entrepreneurial orientation. Strategic
management influences the development and the performance of a firm (Rouse
and Daellenbach, 1999). Strategic management levels within firms is not
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empirically measured in this research, however, principles of strategic
management are used in the discussion of strategic entrepreneurship.
Strategic planning is delimited to planning flexibility and the influence of the
external environment. Planning flexibility is measured by indicators such as:
technology, economic conditions, new competition, government regulations,
customer needs, supplier strategies and political factors. The examination of the
external environment in the context of this study focuses on the issues specific
to small business performance, rather than broader business performance
issues that mostly affect larger, more well-established businesses. In addition,
entrepreneurial orientation is delimited to innovativeness, risk-taking and
proactiveness and excludes competitive aggressiveness and autonomy
Performance was delimited to the importance of, and satisfaction levels in, the
following areas:
1) Sales growth rate
2) Market share
3) Operating profit
4) Market development
5) New product development
1.6 Definition of Terms
For this study, the definitions for the key terms and concepts used are as
follows:
Small and Medium Enterprise (SME) – The National Small Business Act of
South Africa of 1996, as amended in 2003, defines a SME as: “a separate and
distinct entity including cooperative enterprises and non-government
organisations managed by one owner or more, including its branches or
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subsidiaries if any is predominantly carried out in any sector or sub-sector of the
economy mentioned in the schedule of size standards and can be classified as
a SME by satisfying the criteria mentioned in the schedule of size standards”
(Government Gazette of the Republic of South African, 2003).
The quantitative definition of SMEs in South Africa is shown in Table 1 below.
Table 1.1: Schedule of size standards for the definitions of SMEs in South
Africa
Type of firm Number of Employees Turnover Balance
Sheet
Small 1- 49 Maximum R13m Maximum
R5m
Medium 51 – 200 Maximum R51m Maximum
R19m
Source: Government Gazette of the Republic of South Africa (2003)
Entrepreneurship – Entrepreneurship is a dynamic process of innovation,
opportunity recognition and creation of a new venture to create wealth, and
includes the assumption of the risks and rewards of new venture (Hisrich and
Peters, 1998; Shane and Venkataraman, 2000). The discovery and exploitation
of opportunities also fall within the definition of entrepreneurship.
Entrepreneurial Orientation – Entrepreneurial orientation has been defined as
the processes and decision-making activities that lead to a new market entry
and the support of business activities (Kropp, Lindsay and Shoham, 2006).
Entrepreneurial orientation also refers to the strategy making practices that
businesses implement to identify and launch new ventures.
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Strategic Management – Strategic management is the set of analyses,
decisions and actions an organisation undertakes in order to create and sustain
its competitive advantage. The prominent topics in strategic management are
long-range planning and strategy to determine the long-term performance of a
company (Rouse and Daellenbach, 1999).
Strategic Planning Process – Strategic planning processes are the activities a
company utilises to develop and decide its mission and goals, explore the
competitive environment and analyse any strategic alternatives it may be
required to implement (Anderson, 2004).
Strategic Entrepreneurship – Strategic entrepreneurship refers to the
connection between entrepreneurship and strategic management literature
(Kuratko and Audretsch, 2009). It can also be described as the integration of
entrepreneurial (opportunity-seeking actions) with strategic (advantage-seeking
actions) perspectives to design and implement entrepreneurial strategies that
create wealth (Hitt, Duane, Camp and Sexton, 2001).
Firm’s Performance – Performance is defined as a measure of how well or
poorly the firm is doing (Phandya and Rao, 1998). Financial measures such as
return on investment, return on equity, return on capital, etc. and non-financial
measures such as employee retention, market share, etc. are used holistically
and collaboratively to measure a company’s performance.
1.7 Assumptions
The following assumptions have been made with regards to this study:
• The respondents will be able to understand and adequately respond to
the questions asked in the questionnaire.
• The respondents will have had exposure to entrepreneurship as defined
in this study, in some form; whether by association, exposure or training.
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CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
This chapter reviews the theoretical background, constructs and concepts of
entrepreneurship, entrepreneurial orientation, strategic management, strategic-
planning processes and strategic entrepreneurship. The background and
characteristics of entrepreneurship are presented, the primary concepts of
entrepreneurial orientation, specifically innovation, risk-taking and
proactiveness, are discussed, a review of strategic management and strategic
entrepreneurship is presented; as well as a breakdown of strategic
entrepreneurship concepts.
The chapter continues with a review of company performance and the
complexity involved in applying performance measures within SMEs.
The chapter concludes with a statement of the problem and the hypothesis
tested.
2.2 Entrepreneurship
The use of the term entrepreneurship dates back to the work of Richard
Cantillon in 1734, but the concept of entrepreneurship has only become an area
of intellectual and academic study since the late 19
th
Century (Katz, 2003), and
the bulk of entrepreneurship research has only been undertaken since the last
quarter of 20
th
Century. Central to these discussions have been a number of
theoretical views on the definition of entrepreneurship (Hisrich and Peters,
1998). However, to date, consensus has not been reached on the definition of
entrepreneurship and the elements that characterise it (Shane and
Venkataraman, 2000; Hitt et al., 2001).
According to Shane (2003), the lack of a consistent conceptual framework for
entrepreneurship is as a result of researchers considering only one part of the
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entrepreneurial process rather than all relevant aspects collectively. Other
authors and academics have cited the lack of both definitive development and a
specific theory of entrepreneurship as the true causes for absence of
agreement on the definition of entrepreneurship (Phan, 2004; Kuratko, Ireland,
Covin and Hornsby, 2005). This disagreement can be further attributed to other
elements, including the way various researchers view the role or action of an
entrepreneur (Vesper, 1980). Thus the question remains as to what defines and
characterises entrepreneurship.
Past definitions of entrepreneurship have varied in both content and focus, often
placing emphasis on individual characteristics, organisational attributes or the
practices of either the individual or organisation in business strategy and
process. Furthermore, some scholars argue that the definitions of
entrepreneurship can be classified into three groups: definitions based on traits
or qualities, roles or functions of the entrepreneur in the economic process, and
behaviours and activities of entrepreneurs (Kaufmann and Dant, 1998).
Some scholars have classified the definition of entrepreneurship into, two
mainstream research approaches as follows the individual approach and the
organisational approach. In the individual approach, psychological traits,
sociological characteristics and contextual factors of individuals are examined
and classified as important for entrepreneurship (Shane and Venkataraman,
2000). In the organisational approach, entrepreneurial activities of
organisations, regardless of their type, size, age and the environment in which
they operate, are examined. On the theoretical side, elements that are dominant
in the definition of entrepreneurship are risk-taking (Cantillon, 1734),
representation or meaning of profit (Vesper, 1980), innovation (Schumpeter,
1934), inherent personal attributes (McClelland, 1962) and the importance of
the environment and the opportunities it presents (Acs and Audretsch, 2003).
Earlier studies in entrepreneurship research highlighted new venture creation as
the primary criteria for something to be considered entrepreneurial
(Schumpeter, 1934; McClelland, 1961). Even in recent literature, many
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entrepreneurship scholars acknowledge new entry as the “fundamental act of
entrepreneurship” (Lumpkin and Dess, 1996:139). Lumpkin and Dess
(1996:136) indicate that new entry refers to “entering new or established
markets with existing goods or services, by starting a business or through an
existing business.” Thus, this definition inherently includes the existence of
entrepreneurship in large, established firms, referred to as corporate
entrepreneurship or intrapreneurship (Verheul, Uhlaner and Thurik, 2005).
Another foundation for the development of a definition of entrepreneurship has
been opportunity recognition (Venkataraman, 1997; Shane and Venkataraman,
2000). Drucker (1964) originally popularised the idea that entrepreneurs
maximise opportunities and several recent studies have included the role of
opportunity recognition as a key element in the definition of entrepreneurship.
This concept is illustrated by the work of Hitt et al.(2001:481), which refers to
entrepreneurship as “the identification and exploitation of previously unexploited
opportunities”. In a similar manner, George and Zahra (2002:590) refer to
entrepreneurship as “the act and process by which societies, regions,
organisations, or individuals identify and pursue business opportunities to
create wealth”.
When defining entrepreneurship, it is critical that a distinction is made between
the process of entrepreneurship and the content, or event, of entrepreneurship
(Lumpkin and Dess, 1996). Following this distinction, the definition of
entrepreneurship adopted for this study is that “entrepreneurship is a dynamic
process of innovation, opportunity recognition and creation of a new venture to
create wealth, and includes the assumption of the risks and rewards of new
venture” (Hisrich and Peters, 1998; Shane and Venkataraman, 2000). This
definition encompasses both individual and organisational approaches that are
clarified in most of the definitions of entrepreneurship examined above.
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2.2.1 Entrepreneurship and Economic Growth
Entrepreneurship is a crucial factor in the economic development of any
country, and is even more significant in a developing country such as South
Africa (Haasje, 2006). Small enterprises play a valuable role in employment
creation, stability, competitiveness, developing skills and ensuring economic
growth. In South Africa, the Government, in an attempt to provide favourable
business environment, has put in place strategies and policies, and provided a
large amount of resources and financial support to encourage the development
small medium and micro-enterprises (SMME) (Ahwireng-Obeng, 2005).
The hypothesis that entrepreneurship is linked to economic growth finds its
most basic foundation in simple intuition, common sense and economic
observation: activities to convert ideas into economic opportunities and, by
extension, growth lie at the very core of what entrepreneurship is.
Entrepreneurship was a central area of interest and research for a number of
leading economic theorists in the early 20
th
Century, then the level of interest
diminished for a period of time until it increased again in the 1970s (Karlsson,
Friis and Paulsson, 2004). The positive connection between entrepreneurship
and economic growth is based on the entrepreneur identifying and profiting from
a situation of disequilibrium by improving the inefficiencies or deficiencies in a
specific economic market (Kirzner, 1973). In extension to Kirzner’s model,
Holcombe (1998) argues that these opportunities must come from somewhere;
namely the insights of other entrepreneurs. Thus, entrepreneurship generates
more entrepreneurship and further economic growth.
According to Schumpeter (1942), “an entrepreneur is a person who carries out
new combinations”. New combinations comprise better ways to increase
existing demand or develop new products, and in a process referred to as
“creative destruction” the new combinations often render the current
technologies and products obsolete. Finding new combinations of factors of
production is a process of entrepreneurial discovery that will become the engine
that drives economic development. The process of “creative destruction” is built
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on dynamic, deliberate entrepreneurial efforts to change market structures and
can be an invaluable element for additional innovation and profit opportunities.
The concept of creative destruction is the basis for Schumpeter’s theory of long
waves of business cycles and economic growth. Business cycles are seen as
the result of innovation, which consists of the generation of a new idea and its
implementation in the form of a new product or process of service, which in turn
leads to the dynamic growth of the national economy, an increase in
employment and creation of pure profit for the innovative enterprise
(Schumpeter, 1911; Schumpeter, 1942; Dejardin, 2000; Thurik and Wennekers,
2001).
There are two models that have succeeded in linking entrepreneurship to
economic growth (Anon, 2004). These models are proposed by (Wennekers
and Thurik, 1999) and the GEM research programme. Wennekers’ and Thurik’s
model distinguishes between three levels of analysis: individual level, the firm
level and the macro level. According to the authors, entrepreneurial activity
originates at the individual level and can always be traced to a person, the
entrepreneur. The individual entrepreneur operates within a given space, the
firm level, which has a specific culture, institutional factors and business
environment that will have either a positive or negative effect on entrepreneurial
activity. Figure 2.1shows the Wennekers and Thurik Model.
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Source: Carree and Thurik (2002): 20
Figure 2.1: The Wennekers and Thurik Model
The model indicates that innovations and start-ups are vehicles for transforming
personal entrepreneurial qualities and ambitions into actions. The innovations
and start-ups foster an environment of competition that translates into actual
changes in the market. As the market changes, new opportunities are created
and the macro level of the economy is influenced. The Wennekers and Thurik
model indicates that entrepreneurial activity expands and transforms the
productive potential of the economy by inducing higher productivity, an
expansion of existing industries and the creation of new niches.
The GEM conceptual model approaches the concept from a different angle
compared to the Wennekers and Thurik model. It analyses the success of large
firms in advancing market opportunities for SMEs and the role of
entrepreneurship in the enterprise creation/growth process. It suggests
entrepreneurship is one of the main instruments driving macroeconomic growth
along with the entrepreneurial complementary nature.
Level of
analysis
Conditions for
entrepreneurship
Crucial elements of
entrepreneurship
Impact of
entrepreneurship
Individual
level
Firm
level
Macro
level
Psychological
endowment
Culture
Institutions
Business
Culture
Culture
Institutions
Attitudes
Skills
ACTIONS
Start-ups
Entry into new markets
Innovations
Variety
Competition
Selection
Firm Performance
Self-realization
Personal wealth
Competitiveness
Economic growth
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Source: Geneva 2004
Figure 2.2: The GEM Conceptual Model
The uppermost portion of figure 2.2 above shows the role of large established
firms. Depending on whether or not the national framework conditions allow for
it, large firms are generally integrated in the international financial markets,
areas of technology and play a role in research and development (R&D). Large
firms are able to stimulate the SME sector through technological spill-overs,
spin-offs and increased domestic demand for goods and services that the SME
sector can supply. The created opportunities require a competitive and stable
SME sector for them to be successfully exploited and be profitable. The bottom
portion of figure 2.2 shows the second mechanism driving economic growth, the
role of entrepreneurship in the creation and growth of firms. The entrepreneurial
process occurs in the context of a set of framework conditions as illustrated in
the diagram above. The creation of enterprises is dependent on the
entrepreneurial opportunities and entrepreneurial capacity. As much as large
Social, cultural
and political
context
General national frame-
work conditions
Openness(external trade)
Government (extent, role)
Financial Markets
(ef f iciency)
Technology and R&D (level
intensity)
Inf rastructure(physical)
Management (Skills)
Labour markets (f lexibility)
Institutions (unbiased, rule
of law
Entrepreneurial frame-
work conditions
Financial
Government policies
Government programmes
Education and training
R&D transf er
Commercial and legal
inf rastructure
Internal market openness
access to physical
inf rastructure
Culture and social norms
Major established
firms
Micro, small and
mediums firms
Entrepreneurial
opportunities
National
economic
growth (GDP,
jobs)
Creation and
closure of
enterprises
Entrepreneurial
capacity
Skills
Motivation
25
firms can assist in the creation and stimulation of smaller enterprises, SMEs are
also capable of improving the profitability of large firms by supplying
competitively priced and reliable products and services to the large firm to
improve its bottom-line.
The link between entrepreneurship and economic growth has been established
though entrepreneurial activities namely, competition, innovation and job
creation through business start-ups. According to Geroski (1994), competition
plays a significant role in stimulating productivity, with both new firms and new
ideas provoking movements towards, and movements of, the production
frontier, which would not have occurred in its absence. An econometric study of
the United States (US) telephone industry by Gort and Sung (1999) shows that
increased competition has lead to greater efficiency within the industry.
Competition can influence efficiency in four ways: greater incentive to stimulate
demand, higher quality of capital inputs, lower monitoring costs and greater
efficiency of firm-specific organisational capital (Gort and Sung, 1999).
In terms of business start-ups and economic growth, a study by (Baldwin and
Picot, 1995) shows that small firms have a higher gross volatility in job growth
creation the study also show a higher net employment growth than that of large
firms. The Global Entrepreneurship Monitor (GEM) 2000 concludes that there is
a strong relationship between entrepreneurial activities, defined as start-up
activities, and economic growth. The GEM report 2000, claims the definition of
entrepreneurship constitutes the singularly most important factors for economic
growth. The relative importance of small firms is not undisputed as Davis,
Haltiwanger and Schuh (1996) and Bednarzik (2000) remark in their studies, but
Davis et al., (1996) argue that, although smaller firms have a higher gross job
creation rate, large firms simply supply more in terms of net job creation.
The findings of the study by Davis et al (1996) are contrary to the findings of
Baldwin and Picot (1995). The former’s conclusion is drawn from a study of data
from the U.S Census Bureau between the years of 1972 and 1998, whereas
Baldwin and Picot (1995) studied the Canadian manufacturing sector from 1970
26
to 1976. This difference indicates that, while an international comparison of the
relative importance of small firms with respect net job creation is critical, the
results are likely to differ between countries due to institutional reasons and the
time the study was conducted (different economical times). The above research
shows that the results of this study cannot be extrapolated to other countries
without prior research.
2.3 Entrepreneurial Orientation
The contemporary research on entrepreneurship began with the work of Joseph
Schumpeter (1883–1950), who emphasised the importance of new entry for
business innovation in one of his earliest works: The Theory of Economic
Development Schumpeter (1936), which refers to the process as creative
destruction. Schumpeter focused on innovation and the individual entrepreneur
and maintained that wealth was created when factors were changed, whether
by introduction of new products, new services or within an organisation, such as
the creation of a new section within an established firm. According to Dess &
Lumpkin (2005), the entrepreneurial orientation concept draws upon prior
research that views strategy development in terms of patterns of action or
decision-making styles that can be generalised across organisations.
Entrepreneurial orientation refers to a firm’s strategic orientation and capturing
of specific aspects of decision-making styles, methods and practices. As such, it
reflects how a firm operates rather than what it does (Lumpkin and Dess, 1996).
The importance of entrepreneurial orientation to the survival and performance of
a company has been acknowledged in a variety of entrepreneurship literature
(Miller, 1983; Zahra and Covin, 1995; Lumpkin and Dess, 2001) and many fast-
growing corporations attribute much of their success to an entrepreneurial
orientation (Dess and Lumpkin, 2005). Five dimensions: autonomy,
innovativeness, proactiveness, risk-taking and competitive aggressiveness,
have been useful in characterising and distinguishing key entrepreneurial
processes, that is, a firm’s entrepreneurial orientation. However, in this study we
27
limit the focus to only the innovativeness, proactiveness and risk-taking
constructs of entrepreneurial orientation.
Entrepreneurial orientation generally involves a willingness to innovate, engage
in risky exercises, take self-directed actions and be more proactive and
aggressive in exploiting new opportunities in the marketplace (Lumpkin and
Dess, 1996). Innovativeness refers to the propensity of a firm to implement new
ideas and creative processes that may result in the development of a new
product, service or technological process (Wicklund, 1999). The proactiveness
element of entrepreneurial orientation reflects the extent to which a firm can be
defined as a leader or a follower, and it is associated with aggressive posturing
in relation to competitors (Teece, Pisano and Shuen, 1997). Risk-taking refers
to the extent to which a firm is willing to invest resources in significant, and
potentially risky, investments (Freel, 2005).
According to Wicklund & Shepherd (2003), firms with entrepreneurial orientation
possess the ability to discover and exploit new market opportunities. Further
research has also shown that companies with entrepreneurial orientation can
respond to challenges effectively and prosper in a competitive and dynamic
environment (Shane and Venkataraman, 2000).
This research evaluates the three elements of entrepreneurial orientation further
below.
2.3.1 Innovativeness
Increased and ongoing product innovation is of major importance in today’s
highly competitive environment. The entrepreneurial orientation subdivision of
innovativeness examines a company’s ability to engage in, and support, new
ideas, novelties, experimentation and creative processes that may result in new
products, services or technological processes (Lumpkin and Dess, 1996).
Innovativeness has been widely considered to be a component of the
entrepreneurial process since Schumpeter recognised it as the fundamental
28
undertaking of the entrepreneurial organisation. Many scholars agree with
Schumpeter’s statement that innovation is a driving force behind the creation of
new ventures and new products (Lindelof and Lofsten, 2006; Kroeger, 2007).
However, managing innovativeness within a firm can be challenging.
Challenges may arise from funding of R&D departments that drive innovation to
acquiring competent human resources for the departments.
Entrepreneurial innovation can be defined as the willingness to support
creativity and experimentation in the introduction of new products or services
and the use of technological leadership and research and development (R&D)
in developing processes (Lumpkin and Dess, 2001). Inventions and new ideas
need to be nurtured even when their benefits are not immediately clear,
because should the new concept prove successful, it will result in profits and
project the company to greater heights of performance. Innovativeness requires
that firms move away from existing technologies and practices and undertake
new ideas and ways of doing things (Lumpkin and Dess, 1996). Innovation
comes in many different forms; the prominent three are as follows:
• Technological innovation: this consists of research and engineering
endeavours aimed at creating new products and services;
• Product market innovativeness: this is comprised of market research,
product design and innovations in advertising and promotion; and
• Administrative innovativeness: this refers to novelty in management
systems, control techniques and organisational structure.
These innovative processes offer the advantage of low costs, rapid production,
faster distribution, better quality and improved customer service (Lumpkin and
Dess, 1996). According to Dess, Lumpkin & Covin (1997), product-market
innovativeness includes an emphasis on product design, market research,
advertisement and promotion. Dess et al. (1997) states that technological
innovativeness focuses primarily on product and process development,
engineering, R&D, technical expertise and industry knowledge. A study by
Roberts (1999) clearly demonstrates that innovative propensity influences the
29
extent to which abnormal profit outcomes persist over time, that is, more
innovation = greater profit.
Innovation is dependent on a variety of factors, such as innovative behaviour,
work environment, learning orientation and organisational learning procedure
(Hult and Ferrell, 1997; Zahra and Ireland, 2000; Kleysen and Street, 2001).
The particular capabilities of organisations for creating and sharing knowledge
derive from a range of factors, including, but not limited to, the specific facilities
organisations have for the creation and transfer of tacit knowledge, and the
organising principles by which individual and functional expertise are structured,
coordinated, and communicated, and through which individuals cooperate and
organisations as social communities (Kogut and Zander, 1993; Spender, 1996;
Nahapiet and Ghoshal, 1998). Table 2.1 shows the factors influencing an
organisation’s ability to manage innovation.
30
Table 2.1: Factors influencing a firm’s ability to manage innovation
Factor Sub-Factors Study
Technology Utilisation of technology;
Technical skills and
education
Erdener & Dunn,
1995
Innovation process Idea generation;
Implementation mechanism
Knight, 1987;
Amar, 2004
Corporate strategy Organisational strategy;
Strategic decision making
Damanpour &
Evan, 1984;
Read, 2000
Organisational structure Centralisation; Formality Mintzberg, 1992
Organisational culture Communication; Attitude to
risk
Hofstede, 2001
Employees Motivation to innovate;
Training
Ahmed, 1998;
Mostafa, 2005
Resources Utilisation of slack resources;
Financial resources
Nohria & Gulati,
1996; Knight,
1987
Knowledge management Organisation learning;
Utilisation of knowledge
repositories
Salavou, 2004
Management style and
leadership
Management style;
Motivation of employees
Hyland & Beckett,
2005
Source: O'Regan and Ghobadian ( 2002), Effective Strategic Planning in Small and Medium
Sized Firms.
31
Innovativeness can be a source of significant growth and development in new
firms and according to Drucker (1985), innovation is the primary activity of
entrepreneurship. Companies need to take a conscious decision to support and
invest in innovative research and development and to create an environment in
which it can develop. However, there are also major pitfalls for firms that invest
heavily in innovation. Expenditure on R&D aimed at identifying new products or
processes can be a waste of resources if the effort does not yield results.
Therefore, while innovativeness is a vital aspect of company performance, it
also involves major risks (innovative ideas do not always yield profits) of which
the company must be aware and prepared for, because investments in
innovations may not pay off.
2.3.2 Measures of Innovation
Some scholars have used different measures to account for innovativeness
within a firm and measures have differed based on the type of innovativeness
being measured; technological or product/market. According to Lumpkin & Dess
(1996), firms lie along a continuum of innovativeness, ranging from a
willingness to try a new product line or new technology to a enthusiastic pursuit
of, and commitment to, an industry-leading technological product advancement.
Innovation measurements within firms have mainly existed in the form of
individual responses from surveys or an analysis of existing financial, and other
organisational, data such as resources and structure (Zahra and Covin, 1993).
Technological innovation focuses on the pursuit of new processes or production
methods, thus indicating a need for alternative measurements to those that
measure product innovation. These measurements are based on a firm’s levels
of focus on technological development, ability to adopt new processes and its
desire to gain a reputation for trying and producing new processes (Zahra and
Covin, 1993). This is in contrast to a previously used measure for
product/market innovation; a count of the number of new products or services
introduced by an organisation (Covin and Slevin, 1989).
32
Measures of innovation have historically focused on measuring the resources a
company has invested in R&D. Miller (1988) examined R&D expenditure as a
percentage of total sales as an indicator of how innovative a particular company
is. The variety of measures that can be used to identify and analyse the
innovativeness of an organisation provides a strong foundation for future
investigation of this variable, thus making the different measures useful in
examining the overall innovative nature of a firm.
2.3.3 Proactiveness
A firm’s propensity to identify and seize new opportunities can be referred to as
proactiveness (Lumpkin and Dess, 1996). Proactive firms monitor trends,
identify the future needs of existing customers and anticipate changes in
demand or potential problems that could lead to new venture opportunities.
Kocel (1995) described the concept of proactiveness as “giving direction” to the
events by identifying and forecasting the future needs, expectations and
changes instead of taking action and responding only once they have already
emerged. Proactiveness is an attitude of anticipating and acting on future wants
and needs in the marketplace and creating a “first mover advantage” (Lumpkin
and Dess, 2001). “First mover advantage” refers to the benefit gained by firms
that are the first to enter new markets, establish brand identity, implement
administrative techniques or adopt new operating technologies in an industry
(Dess and Lumpkin, 2005).
There are several advantages attached to being a first mover. Where
competition would usually drive down the price of the product or service,
industry pioneers often capture unusually high profits because of a lack of
competition. First movers that successfully establish brand recognition are
usually able to retain their image once other players enter the market and hold
on to the market share gains they earned by entering the market first. In
general, first movers have an advantage that can be sustained until the industry
enters the maturity phase of its life cycle (Freel, 2005). At products’ maturity
33
phase, competition from new players as well all development of new products
that can likely substitute the product at maturity phase may result in the first
mover loosing advantage. The first movers advantages identified by Freel
(2005) concur with a definition of proactiveness offered by Dess & Lumpkin
(2005), in that proactiveness involves recognising changes and having the
willingness to act on those insights ahead of competitors in an attempt to gain
higher profits.
The two main attributes of proactiveness are aggressive competitive behaviour
directed at rival firms and the organisational pursuit of favourable business
opportunities (Stevenson and Jarillo, 1990). According to Aloulou and Fayolle
(2005), it has been a challenge to investigate whether or not these concepts
can be applied to SMEs. Proactiveness is effective in creating competitive
advantage because a company that is an initiator is able to penetrate the
market first and its competitors are forced to respond to the initiators actions
rather than initiate their own (Lumpkin and Dess, 1996). According to Knight
(1997), proactiveness is an important vehicle for the survival of firms and for
higher performance and, therefore, sustainable success.
However, Dess & Lumpkin (2005) argue that being an industry leader does not
always lead to competitive advantage. Some firms that have launched
pioneering new products or staked their reputation on new products have failed
to get the pay-off they hoped for. Therefore, careful monitoring and scanning of
the environment, as well as extensive feasibility research is needed for a
proactive strategy that will result in competitive advantage. Firms that do this
well usually have significant growth and internal development.
2.3.4 Measures of Proactiveness
Determining ways in which to accurately measure proactiveness has been the
focus for a number of scholars and is a topic of ongoing discussion. One topic
of particular interest arises when attempting to measure proactiveness as a
continuous variable. Proactive firms are viewed as aggressive in response to
34
competitors, while a company on the opposite spectrum of the continuum would
be labelled as “reactive” (Knight, 1997). However, Lumpkin & Dess(1996)
suggest that the use of the term “reactive” is inappropriate, as it suggests the
company is still responding to its competitors, and not simply doing nothing at
all. Thus, they suggest measuring proactiveness on a continuum ranging from
“proactive” to “passive”. Using the concepts of proactiveness as the anchors of
the continuum, reactiveness would fall in the middle and represents firms which
are not market leaders, but have the ability to adapt to change and recognise
the need to pursue developing markets, but are not pioneers in doing so.
One of the measures for proactiveness used by scholars is that of the tendency
of a firm to be a leader, rather than a follower, in the development of new
technologies, products, processes, etc. (Miller, 1983; Covin and Slevin, 1989).
This approach removes the possibility of a purely objective measure but allows
for a more realistic examination of how proactive a company actually functions,
as it does not require the organisation under examination to be the first mover.
It must be noted that some studies have failed to find a significant difference
between innovativeness and proactiveness when factor-analysing the latent
constructs of the variables (Morris and Paul, 1987), thus resulting in a single
dimension representing both constructs. In this study, innovation and
proactiveness will be treated individually.
2.3.5 Risk-taking
The concept of risk-taking in entrepreneurship refers to the willingness of
entrepreneurs to take calculated business-related risks (Brockhaus, 1980). To
be successful, SMEs usually have to take on riskier projects, even if it means
foregoing the methods or products that have worked for other businesses
(Lumpkin and Dess, 2001). For better firm performance and high returns, firms
take risks such as accumulating high levels of debt, committing large amounts
of resources, introducing entirely new products into new markets and investing
in unexplored technologies (Dess and Lumpkin, 2005).
35
The three types of risk that firms face are business risk, financial risk and
personal risk (Dess and Lumpkin, 2005):
• Business risk is the risk involved in a firm entering into a business
venture without knowing the probability of success.
• Financial risk is the risk a firm takes when borrowing or committing
significant amounts of money in order to increase returns, with no
absolute guarantee of return.
• Personal risk refers to the risks that an entrepreneur assumes when
deciding in favour of a strategic course of action.
Risk-taking behaviour dominates entrepreneurial literature, and entrepreneurial
firms are characterised by their confidence and the high tolerance they have for
risk that could potentially lead to new opportunities (Chow, 2006). According to
Covin and Slevin (1991), a company that does not take risks in a dynamic
environment will lose market share and will not be able to compete successfully
with the other entrepreneurial firms in the same sector.
As is highlighted in most entrepreneurship literature, the strength of an
entrepreneur lies in his or her ability to identify and exploit opportunities.
Successful entrepreneurs avoid focusing on potential risk and rather centre their
attention on exploiting opportunities (Drucker, 1985). The significance of
adaptation to environmental change and exploitation of opportunities is
extensively analysed in existing strategic management and entrepreneurship
literature (Shane and Venkataraman, 2000).
Risk-taking, by its very nature, involves potential dangers and pitfalls and only
risks managed by vigilance are likely to lead to competitive advantage. In
contrast, actions taken without sufficient forethought, research and planning
may prove to be very costly, due to losses resulting from poor risk analysis,
assessment and mitigation.
36
2.3.6 Measures of Risk Taking
The amount of risk firms are willing to accept has been researched in many
different ways (Brockhaus, 1980; Miller, 1983; Sitkin and Pablo, 1992). The
threat of organisational risk is present in every firm; Lumpkin and Dess (1996)
claim no firm operates at a level of zero risk. This leaves firms to consider the
level of risk they are willing to actively pursue, or tolerate in many cases. Risk is
assumed through heavy borrowing, excessive resource commitments and/or
entering an unknown market environment. Based on this, the level of risk in a
firm can be plotted along a continuum, ranging from low risk to high risk.
A common measure of risk focuses on the risk level of projects assumed by an
organisation (Miller, 1983). This approach measures the number of high-risk
R&D projects pursued, and the resources allocated to those projects, to assess
an organisation’s propensity for risk-taking. Other approaches used include
examination of the risk orientation of individuals, risk analysis by decision
makers, past history of performance in high-risk situations, risk preferences of
organisations or individuals and the perceptions of risk-related problems
(Brockhaus, 1980; Miller, 1983; MacCrimmon and Wehrung, 1990; Sitkin and
Pablo, 1992). The extensive research undertaken on the many areas of risk
illustrates the influence of this variable on organisational action and its
importance in research.
2.4 Strategic Management
The fundamental question in the field of strategic management is how firms
achieve and sustain competitive advantage. According to Barney (1991),
strategic management frameworks enable firms to gain competitive advantage
by strategically positioning themselves to “exploit the internal strengths, through
responding to the environmental opportunities, while neutralising external
threats and avoiding internal weaknesses.” A company’s strategic management
research may focus on the internal strengths and weaknesses, or focus on the
37
external opportunities and strengths (Porter, 1980; Duschek, 2004). The
majority of the research conducted in this field has focused on the external
factors.
Strategic management consists of the analysis, decisions and actions an
organisation undertakes in order to create and sustain competitive advantage
(Dess, Lumpkin and Marilyn, 2005). The aim of strategic management is to
decide on organisational goals, the means required to achieve these goals and
to ensure that the firm is suitably positioned in order to pursue these goals
(Browne, 1994).
From this definition of strategic management, three ongoing processes can be
recognised: analysis, decisions and actions. The analysis process of strategic
management is concerned with analysing the goals of the organisation (vision,
mission and strategic objectives) in the context of the internal and external
environment in which it operates (Dess et al., 2005). Once analysis has been
done, decisions need to be taken based on the information gathered and
analysed that will result in competitive advantage for the company. The last
process of strategic management is the implementation of the decisions made.
Various researchers have conducted studies to determine whether firms that
engage in strategic management outperform those that do not (Herold, 1972;
Karger and Malik, 1975). Powell (1992) observed that, generally, research
reveals that strategic management leads to improved performance far more
frequently than it results in no change or in even poorer performance.
The real value of strategic management for SMEs lies in the future orientation of
the planning process rather than in any written strategic plan (Bryson and
Bromiley, 1993). Some studies revealed that an overly formal process may, in
fact, have negative effects on the development and sustainability of an SME
(Robinson and Pearce, 1983). A reliance and emphasis on a rigid and written
strategic plan may prove to be disabling to some SMEs because it restricts the
flexibility that is crucial to their success
38
2.5 Strategic Planning Process
Research has consistently shown that most SMEs do not engage in strategic
planning activities (Robinson and Pearce, 1984; Sexton and van Auken, 1985;
Beaver, 2003). This is in conflict with much of the strategy literature that dictates
that enterprises must actively plan for the future to compete effectively and
survive (Ennis, 1998). The concern here is that in neglecting strategic planning,
SMEs may not achieve their full performance and growth potential, and their
survival could be placed at risk (Berry, 1998). Subsequently, considerable
research effort has been expended on identifying barriers that hinder planning
so these may be overcome or, at least, mitigated and strategic planning
encouraged in SMEs.
Strategy is defined by Farjoun (2002:572) as: “the planned or actual co-
ordination of the firms major goals and actions in time and space, that
continuously co-align the firm with its environment”. This definition encapsulates
three inter-related points: behaviour, co-ordination and adaptation. Strategy is
arguably one of the most challenging tasks facing any firm, given the
increasingly volatile business environment. It is necessary to ensure that, as far
as possible, the firm ‘fits’ the outside environment and meets its customer
needs both effectively and efficiently (Drihlon and Estime, 1993). Strategy is the
core aspect of strategic planning.
Strategic planning is concerned with the setting of long-term organisational
goals, the development and implementation of plans to achieve these goals and
the allocation or diversion of resources necessary for realising the set goals
(O'Regan and Ghobadian, 2004). Essentially, strategic planning is a set of
concepts, procedures and tools designed to assist managers, owners and
leaders to act strategically in order to gain competitive advantage. According to
O'Regan and Ghobadian ( 2002), the purpose of strategic planning is to enable
a business to gain, as efficiently as possible, a sustainable edge over its
competitors. Porter (1996:52) states that effective strategic planning gives a firm
competitive advantage over its competitors as it “renders choices about what
39
not to do, as important as choices about what to do”. He continues by saying
that “the root of the problem is the failure to distinguish between operational
effectiveness and strategy,” as the firms pursue the same goal of organisational
effectiveness, which he compares with “a series of races down identical paths,
that no one can win,” instead of clarifying their strategies, which will give them
competitive advantage.
Comprehensive review of small business literature suggests that, ceteris
paribus, strategic planning is generally more common in better performing
enterprises (Lurie, 1987; Miller and Cardinal, 1994; Hormozi, Sutton, McMinn
and Lucio, 2002). Small businesses that engage in strategic planning are likely
to be more innovative, develop newly patented products and employ new
process and management technologies that will enable them to achieve
international growth (Upton, Teal and Felan, 2001; Gibbons and O'Connor,
2005). Roper (1997) reached a similar conclusion in his study of strategic
planning in 703 small firms. Berman, Gordon and Sussman (1997) found that
“firms that plan produce better financial results than firms that do not plan.”
Ghobadian and O'Regan (2000) carried out a comprehensive review on
previous emperical research as they examined the link between strategy and
performance. The findings of this review showed a positive correlation between
strategy and performance, meaning that, firms which strategise stand to be
more profitable and successful than firms which do not strategise.
Numerous writers argue that these mixed results are due to the lack of a clear
definition of strategy and a consistent method for measuring performance in the
study (Snow and Thomas, 1994; Boyd and Reuning-Elliott, 1998). Others
suggest that the differences in the empirical study findings can be attributed to
lack of industry variety (Risseeuw and Masurel, 1994) or a small sample size
(Matthews and Scott, 1995).
Despite all the advantages gained through the application of strategic planning,
research shows that most SMEs do not engage in strategic planning (Robinson
and Pearce, 1983; Orser, Hogarth-Scott and Riding, 2000; Sandberg, Robinson
40
and Pearce, 2001). The primary focus of small business operators is on short-
term operational actions, rather than long-term strategic issues, and their
decision-making is generally reactive and intuitive as opposed to proactive and
deliberate(Gaskill, van Auken and Manning, 1993; Brouthers, Andriessen and
Nicolaes, 1998; Mazzarol, 2004). The ways in which small firms tend to respond
to change exemplifies this. Firstly, they tend to look inwards rather than
outwards at the external environment and ignore change, or do not see that
there is change. Secondly, some continue to rely on efficiency-based measures
as their ‘strategic plan’ for the future, rather than real strategic planning. Thirdly,
some believe that, as they are part of a localised supply chain, they are immune
to any external influences; which they are not. For those small business
operators that do plan, planning is commonly ad hoc rather than formal and
therefore provides little basis upon which performance can be measured
(Kelmar and Noy, 1990).
According to Mazzarol (2004), SME owners and managers have been accused
by scholars of being strategically myopic and lacking in long-term vision as to
the strategic direction of their companies. The concern is that, by not focusing
on strategic planning, SMEs may not reach their full performance and growth
potential, and their survival could be placed at risk (Berry, 1998). The main
influences on strategic planning are arguably, organisational culture and
leadership.
Culture is defined as ‘the way things are done in business’ illustrating a
company’s philosophy or characteristics that distinguish one organisation from
another (Hofstede, 1984:328). Organisational culture is often seen as a conduit
through which top management can encourage the development and
implementation of corporate strategy (O'Regan and Ghobadian, 2005).
Conversely, culture can be a major obstacle in the implementation of new ideas,
processes and systems. Depending on the culture of the firm and its propensity
to innovate, employees may be discouraged to be innovative and come up with
new products and process.
41
2.6 Strategic Entrepreneurship
Strategic entrepreneurship has emerged through a combination of strategic
management literature and entrepreneurship literature (Simmons, 2010). It
incorporates aspects from both fields to combine entrepreneurial actions with
strategic perspective (Ireland, Hitt and Sirmon, 2003; Simmons, 2010).
According to Ireland et al. (2003), strategic entrepreneurship is the action of
simultaneously engaging in the search for opportunities and competitive
advantage for devising and implementing entrepreneurial strategies that create
wealth. Therefore, strategic entrepreneurship involves opportunity-seeking and
advantage-seeking behaviours that result in superior firm performance (Ireland
et al., 2003). Strategic entrepreneurship is a new concept in entrepreneurship
literature, however, it is an important one, in that effective strategic
entrepreneurship practices result in a firm being able to form a balance between
opportunity-seeking and advantage-seeking behaviours (Ireland et al., 2003).
Due to the extremely competitive business environment, the integration of
entrepreneurship (entrepreneurial orientation) and strategic management
(strategic orientation) has been increasingly explored by numerous researchers
based on the concept of strategic entrepreneurship (Ireland et al., 2003).
Scholars have debated whether strategic entrepreneurship is a framework,
model, theory, paradigm, concept or a simple point of reference (Schindehutte
and Morris, 2009). During the course of this process, four distinctive dimensions
of strategic entrepreneurship have been identified: entrepreneurial mindset;
entrepreneurial culture; entrepreneurial leadership; and applying creativity and
developing innovation (Ireland and Webb, 2007).
Entrepreneurial mindset is both an individualistic and collective phenomenon in
that it is important for individual entrepreneurs and for managers and
employees in established firms to think and act entrepreneurially (Covin and
Slevin, 2002). Entrepreneurial mindset is a way of thinking about business that
focuses on, and captures the benefits of, uncertainty (McGrath and MacMillan,
2000). Organisations that are capable of successfully dealing with uncertainty
42
tend to outperform those that are unable to do so (Brorstrom, 2002). Based on
academic literature, it is believed that effective strategic entrepreneurship helps
a firm position itself in such a way that it is capable of successfully responding
to the types of significant environmental changes that affect many firms in the
current competitive business arena (Ireland and Webb, 2007).
Entrepreneurial culture is a system of shared values and beliefs that shape a
firm’s structural arrangements and its members’ actions to produce behavioural
norms (Dess and Picken, 1999). A firm’s culture affects its employees’
expectations of one another as well as their expectations of interactions with
external stakeholders.
Entrepreneurial leadership is the ability to influence others to manage resources
strategically in order to identify and display both opportunity-seeking and
advantage-seeking behaviours (Covin and Slevin, 2002). Covin & Slevin (2002)
argue that entrepreneurial leadership is characterised by six essential elements:
supporting an entrepreneurial capability, protecting innovations threatening the
current business model, making sense of opportunities, questioning the
dominant logic, revisting the deceptively simple questions and linking
entrepreneurship and strategic management.
Further contructs of strategic entrepreneurship are the application of creativity
and the development of innovation. First movers in innovation impact
significantly on competitors’ market power and enjoy, potentially transient,
monopoly advantages and abnormal profits because of the slower actions of
competitors (Thesmar and Thoenig, 2000). According to Hitt et al., (2001),
innovations resulting from new combinations of production factors are critical to
a firm’s wealth-creating efforts. Innovation is linked to successful performance
of organisations in both the industrial and service sectors as well as to the
greater economy as a whole (Kluge, Meffert and Stein, 2000). Effective
innovations create new value for customers (Mizik and Jacobson, 2003) , and
therefore the organisation performs well.
43
Creativity is also an essential element for increased performance. Barney &
Arikan (2001) argue that creativity is increasingly important, especially for
companies operating in markets with multiple opportunities to differentiate
goods and services. Creativity is a continuous process rather than the outcome
of a single act, is the basis of innovation and is encouraged when the resources
supporting it are managed strategically (Barney and Arikan, 2001).
2.7 External Environment
The understanding of environments, in the context of environmental studies,
generally draws upon three dimensions; munificence, complexity and dynamism
(Freel, 2005). Munificence indicates a firm’s dependence upon environmental
resources, while complexity and dynamism reflect the degree of uncertainty the
firm faces. According to Milliken (1987), there are three types of environmental
uncertainty in which a company could operate:
• Effect uncertainty is the inability to predict the nature of the effects of a
future state of the environment on the organisation.
• Response uncertainty is the inability to predict the likely consequences of
a response choice.
• State uncertainty is the situation that occurs when managers do not feel
confident that they understand the significant events in an environment
or feel unable to accurately assign probabilities to the likelihood that a
particular change or event will occur.
It is generally accepted that a manager’s perception of the environment is more
important than the actual state of the environment (Duncan, 1972; Miller, 1988).
If managers perceive an environment to be uncertain they are likely to make
decisions that are designed to deal with uncertain environments. According to
Freel (2005), environments are neither certain nor uncertain in themselves but
perception makes them so. Perceptions of environmental uncertainty occur
when executives fail to predict the future changes in the mechanisms of the
44
environment or possess an incomplete understanding of the relationship
between components of the environment (Buchko, 1994). Furthermore,
uncertainty is considered to be a function of dynamism and complexity; the
more complex and shifting the environment, the higher the level of
environmental uncertainty (Damanpour, 1996).
A study by Russell & Russell (1992), shows that one of the few sets of
consistent findings in innovation literature is that innovation is positively
correlated with environmental uncertainty. The explanations for the findings are
that:
• A high degree of innovation leads to perceptions of increased uncertainty
among managers, that is, innovation causes environmental uncertainty.
By contrast, the alternative reasoning suggests that high levels of
uncertainty generate more innovation through greater scope for
opportunity-seeking and adaptive behaviour (Russell and Russell, 1992).
• Environmental uncertainty requires firms to change and adapt.
Dynamic environments are associated with high unpredictability levels in terms
of customers and competitors that trade within them and high rates of change in
market trends and industry innovation (Dess and Beard, 1984). In dynamic
environments within which levels of demand change rapidly, opportunities
become abundant and performance should be highest for those firms that have
an orientation to actively pursue new opportunities. In other words, it is
expected that the alignment of entrepreneurial orientation and a dynamic
environment would have a positive effect on performance (Wicklund and
Shepherd, 2005). Firms that are not flexible enough to adapt to a dynamic
environment are less likely to benefit from the environment in which they
operate, because market demand might shift from a firm’s existing products.
This will inevitably negatively impact performance if it does not have new
products that align with the changes and movements in the environment.
45
A study by Zahra (1993), found that a strong positive relationship exists
between entrepreneurship and performance among firms in dynamic
environments, whereas there was a predominantly negative relationship
between the two factors in firms that operated in static and impoverished
environments. These findings correlate with the findings of a study by Miller
(1988), in that innovative strategies in dynamic environments were associated
with higher performance.
2.8 Firm Performance
Accurate and appropriate measurement of performance is a critical element in
entrepreneurship research (Murphy, Trailer and Hill, 1996). According to
Laitinen (2002), a well-organised system of performance measurement may be
the single most powerful mechanism at management’s disposal to enhance the
probability of successful strategy implementation. In many of the studies in the
field of strategic entrepreneurship, firm performance is defined as a dependent
variable and the entrepreneurship activity of the firm is considered an
independent variable. There is strong agreement among the researchers that
the results of successful entrepreneurial activities positively correlate with the
improvement of a company’s performance (Zahra, 1991; Zahra and Covin,
1995; Wicklund and Shepherd, 2005).
Measuring absolute firm performance is very difficult, because the concept is
complex and multi-dimensional. Researchers suggest that multiple performance
indicators should be used to measure this complex construct (Lumpkin and
Dess, 1996). The predictable approach to firm’s performance has been to
consider financial performance (Slater, Olson and Venkateshwar, 1997).
Another approach to organisational performance is to use measurement against
purpose, using perceptual measures of company performance (Steiner, 1979).
A similar approach to assessing the level of satisfaction arising from specific
factors and actions was adopted by other researchers such as Luo & Park
(2001). The literature suggests that responses on performance approach are
46
reliable (Nayyar, 1992; Tan and Litschert, 1994) as compared to independent
data from the organisation.
Much of the research on performance measurement has come from the areas
of organisational theory and strategic management. As discussed previously,
organisational performance can be measured using financial measures, non-
financial measures or a combination of both. The financial measures include
profit before tax and turnover while the non-financial measures focus on issues
pertaining to customer satisfaction, customer referral rates, delivery time,
waiting time and employee turnover (Haber and Reichel, 2005). The
performance measures used in this report are a combination of financial and
non-financial measures.
Several researchers have suggested that subjective performance measurement
may be appropriate given the restrictions imposed by objective measures (Dess
and Robinson, 1984; Gupta and Govindarajan, 1984c). Objective measures
works mostly with more developed companies and do not fully accommodate
SMEs.
2.8.1 Entrepreneurial Orientation and Firm Performance
The relationship between entrepreneurial orientation and firm performance has
been at the forefront of entrepreneurship literature for many years. Numerous
scholars have theorised about the positive relationship that exists between
entrepreneurial orientation and profitability and/or growth of the firm (Covin and
Slevin, 1991; Lumpkin and Dess, 1996). However, the studies have differed in
their approaches to measuring entrepreneurial orientation, with some using a
multi-dimensional approach and others using a uni-dimensional approach.
When entrepreneurial orientation was examined as a uni-dimensional construct,
many researchers obtained results that supported the existence of a positive
relationship between entrepreneurial orientation and firm performance (Zahra
and Covin, 1995). Zahra & Covin (1995) found a significant positive relationship
47
between entrepreneurial orientation and performance and claimed that the
relationship is increased over time. A separate study by Becherer and Maurer
(1997) confirmed a positive relationship between entrepreneurial orientation and
firm performance. A study by Wiklund (1999), which took a longitudinal
approach by examining 132 Swedish firms over a two-year period to assess the
relationship between entrepreneurial orientation and firm performance. The
findings of this study confirmed a positive relationship between these two
factors, and concurred with Zahra & Covin (1995) in that this relationship is
enhanced over time.
Other studies have revealed insignificant, and sometimes negative,
relationships between entrepreneurial orientation and firm performance (Covin,
Slevin and Schultz, 1994; Kaya and Syrek, 2005). However, empirical results
obtained by analysing the relationship between these variables continue to
correlate with the wide majority of research supporting the relationship as a
positive one. It has become increasingly evident that an entrepreneurial
orientation and performance relationship will likely result in a positive
relationship between the two variables.
2.8.2 Innovativeness and Firm Performance
A multi-dimensional approach to the entrepreneurial orientation construct
requires the individual assessment of the relationship between each unique
dimension of entrepreneurial orientation and firm performance. The first of the
three dimensions to be examined is that of firm innovativeness. Many scholars
have offered suggestions for the measurement of firm level entrepreneurship,
most of which include the innovative nature of an organisation as a key
component. Some researchers have suggested the use of product innovation
as a sole predictor of firm-level entrepreneurship (Jennings and Lumpkin,
1989).
In his study, Schumpeter (1934) claims that innovative thinking within a firm can
result in two types of innovation, namely a slight improvement to existing
48
products to increase efficiency or productivity, and the development of new
products or processes resulting in new market creation. These two types of
innovation are known as incremental and radical respectively. The presence of
innovation and the resulting advantages highlight how important it is to a
company’s success.
The idea of innovation as the sole predictor of entrepreneurship has been
generally dismissed; however, the importance of innovation as a contributing
variable to an overall measure of firm level entrepreneurship is indisputable.
The findings of an empirical study by Zahra & Bogner (2000) supports the
positive relationship between innovation and performance.
2.8.3 Proactiveness and Firm Performance
Empirical evidence has shown the impact of proactiveness on firm performance.
A study by Becherer & Maurer (1999) found a significant positive relationship
between proactiveness and a firm’s change in sales levels. Becherer and
Maurer’s (1999) study surveyed the managers of 215 small firms and the results
provided evidence to support the importance of proactiveness in an
organisation. The results of many other studies have also found a strong
positive correlation between proactiveness and firm performance (Lumpkin and
Dess, 2001; Krauss, Frese, Friedrich and Unger, 2005).
2.8.4 Risk-taking and Firm Performance
The relationship between a firm’s level of risk-taking and performance has been
a topic of interest in the field of entrepreneurship for almost two decades.
Lumpkin & Dess (1996) suggest that entrepreneurial firms often make large
investments in resources with the aim of capitalising on available opportunities
in the market, resulting in higher returns. Firms willing to take risks by
committing resources can benefit by receiving significant financial gains.
49
As clarified previously, an entrepreneurial firm is one that engages in product-
market innovation, undertakes risky ventures and is the first to come up with
proactive innovations (Miller, 1983). Focusing on the risk portion of the definition
of entrepreneurial firms by Miller (1983), entrepreneurial firms are expected to
take risks while non-entrepreneurial firms are expected to be risk averse. The
above statement implies that entrepreneurial behaviour, when measured by the
risk-taking variable, maximised at a moderate level of risk, results in a curvi-
linear relationship between the variables (Miller, 1983). Following this logic by
Miller (1983), a non-linear relationship between risk-taking and
entrepreneurship can be expected.
The results of a study by Begley & Boyd (1987) supported the existence of a
curvi-linear relationship between risk-taking and performance, in that firm
performance was maximised at a moderate level of risk-taking. These findings
suggest that an overall analysis of the individual dimension of risk-taking in
relation to firm performance will reveal a non-linear relationship.
CHAPTER 3: RESEARCH METHODOLOGY
Based on the problem statement and hypothesis outlined in Chapter 1, this
chapter will cover the research design and research methodology used to test
the hypothesis. Firstly, the research methodology and research design are
discussed. Secondly, the sample population is identified and described. Thirdly,
the research instrument, procedure for data collection, data analysis, data
interpretation and the limitations of the study are discussed. Lastly, the tests for
hypothesis are presented.
50
3.1 Research Methodology
The data was collected from 133 firms across South Africa. Most of these firms
are based in the provinces of Mpumalanga, Gauteng, The Free State, Kwazulu-
Natal and The North West. Closed-ended, quantitative data was collected that
related to each organisation as a whole and also personal characteristics of the
respondents. Responses and information were collected from the firms’
representatives using an online survey method. The respondents were
requested to complete a prepared questionnaire, an example of which can be
found in APPENDIX 1 and administered through an online survey website
called Survey Monkey.
The qualitative method used for the purposes of this study allows the
researcher to gain insight into the nature of the relationship between strategic
entrepreneurship and firm performance and to test the validity of the literature.
The sample was selected and administered on a convenience basis.
3.2 Research Design
The study “Strategic Entrepreneurship and SMEs Performance in South Africa”
attempts to prove the relationship between strategic entrepreneurship and SME
performance. This study is classified as an exploratory study. Exploratory
research is often utilised to yield information that may reveal problems which
are not yet clearly defined or for which the real scope is still unclear. The
researcher makes use of new data collected through an online survey in an
attempt to add to the existing knowledge on strategic entrepreneurship and firm
performance in South Africa.
51
3.3 Population and Sample
3.3.1 Population
The target population is small and medium enterprises in various provinces in
South Africa, across all sectors of the economy. The criteria that these targeted
companies had to meet for this study was that they had to fit into the definition
of an SME as per the National Small Business Act of South Africa of 1996, as
amended in 2003. This implies that they were selected based on number of
employees and annual sales income.
Selection based on sales posed challenges because some of the companies’
revenues could not be confirmed. Most of SMEs are not comfortable with
divulging their sales and profit figures, and as they are not public companies
they are not required to. The questionnaire was designed to identify the SMEs
classification and those that did not fall within the required classification were
removed from the sample before analysis.
3.4 The Research Instrument
A number of scales are used to assess the various constructs. Measures from
prior studies on strategic entrepreneurship and firm performance are used and
all scales used are supported by literature. The table below identifies the scales
used and provides evidence of the literature support for their reliability and
validity.
52
Table 3.1: Literature support for scales
Instrument Literature Support
Entrepreneurial orientation scale Kwandalla (1977); Miller (1983);
Covin & Slevin (1989)
Planning flexibility scale Barringer & Bluedorn (1999);
Entrialgo, Fernandez & Vazquez
(2000)
External environment scale Kwandalla (1977); Zahra (1991);
Naman & Slevin (1983); Wicklund &
Shepherd (2005)
Performance scale Gupta & Govindarajan (1984);
Naman & Slevin (1983); Covin,
Slevin & Schultz (1997); O’Regan &
Ghobadian (2004)
3.4.1 Sample
The sample was based on convenience and snowball methods (Leedy and
Ormond, 2001). Firms on the Anglo Zimele SMEs database and SME owners
known to the researcher as well as Entrepreneurship Magazine database were
approached. 206 firms were identified and questionnaires sent to the
representatives. A total of 133 representatives responded to the survey, and
these constituted the sample. The sample contains firms based in five provinces
in South Africa, namely The Free State, Gauteng, Mpumalanga, The North
West and Kwazulu Natal.
53
The questionnaire contained closed-ended questions, which allowed the
respondents to choose from specified answers. Closed-ended questions were
selected because the researcher wanted to be more specific in the information
gathered and require less time from the respondents to complete the
questionnaire. Likert-type Scale questions were included in the questionnaire.
3.4.2 Entrepreneurial Orientation Scale
The entrepreneurial orientation used in this study is based on the original work
of (Khandwalla, 1977), which was subsequently modified by (Covin and Slevin,
1989). In this study, the scale is a reduced seven-point Likert-type scale that is
used to measure the three dimensions of entrepreneurial orientation
(innovativeness, risk-taking and proactiveness). The combination of the levels
innovativeness, risk-taking and proactiveness has been concluded by research
to measure an organisation’s entrepreneurial orientation (Aloulou and Fayolle,
2005; Wiklund and Shepherd, 2005). This combination has shown high levels of
validity and reliability in numerous studies, as discussed previously.
The first three items of the nine-item entrepreneurial orientation scale will be
used to measure risk-taking, the fourth and fifth items will assess
innovativeness and the remaining four items will assess proactiveness. The
respondents are asked to indicate their responses to each question on a seven-
point Likert-type scale (1 = strongly agree, 7 = strongly disagree and 4 =
neutral). The ratings of these responses will be averaged to generate an
entrepreneurial index, with the result that the higher the index, the more
entrepreneurial the firm.
3.4.3 Planning Flexibility Scale
Planning flexibility refers to the extent to which the organisation has the ability to
change and respond quickly to changes in external and internal environmental
dynamics. Planning is measured using a nine-item scale that identifies the
54
degree of planning flexibility. The items used in this scale are taken from an
instrument developed by (Barringer and Bluedorn, 1999). For assessment,
respondents are asked to indicate on a seven-point Likert-type scale (1 = very
difficult and 7 = not at all difficult) the degree of difficulty they believe exists for
their firm to change its strategic plans in response to environmental change.
The ratings of these items will be averaged to assess the degree of planning
flexibility in the firm, with the result that the higher the score, the more flexible
the strategic planning process. The coefficient alpha for the planning flexibility
scale is 0.8 (Entrialgo, Fernandez and Vazquez, 2000).
3.4.4 External Environment Scale
External environment refers to the uncertainty and prevailing dynamics that
changes in the external environment have on the firm. The characteristics used
to describe the environment include turbulence, hostility and dynamism
(Wicklund and Shepherd, 2005). Higher levels of turbulence, hostility and
dynamism create greater levels of uncertainty and unpredictability in the
organisation. This study uses the turbulence scale of the environmental
uncertainty scale developed by (Naman and Slevin, 1993). The scale uses a
seven-point Likert-type scale (1 = strongly disagree and 7 = strongly agree).
The mean score, averaged across the items, assesses the degree of
uncertainty facing the firm. With the result that the higher the score, the higher
the degree of uncertainty.
3.4.5 Firm Performance Scale
The performance scale used in this report is motivated by the findings of Naman
and Slevin (1993) and assumes that SMEs owners and managers are often not
willing to disclose the performance of their firm. Seven-point Likert-scales are
used to assess the importance of, and satisfaction with, an organisation’s
performance. The research shows that managers’ perceptions of the
55
performance of their firm are highly consistent with how the firm actually
performs, as indicated by objective measures (Dess and Robinson, 1984).
The performance measure used in this study was originally developed (Gupta
and Govindarajan, 1984b). The first section of the performance scale asks the
respondents to indicate on a five-point Likert-type scale (1 = of little importance
and 5 = extremely important) the degree of importance to their firm of the stated
items. The factors assessed are sales growth rate, market share, operating
profit, profit to sales ratio, market development and new product development.
The second section of the performance scale uses the same factors as the first
but measures the satisfaction of respondents rather than degree of importance.
3.4.6 Demographics
The survey instrument includes a number of demographic questions, which are
included for descriptive and control purposes. These questions address the
following: age of a firm, gender of respondents, education level of respondents,
classification of industry, net sales and past description of firm performance.
The age of a firm will be determined by the number of years since the
establishment of that firm. According to Durand & Courderoy (2001), older firms
are more likely to compete in mature industries and might be slower in reacting
to change, which could result in a negative impact on their performance.
Younger firms pursue radical innovations more often than older firms (Rosen,
1991). It is further noted that a firm’s age influences its entrepreneurial
activities, and that older organisations are expected to be less entrepreneurial in
their operations and more conservative in their market orientation (Zahra,
1991). Based on literature that assesses the relationship between the age of a
firm and performance, a firm’s age will be used as a control variable in this
study.
The second control variable used in this study is the classification of the
industry in which the firms operate. The type of industry in which a firm
competes has been shown to exert an influence on the entrepreneurial process
56
(Kreiser, Marino and Weaver, 2002). According Wicklund & Shepherd (2005),
firms in different industries may demonstrate different environmental and
organisational characteristics which may, in turn, influence performance.
The third control variable used is this research is the size of the firm. According
to Zahra (1993), there is a significant relationship between the size of a firm and
innovation. Literature shows that smaller firms may exhibit different
organisational characteristics compared to their larger counterparts and that the
difference in size may influence performance (Robinson, 1982). Difference in
company size also influences entrepreneurial orientation and organisational
processes (Covin and Slevin, 1989; Zahra, 1991). Big firms are more
entrepreneurially orientated than small firms and this is attributable to
availability of funding.
3.6 Procedure for Data Collection
The data was gathered by means of an online survey tool; Survey Monkey. A
convenience sample of SMEs on Anglo Zimele’s database and entrepreneurs
known to the researcher as well as Entrepreneurship Magazine database were
selected. An electronic survey link was emailed to the owners, managers or
representatives of the selected firms with a cover letter, and the respondents
were requested to complete and return the questionnaire within a timeframe of
10 days. A reminder email was sent to all potential respondents who had not
replied by the 10
th
day, and all others who had not replied by the 15
th
day were
called and asked to respond. It was expected that it would not take respondents
longer than 12 minutes to complete the questionnaire.
3.7 Limitations of the Study
The most significant limitation in terms of this research was the inability to
generate a random sample. This was due to the difficulty faced in obtaining
information on SMEs across all provinces within South Africa. As a result, a
57
convenient snowball sampling was used to generate the sample. The results
from the use of such inferential statistics from a non-random sample are valid,
as long as it is understood and accepted that they cannot be extended to the
rest of the population.
The main research limitation of this study is that it does not cover all nine
provinces of South Africa. The Anglo Zimele and Entrepreneurship Magazine
databases used to obtain the list of SMEs do not have details of the small
businesses that operate in rural areas.
3.8 Validity and Reliability
The validity and reliability of a portion of research provide the basis upon which
a decision can be made on whether it can be considered knowledge (Rowley,
2002). This is vital, because if the requirements for the constructs are satisfied,
the research can be incorporated into the body of existing knowledge in a
specific field.
3.8.1 External Validity
External validity is the extent to which the findings of a study can be generalised
to other populations (Struwig and Stead, 2001). In this research, the sample
consists of company representatives, mostly entrepreneurs from various sectors
across South Africa. The sample size consists of 133 representatives from
various sectors. The sample is a partial representative of the population.
3.8.2 Internal Validity
Internal validity is the extent to which it can accurately be stated that the
independent variable produced an observed effect (Rowley, 2002). In this study,
the researcher ensures that the statements in the questionnaire have a logical
link to the issue under study in order to strengthen the validity of the responses
(Kumar, 1999).
58
3.9 Reliability
Reliability is the extent to which a study could be repeated and yield similar
results (Rowley, 2002). This can be achieved by ensuring that data is collected
in a consistent and transparent manner. In this study, Survey Monkey was used
to collect data in a consistent manner and saved in an electronic format as
evidence. Therefore, this study can be repeated with the expectation of similar
results.
CHAPTER 4: PRESENTATION OF RESULTS
4.1 Introduction
This chapter is concerned solely with presenting the results of the analysis.
Tables and figures are used for ease of reading and interpretation of results.
This chapter begins by presenting the demographic profile of the companies
used in the research. Thereafter, the analyses of independent variables are
presented using descriptive statistics measures such as means, medians,
reliability analysis and Cronbach’s coefficient.
Frequency measures were used for demographic variables and ordinal
variables in examining the firm’s performance. Performance was measured by a
Likert-type scale in order to analyse its relationship with entrepreneurial
orientation measures and planning flexibility. Performance was assessed using
the respondents’ views on importance of, and satisfaction with, performance.
The importance of performance to the firm was measured using a five-point
Likert-type scale, with 1 indicating ‘of little performance’ and 5 indicating ‘of
extreme importance’. In relation to performance satisfaction, a five- point Likert-
type scale was also used with 1 indicating ‘highly dissatisfied’ and 5 indicating
‘extremely satisfied.’
59
The last part of this chapter focuses on the testing of the hypothesis using the
following procedure:
The three variables of entrepreneurial orientation were entered into a regression
model simultaneously to determine significance of the combined entrepreneurial
orientation variables. Thereafter, a forward stepwise regression was carried out
on the individual entrepreneurial orientation variable to determine the
significance of each variable independently. The significance of planning
flexibility was also tested using regression analysis. Finally, the moderating
effects of the external environment on entrepreneurial orientation variables and
planning flexibility were tested. Scatterplots were used to test for moderation.
4.2 Demographic Profile of Respondents
Respondent demographics were measured by asking the respondents their
classification of the industry in which they work, how many years the company
had been in business, the number of employees in the company, annual net
sales, their position within the company, their gender and their formal education
level.
4.2.1 Gender
Out of the 133 respondents, Figure 4.1 below demonstrates the gender
distribution of the sample. Males constitute a larger percentage (57%) than
females (38%) and 5% of the respondents did not specify their gender.
60
Figure 4.1: The gender distribution of the respondents
4.2.2 Firm Age
Figure 4.2 shows the distribution of the number of years firms have been in
business. Most of the firms have been in business for two to five years (68%),
followed by firms who have been operating for six to 10 years. This finding
(majority of firms being two to five years old) may be linked to the support
measures that the SA government has put in place to support SMEs. It is also
expected that after 5 years most firms will either not qualify under SMEs
definition (More employees/income) or have failed. Only 2% of respondents
firms have been operation for more than 16 years, which correlates with the
literature reviewed previously, that states most SMEs have been in operation for
fewer than five years. Figure 4.2 also reflects that 3% of the respondents did not
state the number of years their firms have been in business.
57%
38%
5%
Gender distribution of respondents
Male
Female
Not Specified
61
Figure 4.2: Years in business of the respondents firms
4.2.3 Business Sector
23% of respondents indicated that their firms operate within the services sector.
12% of the respondents indicated that they operate in the distribution and
construction industries. The agricultural sector is the least represented in this
study at only 3%. Sixteen respondents (12%) indicated that they operate within
sectors not classified in this research, and only one respondent did not specify
the industry in which his or her firm operates. Table 4.1 below shows the
distribution of firms per sector.
7%
68%
17%
4%
2%
3%
Years in business of respondents
0 - 1'
2 - 5'
6 - 10'
11 - 15'
16 +
Not classified
62
Table 4.1: Business sectors within which respondents operate
Sector Count Percentage
Service 31 23%
Distribution 16 12%
Construction 16 12%
Retail 15 11%
Wholesale Trade 13 10%
Manufacturing 12 9%
Mining Trade 9 7%
Agriculture 4 3%
Other 16 12%
Missing 1 1%
4.2.4 Number of Employees
One of the classifications of SMEs is based upon the number of employees a
firm employs. Figure 4.3 demonstrates the distribution of number of employees
the firms surveyed employ. From the surveyed sample, 51% of the respondents’
companies employ one to 25 employees. 44% of the respondents’ companies
employ 26 to 50 employees. Only 5% of the respondents’ companies employ
51- 100 employees and 1% of the respondents did not reveal how many people
their companies employ.
63
Figure 4.3: Number of employees
4.2.5 Net Annual Income
The results of the study further demonstrate that 25% of the respondents’
organisations have net sales of less than R500,000.00 per annum. Nearly half
(44%) of the respondents’ companies have net sales of between R500,001.00
and R1,999,999.00 per annum. Few respondents’ companies show net sales of
more than R2,000,000.00 per annum with 17% of respondents stating their
companies achieved net sales of between R2,000,000.00 and R4,999,000.00.
3% of respondents’ organisations show a net sales of between R5,000,000.00
and R9,999,999.00 and 5% of the respondents stating net sales of more than
R10 million. 2% of the respondents did not indicate their companies’ annual net
sales.
4.2.6 Description of Industry and Firm
59% of the respondents indicated that the industries within which they operate
have remained stable over the preceding three years, while 33% of the
respondents demonstrated that their specific industries are growing and 6%
indicated that the industries in which they operate are declining. These results
are contrary to what the respondents answered when asked about firm growth
51%
44%
5% 1%
Number of employees
1-25
26 – 50
51 – 100
Not specified
64
over the last three years; out of the 133 responses received, 43% of the
respondents indicated that their firms are growing, 45% of the respondents
demonstrate that their firms are stable and 10% show that their firms have
declined over the preceding three years.
4.2.7 Educational Level of Respondents
Table 4.2 reflects the educational level of the respondents. 13 (10%) of the
respondents did not finish high school and 35 (26%) respondents have a Grade
12 qualification. 52 (39%) of the respondents have completed either college or
Technikon studies. 22 (17%) respondents indicated that they have obtained a
Bachelor’s degree, while eight respondents (6%) have achieved a Master’s
degree and only one respondent (1%) has a Doctorate degree.
Table 4.2: Education level
Education level Count Percentage
Less than High School 13 10%
High School 35 26%
College/Diploma 52 39%
Bachelor's Degree 22 17%
Master’s Degree 8 6%
Doctoral Degree 1 1%
Missing 2 1%
4.3 Data Analysis
4.3.1 Reliability Analysis
For a better understanding and interpretation of how each of the entrepreneurial
orientation constructs (innovativeness, risk-taking and proactiveness) influence
performance, the research treats these factors independently of each other.
65
Reliability analyses were conducted on the scales of all survey items used in
this research and Table 4.3 contains simple correlations of these scale means.
Based on previous research (Hair, Anderson, Tatham and Black, 1995), a
threshold value coefficient alpha score above 0.70 is considered acceptable to
confirm the reliability of experimental research.
The Cronbach coefficient alpha used showed satisfactory internal consistency
reliabilities for each of the constructs: Innovativeness - 0.89, Risk-taking - 0.79
and Proactiveness - 0.79. In the study by Gupta and Govindarajan (1984a), the
inter-item reliability is 0.88 for performance compared to 0.89 in this study. The
environmental uncertainty scale had a mean value of 48.60, standard deviation
of 13.53 and alpha reliability of 0.94. A study by Barringer and Bluedorn (1999)
reported an inter-item reliability of 0.80 for planning flexibility. In this study,
alpha reliability for planning flexibility is 0.94.
In assessing the correlation matrix, some variables are identified as being
correlated, but no evidence of multi-co-linearity exists. When reliability is
examined using Cronbach’s alpha, all variables exceed the 0.70 threshold
criteria. Based on prior research by Hair et al.(1995), this study is deemed to
be reliable.
Table 4.3: Cronbach’s Coefficient
Variables Cronbach alpha
Average inter-
item correlation
Innovativeness 0.89 0.59
Proactiveness 0.87 0.68
Risk taking 0.79 0.65
Planning flexibility 0.94 0.68
External Environmental
uncertainty 0.94 0.59
Performance 0.89 0.59
66
4.3 Results Pertaining to Hypothesis 1
H1: There is a positive relationship between the entrepreneurial orientation of a
firm and its performance.
The first hypothesis was tested by assessing the significance of the regression
of firm performance on the three dimensions of entrepreneurial orientation:
innovativeness, risk taking and proactiveness.
When all three predictors of entrepreneurial orientation are entered into a
regression model simultaneously, none of these predictors is significant,
although the overall model is significant (Adjusted R²= 0.132; F(3,118)=7.271;
p
In this information about strategic entrepreneurship and performance of small and medium enterprises in south africa.
1
Strategic Entrepreneurship and
Performance of Small and Medium
Enterprises in South Africa
Moshe Mohutsiwa
A research report submitted to the Faculty of Commerce, Law and
Management, University of the Witwatersrand, in partial fulfilment of the
requirements for the degree of Master of Management in Entrepreneurship
and New Venture Creation
Johannesburg
(February, 2012)
2
ABSTRACT
The aim of this paper is to investigate the link between strategic
entrepreneurship and company performance. For the purpose of this study,
strategic entrepreneurship is divided into two sections; entrepreneurial
orientation and planning flexibility. The entrepreneurial orientation factors used
are proactiveness, risk-taking and innovativeness.
A survey was conducted on 133 SMEs’ representatives on a purposive and
convenience basis. The results of the study indicate that, in the South African
context, SMEs need to be proactive, take risks and be innovative to influence
their own performance. The study further indicates that flexibility in planning is
vital for the improved performance of SMEs. The external environment
influences the relationship between entrepreneurial orientation, planning
flexibility and a firm’s performance. These results correlate with the existing
literature on the entrepreneurial orientation, flexibility in planning and
performance of SMEs.
The findings of this survey and this research paper should serve to benefit
entrepreneurs and SME owners and managers and encourage them to develop
entrepreneurial orientation and planning flexibility programmes.
3
DECLARATION
I, Moshe Mohutsiwa, declare that this research report is my own work except as
indicated in the references and acknowledgements. It is submitted in partial
fulfilment of the requirements for the degree of Master of Management in
Entrepreneurship and New Venture Creation in the University of the
Witwatersrand, Johannesburg. It has not been submitted before for any degree
or examination in this or any other university.
…………………………………………
Moshe Mohutsiwa
Signed at ……………………………………………………
On the …………………………….. day of ………………………… 2012
4
DEDICATION
This dissertation is dedicated to my father, Maseng Mohutsiwa, the first
entrepreneur I got to know. Papa ke a leboga.
5
ACKNOWLEDGEMENTS
I wish to extend my grateful thanks to all those who assisted me in the
preparation of this research report.
In particular, I would like to thank my supervisor, Dr Jose Barreira, for his
guidance and supervision.
I would also like to thank Merle Werbeloff for her advice and assistance, and, in
particular, for her valuable guidance in the analysis of the statistical results
contained in this report.
I would also like to express my gratitude to Anglo Zimele for giving me access
to its database of entrepreneurs.
To my wife Samu who has supported me through my Masters studies, thank
you .
And lastly, I would like to thank my brother, sister, nieces and nephews for their
support and prayers.
6
TABLE OF CONTENTS
ABSTRACT ..................................................................................... 2
DECLARATION ............................................................................... 3
DEDICATION .................................................................................. 4
ACKNOWLEDGEMENTS ................................................................ 5
LIST OF TABLES ............................................................................ 9
LIST OF FIGURES .......................................................................... 9
LIST OF APPENDICES ................................................................. 10
CHAPTER 1: INTRODUCTION ................................................... 11
1.1 PURPOSE OF THE STUDY ........................................................................... 11
1.2 CONTEXT OF THE STUDY ........................................................................... 11
1.3 PROBLEM STATEMENT............................................................................... 12
1.4 PURPOSE STATEMENT/OBJECTIVE ............................................................. 13
1.5 HYPOTHESES ........................................................................................... 13
1.4 SIGNIFICANCE OF THE STUDY ..................................................................... 14
1.5 DELIMITATIONS OF THE STUDY ................................................................... 14
1.6 DEFINITION OF TERMS ............................................................................... 15
1.7 ASSUMPTIONS .......................................................................................... 17
CHAPTER 2: LITERATURE REVIEW ........................................... 18
2.1 INTRODUCTION ......................................................................................... 18
2.2 ENTREPRENEURSHIP ................................................................................. 18
2.2.1 ENTREPRENEURSHIP AND ECONOMIC GROWTH ..................................................... 21
2.3 ENTREPRENEURIAL ORIENTATION .............................................................. 26
2.3.1 INNOVATIVENESS.................................................................................................. 27
2.3.2 MEASURES OF INNOVATION .................................................................................. 31
2.3.3 PROACTIVENESS .................................................................................................. 32
2.3.4 MEASURES OF PROACTIVENESS............................................................................ 33
2.3.5 RISK-TAKING ........................................................................................................ 34
2.3.6 MEASURES OF RISK TAKING ................................................................................. 36
7
2.4 STRATEGIC MANAGEMENT ......................................................................... 36
2.5 STRATEGIC PLANNING PROCESS ................................................................ 38
2.6 STRATEGIC ENTREPRENEURSHIP ............................................................... 41
2.7 EXTERNAL ENVIRONMENT .......................................................................... 43
2.8 FIRM PERFORMANCE ................................................................................. 45
2.8.1 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE .................................. 46
2.8.2 INNOVATIVENESS AND FIRM PERFORMANCE .......................................................... 47
2.8.3 PROACTIVENESS AND FIRM PERFORMANCE ........................................................... 48
2.8.4 RISK-TAKING AND FIRM PERFORMANCE .................................................................... 48
CHAPTER 3: RESEARCH METHODOLOGY ............................... 49
3.1 RESEARCH METHODOLOGY ....................................................................... 50
3.2 RESEARCH DESIGN ................................................................................... 50
3.3 POPULATION AND SAMPLE ........................................................................ 51
3.3.1 POPULATION ....................................................................................................... 51
3.4 THE RESEARCH INSTRUMENT ..................................................................... 51
3.4.1 SAMPLE ............................................................................................................... 52
3.4.2 ENTREPRENEURIAL ORIENTATION SCALE .............................................................. 53
3.4.3 PLANNING FLEXIBILITY SCALE ............................................................................... 53
3.4.4 EXTERNAL ENVIRONMENT SCALE .......................................................................... 54
3.4.5 FIRM PERFORMANCE SCALE ................................................................................. 54
3.4.6 DEMOGRAPHICS ................................................................................................... 55
3.6 PROCEDURE FOR DATA COLLECTION .......................................................... 56
3.7 LIMITATIONS OF THE STUDY ....................................................................... 56
3.8 VALIDITY AND RELIABILITY ......................................................................... 57
3.8.1 EXTERNAL VALIDITY ............................................................................................. 57
3.8.2 INTERNAL VALIDITY .............................................................................................. 57
3.9 RELIABILITY .............................................................................................. 58
CHAPTER 4: PRESENTATION OF RESULTS ........................... 58
4.1 INTRODUCTION ......................................................................................... 58
4.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................ 59
4.2.1 GENDER .................................................................................................................. 59
4.2.2 FIRM AGE ................................................................................................................ 60
4.2.3 BUSINESS SECTOR .................................................................................................. 61
4.2.4 NUMBER OF EMPLOYEES .......................................................................................... 62
4.2.5 NET ANNUAL INCOME ............................................................................................... 63
4.2.6 DESCRIPTION OF INDUSTRY AND FIRM ...................................................................... 63
4.2.7 EDUCATIONAL LEVEL OF RESPONDENTS ................................................................... 64
4.3.1 RELIABILITY ANALYSIS ............................................................................................. 64
4.3 RESULTS PERTAINING TO HYPOTHESIS 1 .................................................... 66
4.3 RESULTS PERTAINING TO HYPOTHESIS 2 .................................................... 67
4.4 RESULTS PERTAINING TO HYPOTHESIS 3A .................................................. 68
8
4.5 SUMMARY OF RESULTS .................................................................................. 71
CHAPTER 5: DISCUSSION OF THE RESULTS ........................... 71
5.1 INTRODUCTION ......................................................................................... 71
5.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................ 71
5.3 DISCUSSION PERTAINING TO HYPOTHESIS 1 ............................................... 73
5.4 DISCUSSIONS PERTAINING TO HYPOTHESIS 2 .............................................. 74
5.5 DISCUSSION PERTAINING TO HYPOTHESIS 3A .............................................. 75
5.5 DISCUSSION PERTAINING TO HYPOTHESIS 3B .............................................. 76
5.6 CONCLUSION ............................................................................................ 77
CHAPTER 6: CONCLUSIONS AND ECOMMENDATIONS .......... 78
6.1 INTRODUCTION ......................................................................................... 78
6.2 CONCLUSIONS OF THE STUDY .................................................................... 78
6.3 RECOMMENDATIONS ................................................................................. 79
6.4 SUGGESTIONS FOR FURTHER RESEARCH ................................................... 80
REFERENCES .............................................................................. 81
9
LIST OF TABLES
Table 1.1: Schedule of size standards for the definitions of SMEs in South
Africa
Table 3.1: Literature support for scales
Table 4.1: Business sectors within which respondents operate
Table 4.2: Education level
Table 4.3: Correlation matrix
Table 4.4: Regression summary for the dependent variable: performance
Table 4.5: Regression summary for the dependent variable: performance
Table 4.6: Regression summary for the dependent variable: performance
Table 4.7: Regression summary for the dependent variable: performance
Table 4.8: Regression summary for the dependent variable: performance
LIST OF FIGURES
Figure 2.1: The Wennekers and Thurik Model
Figure 2.2: The GEM Conceptual Model
Figure 4.1: The gender distribution of the respondents
Figure 4.2: Years in business of the respondents
Figure 4.3: Number of employees
10
Figure 4.4: Scatterplot of Performance against Proactiveness
Figure 4.5: Scatterplot of performance and planning flexibility
LIST OF APPENDICES
Appendix A: Questionnaire
Appendix B: Cover letter
11
CHAPTER 1: INTRODUCTION
1.1 Purpose of the study
The purpose of this dissertation is to add to the research literature in the area of
strategic entrepreneurship and SME performance in South Africa. This will be
achieved by an assessment of the level of entrepreneurial orientation and
strategic planning within SMEs and linking these factors to the firms’
performance. Strategic entrepreneurship is the combination of opportunity-
seeking actions and advantage-seeking actions to design and implement
entrepreneurial strategies that create wealth.
Strategic planning is defined as “a tool for organising the present on the basis of
the projection of the desired future” (O'Regan and Ghobadian, 2002). Shane
and Venkataraman (2000) describe strategic planning as “an approach by
management to devise strategy on the basis of complete analysis of the of the
firm’s environment.”
1.2 Context of the Study
This aim of this study, Strategic Entrepreneurship and Performance of SMEs in
South Africa, is to assess the use of strategic entrepreneurship within South
African SMEs and the link between these factors and a firm’s performance. This
study was inspired by the findings of Olawale and Garwe (2010); namely that
the failure rate of South African SMEs is one of the highest in the world, and
currently stands at 75%. Improving the performance of South African SMEs will
contribute positively to their success, which will, as a result, contribute to
national job creation objectives in the country. The South African Government
has put in place several measures, such as tax relief for SMEs, incubation
programmes and Khula Enterprise Finance to encourage and support SME
activity, sustainability and success in the country.
12
However, despite the support programmes implemented by the Government,
SMEs are not achieving the Government’s desired performance and growth rate
of 5% per annum (Olawale and Garwe, 2010). Failure of SMEs to reach the
desired performance levels has motivated this study to examine other areas of
SME management and operation that could, potentially, stimulate higher
performance. Although many studies have been conducted on the SME sector
in South Africa, this is the first study that attempts to show the correlation
between strategic entrepreneurship and performance in this sector.
According to Robinson (1982), small business owners and managers in South
Africa do not engage in systematic planning. Studies conducted (Trombetta,
1976; Shane and Venkataraman, 2000) show that a thorough planning effort
and adoption of the strategic plans result in increased sales. The business gap
identified in the South African SME sector is the empirical study that links
strategic planning, entrepreneurial orientation and performance. The results of
the studies, and the recommendations resulting from them, can be used to
encourage small business owners and managers to engage in strategic
planning and entrepreneurial activities, and advice on the best methods to do
so.
1.3 Problem Statement
The creation and sustainability of SMEs are critical to the economic prosperity
of South Africa. However, the reality is that SMEs have an extremely high
failure rate in South Africa. Indeed, the probability rate of a new SME surviving
beyond 42 months in South Africa is the lowest of any GEM-sampled country. In
the current competitive business environment, to succeed, firms are required, or
even forced, through their products and services, to remain competitive both
locally and globally, regardless of their size and resources.
The competitive global business environment forces firms to assess their own
internal framework. They are required to identify opportunities to develop
13
capabilities and competencies that allow them to be innovative, proactive and
willing to take risks to improve performance and gain, or maintain a competitive
advantage. SMEs need to improve performance by identifying and
implementing strategic planning and management processes, innovation
programmes and entrepreneurial orientation. In addition, they must continuously
assess the external business environment within which they operate, to be in a
position to react to changes in the environment rapidly and effectively to
maintain a competitive edge.
Planning is a vital aspect of strategic entrepreneurship because it offers firms
flexibility in strategy implementation. With strategic entrepreneurship, firms are
able table their development and growth options, look deeply into to their
opportunities and strategically plan to fully exploit the opportunities presented. It
is problematic that SMEs utilise more of operational planning rather than
strategic planning. This element needs to be considered when assessing the
correlation between strategic entrepreneurship and the performance of SMEs.
Currently, there is a knowledge gap in understanding the link between strategic
entrepreneurship and firm performance in South Africa that this report serves to
address.
1.4 Purpose Statement/Objective
The proposed research will contribute, on both a theoretical and empirical level,
to the enhanced understanding of the correlation between the implementation of
strategic entrepreneurship and SME performance.
1.5 Hypotheses
The following hypotheses are tested in this research:
H1: There is a positive relationship between the entrepreneurial orientation of a
firm and its performance.
14
H2: There is a positive relationship between the planning flexibility of a firm and
its performance.
H3a: The external environment will moderate the relationship between
entrepreneurial orientation and performance with the effect that the relationship
is more positive when the environment is dynamic than when it is static (Ensley,
Pearce and Hmieleski, 2006).
H3b: The external environment will moderate the relationship between planning
flexibility and performance with the effect that the relationship is more positive
when the environment is dynamic than when it is static (Ensley, Pearce and
Hmieleski, 2006).
1.4 Significance of the Study
This study attempts to provide clarity on the relationship between the
implementation of strategic entrepreneurship and company performance. The
study also aims to highlight aspects of strategic planning and entrepreneurship
that can assist SMEs in improving performance, creating wealth and achieving
a sustainable competitive advantage.
In a country like South Africa, in which the Government is under significant
pressure to create jobs, the formation of new SMEs and the improvement of
existing SMEs will contribute to alleviating this pressure.
1.5 Delimitations of the Study
This study had several delimitations. It was delimited to strategic
entrepreneurship and the performance of SMEs in South Africa, as opposed to
SMEs across all over Africa. Strategic entrepreneurship is delimited to strategic
management, strategic planning and entrepreneurial orientation. Strategic
management influences the development and the performance of a firm (Rouse
and Daellenbach, 1999). Strategic management levels within firms is not
15
empirically measured in this research, however, principles of strategic
management are used in the discussion of strategic entrepreneurship.
Strategic planning is delimited to planning flexibility and the influence of the
external environment. Planning flexibility is measured by indicators such as:
technology, economic conditions, new competition, government regulations,
customer needs, supplier strategies and political factors. The examination of the
external environment in the context of this study focuses on the issues specific
to small business performance, rather than broader business performance
issues that mostly affect larger, more well-established businesses. In addition,
entrepreneurial orientation is delimited to innovativeness, risk-taking and
proactiveness and excludes competitive aggressiveness and autonomy
Performance was delimited to the importance of, and satisfaction levels in, the
following areas:
1) Sales growth rate
2) Market share
3) Operating profit
4) Market development
5) New product development
1.6 Definition of Terms
For this study, the definitions for the key terms and concepts used are as
follows:
Small and Medium Enterprise (SME) – The National Small Business Act of
South Africa of 1996, as amended in 2003, defines a SME as: “a separate and
distinct entity including cooperative enterprises and non-government
organisations managed by one owner or more, including its branches or
16
subsidiaries if any is predominantly carried out in any sector or sub-sector of the
economy mentioned in the schedule of size standards and can be classified as
a SME by satisfying the criteria mentioned in the schedule of size standards”
(Government Gazette of the Republic of South African, 2003).
The quantitative definition of SMEs in South Africa is shown in Table 1 below.
Table 1.1: Schedule of size standards for the definitions of SMEs in South
Africa
Type of firm Number of Employees Turnover Balance
Sheet
Small 1- 49 Maximum R13m Maximum
R5m
Medium 51 – 200 Maximum R51m Maximum
R19m
Source: Government Gazette of the Republic of South Africa (2003)
Entrepreneurship – Entrepreneurship is a dynamic process of innovation,
opportunity recognition and creation of a new venture to create wealth, and
includes the assumption of the risks and rewards of new venture (Hisrich and
Peters, 1998; Shane and Venkataraman, 2000). The discovery and exploitation
of opportunities also fall within the definition of entrepreneurship.
Entrepreneurial Orientation – Entrepreneurial orientation has been defined as
the processes and decision-making activities that lead to a new market entry
and the support of business activities (Kropp, Lindsay and Shoham, 2006).
Entrepreneurial orientation also refers to the strategy making practices that
businesses implement to identify and launch new ventures.
17
Strategic Management – Strategic management is the set of analyses,
decisions and actions an organisation undertakes in order to create and sustain
its competitive advantage. The prominent topics in strategic management are
long-range planning and strategy to determine the long-term performance of a
company (Rouse and Daellenbach, 1999).
Strategic Planning Process – Strategic planning processes are the activities a
company utilises to develop and decide its mission and goals, explore the
competitive environment and analyse any strategic alternatives it may be
required to implement (Anderson, 2004).
Strategic Entrepreneurship – Strategic entrepreneurship refers to the
connection between entrepreneurship and strategic management literature
(Kuratko and Audretsch, 2009). It can also be described as the integration of
entrepreneurial (opportunity-seeking actions) with strategic (advantage-seeking
actions) perspectives to design and implement entrepreneurial strategies that
create wealth (Hitt, Duane, Camp and Sexton, 2001).
Firm’s Performance – Performance is defined as a measure of how well or
poorly the firm is doing (Phandya and Rao, 1998). Financial measures such as
return on investment, return on equity, return on capital, etc. and non-financial
measures such as employee retention, market share, etc. are used holistically
and collaboratively to measure a company’s performance.
1.7 Assumptions
The following assumptions have been made with regards to this study:
• The respondents will be able to understand and adequately respond to
the questions asked in the questionnaire.
• The respondents will have had exposure to entrepreneurship as defined
in this study, in some form; whether by association, exposure or training.
18
CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
This chapter reviews the theoretical background, constructs and concepts of
entrepreneurship, entrepreneurial orientation, strategic management, strategic-
planning processes and strategic entrepreneurship. The background and
characteristics of entrepreneurship are presented, the primary concepts of
entrepreneurial orientation, specifically innovation, risk-taking and
proactiveness, are discussed, a review of strategic management and strategic
entrepreneurship is presented; as well as a breakdown of strategic
entrepreneurship concepts.
The chapter continues with a review of company performance and the
complexity involved in applying performance measures within SMEs.
The chapter concludes with a statement of the problem and the hypothesis
tested.
2.2 Entrepreneurship
The use of the term entrepreneurship dates back to the work of Richard
Cantillon in 1734, but the concept of entrepreneurship has only become an area
of intellectual and academic study since the late 19
th
Century (Katz, 2003), and
the bulk of entrepreneurship research has only been undertaken since the last
quarter of 20
th
Century. Central to these discussions have been a number of
theoretical views on the definition of entrepreneurship (Hisrich and Peters,
1998). However, to date, consensus has not been reached on the definition of
entrepreneurship and the elements that characterise it (Shane and
Venkataraman, 2000; Hitt et al., 2001).
According to Shane (2003), the lack of a consistent conceptual framework for
entrepreneurship is as a result of researchers considering only one part of the
19
entrepreneurial process rather than all relevant aspects collectively. Other
authors and academics have cited the lack of both definitive development and a
specific theory of entrepreneurship as the true causes for absence of
agreement on the definition of entrepreneurship (Phan, 2004; Kuratko, Ireland,
Covin and Hornsby, 2005). This disagreement can be further attributed to other
elements, including the way various researchers view the role or action of an
entrepreneur (Vesper, 1980). Thus the question remains as to what defines and
characterises entrepreneurship.
Past definitions of entrepreneurship have varied in both content and focus, often
placing emphasis on individual characteristics, organisational attributes or the
practices of either the individual or organisation in business strategy and
process. Furthermore, some scholars argue that the definitions of
entrepreneurship can be classified into three groups: definitions based on traits
or qualities, roles or functions of the entrepreneur in the economic process, and
behaviours and activities of entrepreneurs (Kaufmann and Dant, 1998).
Some scholars have classified the definition of entrepreneurship into, two
mainstream research approaches as follows the individual approach and the
organisational approach. In the individual approach, psychological traits,
sociological characteristics and contextual factors of individuals are examined
and classified as important for entrepreneurship (Shane and Venkataraman,
2000). In the organisational approach, entrepreneurial activities of
organisations, regardless of their type, size, age and the environment in which
they operate, are examined. On the theoretical side, elements that are dominant
in the definition of entrepreneurship are risk-taking (Cantillon, 1734),
representation or meaning of profit (Vesper, 1980), innovation (Schumpeter,
1934), inherent personal attributes (McClelland, 1962) and the importance of
the environment and the opportunities it presents (Acs and Audretsch, 2003).
Earlier studies in entrepreneurship research highlighted new venture creation as
the primary criteria for something to be considered entrepreneurial
(Schumpeter, 1934; McClelland, 1961). Even in recent literature, many
20
entrepreneurship scholars acknowledge new entry as the “fundamental act of
entrepreneurship” (Lumpkin and Dess, 1996:139). Lumpkin and Dess
(1996:136) indicate that new entry refers to “entering new or established
markets with existing goods or services, by starting a business or through an
existing business.” Thus, this definition inherently includes the existence of
entrepreneurship in large, established firms, referred to as corporate
entrepreneurship or intrapreneurship (Verheul, Uhlaner and Thurik, 2005).
Another foundation for the development of a definition of entrepreneurship has
been opportunity recognition (Venkataraman, 1997; Shane and Venkataraman,
2000). Drucker (1964) originally popularised the idea that entrepreneurs
maximise opportunities and several recent studies have included the role of
opportunity recognition as a key element in the definition of entrepreneurship.
This concept is illustrated by the work of Hitt et al.(2001:481), which refers to
entrepreneurship as “the identification and exploitation of previously unexploited
opportunities”. In a similar manner, George and Zahra (2002:590) refer to
entrepreneurship as “the act and process by which societies, regions,
organisations, or individuals identify and pursue business opportunities to
create wealth”.
When defining entrepreneurship, it is critical that a distinction is made between
the process of entrepreneurship and the content, or event, of entrepreneurship
(Lumpkin and Dess, 1996). Following this distinction, the definition of
entrepreneurship adopted for this study is that “entrepreneurship is a dynamic
process of innovation, opportunity recognition and creation of a new venture to
create wealth, and includes the assumption of the risks and rewards of new
venture” (Hisrich and Peters, 1998; Shane and Venkataraman, 2000). This
definition encompasses both individual and organisational approaches that are
clarified in most of the definitions of entrepreneurship examined above.
21
2.2.1 Entrepreneurship and Economic Growth
Entrepreneurship is a crucial factor in the economic development of any
country, and is even more significant in a developing country such as South
Africa (Haasje, 2006). Small enterprises play a valuable role in employment
creation, stability, competitiveness, developing skills and ensuring economic
growth. In South Africa, the Government, in an attempt to provide favourable
business environment, has put in place strategies and policies, and provided a
large amount of resources and financial support to encourage the development
small medium and micro-enterprises (SMME) (Ahwireng-Obeng, 2005).
The hypothesis that entrepreneurship is linked to economic growth finds its
most basic foundation in simple intuition, common sense and economic
observation: activities to convert ideas into economic opportunities and, by
extension, growth lie at the very core of what entrepreneurship is.
Entrepreneurship was a central area of interest and research for a number of
leading economic theorists in the early 20
th
Century, then the level of interest
diminished for a period of time until it increased again in the 1970s (Karlsson,
Friis and Paulsson, 2004). The positive connection between entrepreneurship
and economic growth is based on the entrepreneur identifying and profiting from
a situation of disequilibrium by improving the inefficiencies or deficiencies in a
specific economic market (Kirzner, 1973). In extension to Kirzner’s model,
Holcombe (1998) argues that these opportunities must come from somewhere;
namely the insights of other entrepreneurs. Thus, entrepreneurship generates
more entrepreneurship and further economic growth.
According to Schumpeter (1942), “an entrepreneur is a person who carries out
new combinations”. New combinations comprise better ways to increase
existing demand or develop new products, and in a process referred to as
“creative destruction” the new combinations often render the current
technologies and products obsolete. Finding new combinations of factors of
production is a process of entrepreneurial discovery that will become the engine
that drives economic development. The process of “creative destruction” is built
22
on dynamic, deliberate entrepreneurial efforts to change market structures and
can be an invaluable element for additional innovation and profit opportunities.
The concept of creative destruction is the basis for Schumpeter’s theory of long
waves of business cycles and economic growth. Business cycles are seen as
the result of innovation, which consists of the generation of a new idea and its
implementation in the form of a new product or process of service, which in turn
leads to the dynamic growth of the national economy, an increase in
employment and creation of pure profit for the innovative enterprise
(Schumpeter, 1911; Schumpeter, 1942; Dejardin, 2000; Thurik and Wennekers,
2001).
There are two models that have succeeded in linking entrepreneurship to
economic growth (Anon, 2004). These models are proposed by (Wennekers
and Thurik, 1999) and the GEM research programme. Wennekers’ and Thurik’s
model distinguishes between three levels of analysis: individual level, the firm
level and the macro level. According to the authors, entrepreneurial activity
originates at the individual level and can always be traced to a person, the
entrepreneur. The individual entrepreneur operates within a given space, the
firm level, which has a specific culture, institutional factors and business
environment that will have either a positive or negative effect on entrepreneurial
activity. Figure 2.1shows the Wennekers and Thurik Model.
23
Source: Carree and Thurik (2002): 20
Figure 2.1: The Wennekers and Thurik Model
The model indicates that innovations and start-ups are vehicles for transforming
personal entrepreneurial qualities and ambitions into actions. The innovations
and start-ups foster an environment of competition that translates into actual
changes in the market. As the market changes, new opportunities are created
and the macro level of the economy is influenced. The Wennekers and Thurik
model indicates that entrepreneurial activity expands and transforms the
productive potential of the economy by inducing higher productivity, an
expansion of existing industries and the creation of new niches.
The GEM conceptual model approaches the concept from a different angle
compared to the Wennekers and Thurik model. It analyses the success of large
firms in advancing market opportunities for SMEs and the role of
entrepreneurship in the enterprise creation/growth process. It suggests
entrepreneurship is one of the main instruments driving macroeconomic growth
along with the entrepreneurial complementary nature.
Level of
analysis
Conditions for
entrepreneurship
Crucial elements of
entrepreneurship
Impact of
entrepreneurship
Individual
level
Firm
level
Macro
level
Psychological
endowment
Culture
Institutions
Business
Culture
Culture
Institutions
Attitudes
Skills
ACTIONS
Start-ups
Entry into new markets
Innovations
Variety
Competition
Selection
Firm Performance
Self-realization
Personal wealth
Competitiveness
Economic growth
24
Source: Geneva 2004
Figure 2.2: The GEM Conceptual Model
The uppermost portion of figure 2.2 above shows the role of large established
firms. Depending on whether or not the national framework conditions allow for
it, large firms are generally integrated in the international financial markets,
areas of technology and play a role in research and development (R&D). Large
firms are able to stimulate the SME sector through technological spill-overs,
spin-offs and increased domestic demand for goods and services that the SME
sector can supply. The created opportunities require a competitive and stable
SME sector for them to be successfully exploited and be profitable. The bottom
portion of figure 2.2 shows the second mechanism driving economic growth, the
role of entrepreneurship in the creation and growth of firms. The entrepreneurial
process occurs in the context of a set of framework conditions as illustrated in
the diagram above. The creation of enterprises is dependent on the
entrepreneurial opportunities and entrepreneurial capacity. As much as large
Social, cultural
and political
context
General national frame-
work conditions
Openness(external trade)
Government (extent, role)
Financial Markets
(ef f iciency)
Technology and R&D (level
intensity)
Inf rastructure(physical)
Management (Skills)
Labour markets (f lexibility)
Institutions (unbiased, rule
of law
Entrepreneurial frame-
work conditions
Financial
Government policies
Government programmes
Education and training
R&D transf er
Commercial and legal
inf rastructure
Internal market openness
access to physical
inf rastructure
Culture and social norms
Major established
firms
Micro, small and
mediums firms
Entrepreneurial
opportunities
National
economic
growth (GDP,
jobs)
Creation and
closure of
enterprises
Entrepreneurial
capacity
Skills
Motivation
25
firms can assist in the creation and stimulation of smaller enterprises, SMEs are
also capable of improving the profitability of large firms by supplying
competitively priced and reliable products and services to the large firm to
improve its bottom-line.
The link between entrepreneurship and economic growth has been established
though entrepreneurial activities namely, competition, innovation and job
creation through business start-ups. According to Geroski (1994), competition
plays a significant role in stimulating productivity, with both new firms and new
ideas provoking movements towards, and movements of, the production
frontier, which would not have occurred in its absence. An econometric study of
the United States (US) telephone industry by Gort and Sung (1999) shows that
increased competition has lead to greater efficiency within the industry.
Competition can influence efficiency in four ways: greater incentive to stimulate
demand, higher quality of capital inputs, lower monitoring costs and greater
efficiency of firm-specific organisational capital (Gort and Sung, 1999).
In terms of business start-ups and economic growth, a study by (Baldwin and
Picot, 1995) shows that small firms have a higher gross volatility in job growth
creation the study also show a higher net employment growth than that of large
firms. The Global Entrepreneurship Monitor (GEM) 2000 concludes that there is
a strong relationship between entrepreneurial activities, defined as start-up
activities, and economic growth. The GEM report 2000, claims the definition of
entrepreneurship constitutes the singularly most important factors for economic
growth. The relative importance of small firms is not undisputed as Davis,
Haltiwanger and Schuh (1996) and Bednarzik (2000) remark in their studies, but
Davis et al., (1996) argue that, although smaller firms have a higher gross job
creation rate, large firms simply supply more in terms of net job creation.
The findings of the study by Davis et al (1996) are contrary to the findings of
Baldwin and Picot (1995). The former’s conclusion is drawn from a study of data
from the U.S Census Bureau between the years of 1972 and 1998, whereas
Baldwin and Picot (1995) studied the Canadian manufacturing sector from 1970
26
to 1976. This difference indicates that, while an international comparison of the
relative importance of small firms with respect net job creation is critical, the
results are likely to differ between countries due to institutional reasons and the
time the study was conducted (different economical times). The above research
shows that the results of this study cannot be extrapolated to other countries
without prior research.
2.3 Entrepreneurial Orientation
The contemporary research on entrepreneurship began with the work of Joseph
Schumpeter (1883–1950), who emphasised the importance of new entry for
business innovation in one of his earliest works: The Theory of Economic
Development Schumpeter (1936), which refers to the process as creative
destruction. Schumpeter focused on innovation and the individual entrepreneur
and maintained that wealth was created when factors were changed, whether
by introduction of new products, new services or within an organisation, such as
the creation of a new section within an established firm. According to Dess &
Lumpkin (2005), the entrepreneurial orientation concept draws upon prior
research that views strategy development in terms of patterns of action or
decision-making styles that can be generalised across organisations.
Entrepreneurial orientation refers to a firm’s strategic orientation and capturing
of specific aspects of decision-making styles, methods and practices. As such, it
reflects how a firm operates rather than what it does (Lumpkin and Dess, 1996).
The importance of entrepreneurial orientation to the survival and performance of
a company has been acknowledged in a variety of entrepreneurship literature
(Miller, 1983; Zahra and Covin, 1995; Lumpkin and Dess, 2001) and many fast-
growing corporations attribute much of their success to an entrepreneurial
orientation (Dess and Lumpkin, 2005). Five dimensions: autonomy,
innovativeness, proactiveness, risk-taking and competitive aggressiveness,
have been useful in characterising and distinguishing key entrepreneurial
processes, that is, a firm’s entrepreneurial orientation. However, in this study we
27
limit the focus to only the innovativeness, proactiveness and risk-taking
constructs of entrepreneurial orientation.
Entrepreneurial orientation generally involves a willingness to innovate, engage
in risky exercises, take self-directed actions and be more proactive and
aggressive in exploiting new opportunities in the marketplace (Lumpkin and
Dess, 1996). Innovativeness refers to the propensity of a firm to implement new
ideas and creative processes that may result in the development of a new
product, service or technological process (Wicklund, 1999). The proactiveness
element of entrepreneurial orientation reflects the extent to which a firm can be
defined as a leader or a follower, and it is associated with aggressive posturing
in relation to competitors (Teece, Pisano and Shuen, 1997). Risk-taking refers
to the extent to which a firm is willing to invest resources in significant, and
potentially risky, investments (Freel, 2005).
According to Wicklund & Shepherd (2003), firms with entrepreneurial orientation
possess the ability to discover and exploit new market opportunities. Further
research has also shown that companies with entrepreneurial orientation can
respond to challenges effectively and prosper in a competitive and dynamic
environment (Shane and Venkataraman, 2000).
This research evaluates the three elements of entrepreneurial orientation further
below.
2.3.1 Innovativeness
Increased and ongoing product innovation is of major importance in today’s
highly competitive environment. The entrepreneurial orientation subdivision of
innovativeness examines a company’s ability to engage in, and support, new
ideas, novelties, experimentation and creative processes that may result in new
products, services or technological processes (Lumpkin and Dess, 1996).
Innovativeness has been widely considered to be a component of the
entrepreneurial process since Schumpeter recognised it as the fundamental
28
undertaking of the entrepreneurial organisation. Many scholars agree with
Schumpeter’s statement that innovation is a driving force behind the creation of
new ventures and new products (Lindelof and Lofsten, 2006; Kroeger, 2007).
However, managing innovativeness within a firm can be challenging.
Challenges may arise from funding of R&D departments that drive innovation to
acquiring competent human resources for the departments.
Entrepreneurial innovation can be defined as the willingness to support
creativity and experimentation in the introduction of new products or services
and the use of technological leadership and research and development (R&D)
in developing processes (Lumpkin and Dess, 2001). Inventions and new ideas
need to be nurtured even when their benefits are not immediately clear,
because should the new concept prove successful, it will result in profits and
project the company to greater heights of performance. Innovativeness requires
that firms move away from existing technologies and practices and undertake
new ideas and ways of doing things (Lumpkin and Dess, 1996). Innovation
comes in many different forms; the prominent three are as follows:
• Technological innovation: this consists of research and engineering
endeavours aimed at creating new products and services;
• Product market innovativeness: this is comprised of market research,
product design and innovations in advertising and promotion; and
• Administrative innovativeness: this refers to novelty in management
systems, control techniques and organisational structure.
These innovative processes offer the advantage of low costs, rapid production,
faster distribution, better quality and improved customer service (Lumpkin and
Dess, 1996). According to Dess, Lumpkin & Covin (1997), product-market
innovativeness includes an emphasis on product design, market research,
advertisement and promotion. Dess et al. (1997) states that technological
innovativeness focuses primarily on product and process development,
engineering, R&D, technical expertise and industry knowledge. A study by
Roberts (1999) clearly demonstrates that innovative propensity influences the
29
extent to which abnormal profit outcomes persist over time, that is, more
innovation = greater profit.
Innovation is dependent on a variety of factors, such as innovative behaviour,
work environment, learning orientation and organisational learning procedure
(Hult and Ferrell, 1997; Zahra and Ireland, 2000; Kleysen and Street, 2001).
The particular capabilities of organisations for creating and sharing knowledge
derive from a range of factors, including, but not limited to, the specific facilities
organisations have for the creation and transfer of tacit knowledge, and the
organising principles by which individual and functional expertise are structured,
coordinated, and communicated, and through which individuals cooperate and
organisations as social communities (Kogut and Zander, 1993; Spender, 1996;
Nahapiet and Ghoshal, 1998). Table 2.1 shows the factors influencing an
organisation’s ability to manage innovation.
30
Table 2.1: Factors influencing a firm’s ability to manage innovation
Factor Sub-Factors Study
Technology Utilisation of technology;
Technical skills and
education
Erdener & Dunn,
1995
Innovation process Idea generation;
Implementation mechanism
Knight, 1987;
Amar, 2004
Corporate strategy Organisational strategy;
Strategic decision making
Damanpour &
Evan, 1984;
Read, 2000
Organisational structure Centralisation; Formality Mintzberg, 1992
Organisational culture Communication; Attitude to
risk
Hofstede, 2001
Employees Motivation to innovate;
Training
Ahmed, 1998;
Mostafa, 2005
Resources Utilisation of slack resources;
Financial resources
Nohria & Gulati,
1996; Knight,
1987
Knowledge management Organisation learning;
Utilisation of knowledge
repositories
Salavou, 2004
Management style and
leadership
Management style;
Motivation of employees
Hyland & Beckett,
2005
Source: O'Regan and Ghobadian ( 2002), Effective Strategic Planning in Small and Medium
Sized Firms.
31
Innovativeness can be a source of significant growth and development in new
firms and according to Drucker (1985), innovation is the primary activity of
entrepreneurship. Companies need to take a conscious decision to support and
invest in innovative research and development and to create an environment in
which it can develop. However, there are also major pitfalls for firms that invest
heavily in innovation. Expenditure on R&D aimed at identifying new products or
processes can be a waste of resources if the effort does not yield results.
Therefore, while innovativeness is a vital aspect of company performance, it
also involves major risks (innovative ideas do not always yield profits) of which
the company must be aware and prepared for, because investments in
innovations may not pay off.
2.3.2 Measures of Innovation
Some scholars have used different measures to account for innovativeness
within a firm and measures have differed based on the type of innovativeness
being measured; technological or product/market. According to Lumpkin & Dess
(1996), firms lie along a continuum of innovativeness, ranging from a
willingness to try a new product line or new technology to a enthusiastic pursuit
of, and commitment to, an industry-leading technological product advancement.
Innovation measurements within firms have mainly existed in the form of
individual responses from surveys or an analysis of existing financial, and other
organisational, data such as resources and structure (Zahra and Covin, 1993).
Technological innovation focuses on the pursuit of new processes or production
methods, thus indicating a need for alternative measurements to those that
measure product innovation. These measurements are based on a firm’s levels
of focus on technological development, ability to adopt new processes and its
desire to gain a reputation for trying and producing new processes (Zahra and
Covin, 1993). This is in contrast to a previously used measure for
product/market innovation; a count of the number of new products or services
introduced by an organisation (Covin and Slevin, 1989).
32
Measures of innovation have historically focused on measuring the resources a
company has invested in R&D. Miller (1988) examined R&D expenditure as a
percentage of total sales as an indicator of how innovative a particular company
is. The variety of measures that can be used to identify and analyse the
innovativeness of an organisation provides a strong foundation for future
investigation of this variable, thus making the different measures useful in
examining the overall innovative nature of a firm.
2.3.3 Proactiveness
A firm’s propensity to identify and seize new opportunities can be referred to as
proactiveness (Lumpkin and Dess, 1996). Proactive firms monitor trends,
identify the future needs of existing customers and anticipate changes in
demand or potential problems that could lead to new venture opportunities.
Kocel (1995) described the concept of proactiveness as “giving direction” to the
events by identifying and forecasting the future needs, expectations and
changes instead of taking action and responding only once they have already
emerged. Proactiveness is an attitude of anticipating and acting on future wants
and needs in the marketplace and creating a “first mover advantage” (Lumpkin
and Dess, 2001). “First mover advantage” refers to the benefit gained by firms
that are the first to enter new markets, establish brand identity, implement
administrative techniques or adopt new operating technologies in an industry
(Dess and Lumpkin, 2005).
There are several advantages attached to being a first mover. Where
competition would usually drive down the price of the product or service,
industry pioneers often capture unusually high profits because of a lack of
competition. First movers that successfully establish brand recognition are
usually able to retain their image once other players enter the market and hold
on to the market share gains they earned by entering the market first. In
general, first movers have an advantage that can be sustained until the industry
enters the maturity phase of its life cycle (Freel, 2005). At products’ maturity
33
phase, competition from new players as well all development of new products
that can likely substitute the product at maturity phase may result in the first
mover loosing advantage. The first movers advantages identified by Freel
(2005) concur with a definition of proactiveness offered by Dess & Lumpkin
(2005), in that proactiveness involves recognising changes and having the
willingness to act on those insights ahead of competitors in an attempt to gain
higher profits.
The two main attributes of proactiveness are aggressive competitive behaviour
directed at rival firms and the organisational pursuit of favourable business
opportunities (Stevenson and Jarillo, 1990). According to Aloulou and Fayolle
(2005), it has been a challenge to investigate whether or not these concepts
can be applied to SMEs. Proactiveness is effective in creating competitive
advantage because a company that is an initiator is able to penetrate the
market first and its competitors are forced to respond to the initiators actions
rather than initiate their own (Lumpkin and Dess, 1996). According to Knight
(1997), proactiveness is an important vehicle for the survival of firms and for
higher performance and, therefore, sustainable success.
However, Dess & Lumpkin (2005) argue that being an industry leader does not
always lead to competitive advantage. Some firms that have launched
pioneering new products or staked their reputation on new products have failed
to get the pay-off they hoped for. Therefore, careful monitoring and scanning of
the environment, as well as extensive feasibility research is needed for a
proactive strategy that will result in competitive advantage. Firms that do this
well usually have significant growth and internal development.
2.3.4 Measures of Proactiveness
Determining ways in which to accurately measure proactiveness has been the
focus for a number of scholars and is a topic of ongoing discussion. One topic
of particular interest arises when attempting to measure proactiveness as a
continuous variable. Proactive firms are viewed as aggressive in response to
34
competitors, while a company on the opposite spectrum of the continuum would
be labelled as “reactive” (Knight, 1997). However, Lumpkin & Dess(1996)
suggest that the use of the term “reactive” is inappropriate, as it suggests the
company is still responding to its competitors, and not simply doing nothing at
all. Thus, they suggest measuring proactiveness on a continuum ranging from
“proactive” to “passive”. Using the concepts of proactiveness as the anchors of
the continuum, reactiveness would fall in the middle and represents firms which
are not market leaders, but have the ability to adapt to change and recognise
the need to pursue developing markets, but are not pioneers in doing so.
One of the measures for proactiveness used by scholars is that of the tendency
of a firm to be a leader, rather than a follower, in the development of new
technologies, products, processes, etc. (Miller, 1983; Covin and Slevin, 1989).
This approach removes the possibility of a purely objective measure but allows
for a more realistic examination of how proactive a company actually functions,
as it does not require the organisation under examination to be the first mover.
It must be noted that some studies have failed to find a significant difference
between innovativeness and proactiveness when factor-analysing the latent
constructs of the variables (Morris and Paul, 1987), thus resulting in a single
dimension representing both constructs. In this study, innovation and
proactiveness will be treated individually.
2.3.5 Risk-taking
The concept of risk-taking in entrepreneurship refers to the willingness of
entrepreneurs to take calculated business-related risks (Brockhaus, 1980). To
be successful, SMEs usually have to take on riskier projects, even if it means
foregoing the methods or products that have worked for other businesses
(Lumpkin and Dess, 2001). For better firm performance and high returns, firms
take risks such as accumulating high levels of debt, committing large amounts
of resources, introducing entirely new products into new markets and investing
in unexplored technologies (Dess and Lumpkin, 2005).
35
The three types of risk that firms face are business risk, financial risk and
personal risk (Dess and Lumpkin, 2005):
• Business risk is the risk involved in a firm entering into a business
venture without knowing the probability of success.
• Financial risk is the risk a firm takes when borrowing or committing
significant amounts of money in order to increase returns, with no
absolute guarantee of return.
• Personal risk refers to the risks that an entrepreneur assumes when
deciding in favour of a strategic course of action.
Risk-taking behaviour dominates entrepreneurial literature, and entrepreneurial
firms are characterised by their confidence and the high tolerance they have for
risk that could potentially lead to new opportunities (Chow, 2006). According to
Covin and Slevin (1991), a company that does not take risks in a dynamic
environment will lose market share and will not be able to compete successfully
with the other entrepreneurial firms in the same sector.
As is highlighted in most entrepreneurship literature, the strength of an
entrepreneur lies in his or her ability to identify and exploit opportunities.
Successful entrepreneurs avoid focusing on potential risk and rather centre their
attention on exploiting opportunities (Drucker, 1985). The significance of
adaptation to environmental change and exploitation of opportunities is
extensively analysed in existing strategic management and entrepreneurship
literature (Shane and Venkataraman, 2000).
Risk-taking, by its very nature, involves potential dangers and pitfalls and only
risks managed by vigilance are likely to lead to competitive advantage. In
contrast, actions taken without sufficient forethought, research and planning
may prove to be very costly, due to losses resulting from poor risk analysis,
assessment and mitigation.
36
2.3.6 Measures of Risk Taking
The amount of risk firms are willing to accept has been researched in many
different ways (Brockhaus, 1980; Miller, 1983; Sitkin and Pablo, 1992). The
threat of organisational risk is present in every firm; Lumpkin and Dess (1996)
claim no firm operates at a level of zero risk. This leaves firms to consider the
level of risk they are willing to actively pursue, or tolerate in many cases. Risk is
assumed through heavy borrowing, excessive resource commitments and/or
entering an unknown market environment. Based on this, the level of risk in a
firm can be plotted along a continuum, ranging from low risk to high risk.
A common measure of risk focuses on the risk level of projects assumed by an
organisation (Miller, 1983). This approach measures the number of high-risk
R&D projects pursued, and the resources allocated to those projects, to assess
an organisation’s propensity for risk-taking. Other approaches used include
examination of the risk orientation of individuals, risk analysis by decision
makers, past history of performance in high-risk situations, risk preferences of
organisations or individuals and the perceptions of risk-related problems
(Brockhaus, 1980; Miller, 1983; MacCrimmon and Wehrung, 1990; Sitkin and
Pablo, 1992). The extensive research undertaken on the many areas of risk
illustrates the influence of this variable on organisational action and its
importance in research.
2.4 Strategic Management
The fundamental question in the field of strategic management is how firms
achieve and sustain competitive advantage. According to Barney (1991),
strategic management frameworks enable firms to gain competitive advantage
by strategically positioning themselves to “exploit the internal strengths, through
responding to the environmental opportunities, while neutralising external
threats and avoiding internal weaknesses.” A company’s strategic management
research may focus on the internal strengths and weaknesses, or focus on the
37
external opportunities and strengths (Porter, 1980; Duschek, 2004). The
majority of the research conducted in this field has focused on the external
factors.
Strategic management consists of the analysis, decisions and actions an
organisation undertakes in order to create and sustain competitive advantage
(Dess, Lumpkin and Marilyn, 2005). The aim of strategic management is to
decide on organisational goals, the means required to achieve these goals and
to ensure that the firm is suitably positioned in order to pursue these goals
(Browne, 1994).
From this definition of strategic management, three ongoing processes can be
recognised: analysis, decisions and actions. The analysis process of strategic
management is concerned with analysing the goals of the organisation (vision,
mission and strategic objectives) in the context of the internal and external
environment in which it operates (Dess et al., 2005). Once analysis has been
done, decisions need to be taken based on the information gathered and
analysed that will result in competitive advantage for the company. The last
process of strategic management is the implementation of the decisions made.
Various researchers have conducted studies to determine whether firms that
engage in strategic management outperform those that do not (Herold, 1972;
Karger and Malik, 1975). Powell (1992) observed that, generally, research
reveals that strategic management leads to improved performance far more
frequently than it results in no change or in even poorer performance.
The real value of strategic management for SMEs lies in the future orientation of
the planning process rather than in any written strategic plan (Bryson and
Bromiley, 1993). Some studies revealed that an overly formal process may, in
fact, have negative effects on the development and sustainability of an SME
(Robinson and Pearce, 1983). A reliance and emphasis on a rigid and written
strategic plan may prove to be disabling to some SMEs because it restricts the
flexibility that is crucial to their success
38
2.5 Strategic Planning Process
Research has consistently shown that most SMEs do not engage in strategic
planning activities (Robinson and Pearce, 1984; Sexton and van Auken, 1985;
Beaver, 2003). This is in conflict with much of the strategy literature that dictates
that enterprises must actively plan for the future to compete effectively and
survive (Ennis, 1998). The concern here is that in neglecting strategic planning,
SMEs may not achieve their full performance and growth potential, and their
survival could be placed at risk (Berry, 1998). Subsequently, considerable
research effort has been expended on identifying barriers that hinder planning
so these may be overcome or, at least, mitigated and strategic planning
encouraged in SMEs.
Strategy is defined by Farjoun (2002:572) as: “the planned or actual co-
ordination of the firms major goals and actions in time and space, that
continuously co-align the firm with its environment”. This definition encapsulates
three inter-related points: behaviour, co-ordination and adaptation. Strategy is
arguably one of the most challenging tasks facing any firm, given the
increasingly volatile business environment. It is necessary to ensure that, as far
as possible, the firm ‘fits’ the outside environment and meets its customer
needs both effectively and efficiently (Drihlon and Estime, 1993). Strategy is the
core aspect of strategic planning.
Strategic planning is concerned with the setting of long-term organisational
goals, the development and implementation of plans to achieve these goals and
the allocation or diversion of resources necessary for realising the set goals
(O'Regan and Ghobadian, 2004). Essentially, strategic planning is a set of
concepts, procedures and tools designed to assist managers, owners and
leaders to act strategically in order to gain competitive advantage. According to
O'Regan and Ghobadian ( 2002), the purpose of strategic planning is to enable
a business to gain, as efficiently as possible, a sustainable edge over its
competitors. Porter (1996:52) states that effective strategic planning gives a firm
competitive advantage over its competitors as it “renders choices about what
39
not to do, as important as choices about what to do”. He continues by saying
that “the root of the problem is the failure to distinguish between operational
effectiveness and strategy,” as the firms pursue the same goal of organisational
effectiveness, which he compares with “a series of races down identical paths,
that no one can win,” instead of clarifying their strategies, which will give them
competitive advantage.
Comprehensive review of small business literature suggests that, ceteris
paribus, strategic planning is generally more common in better performing
enterprises (Lurie, 1987; Miller and Cardinal, 1994; Hormozi, Sutton, McMinn
and Lucio, 2002). Small businesses that engage in strategic planning are likely
to be more innovative, develop newly patented products and employ new
process and management technologies that will enable them to achieve
international growth (Upton, Teal and Felan, 2001; Gibbons and O'Connor,
2005). Roper (1997) reached a similar conclusion in his study of strategic
planning in 703 small firms. Berman, Gordon and Sussman (1997) found that
“firms that plan produce better financial results than firms that do not plan.”
Ghobadian and O'Regan (2000) carried out a comprehensive review on
previous emperical research as they examined the link between strategy and
performance. The findings of this review showed a positive correlation between
strategy and performance, meaning that, firms which strategise stand to be
more profitable and successful than firms which do not strategise.
Numerous writers argue that these mixed results are due to the lack of a clear
definition of strategy and a consistent method for measuring performance in the
study (Snow and Thomas, 1994; Boyd and Reuning-Elliott, 1998). Others
suggest that the differences in the empirical study findings can be attributed to
lack of industry variety (Risseeuw and Masurel, 1994) or a small sample size
(Matthews and Scott, 1995).
Despite all the advantages gained through the application of strategic planning,
research shows that most SMEs do not engage in strategic planning (Robinson
and Pearce, 1983; Orser, Hogarth-Scott and Riding, 2000; Sandberg, Robinson
40
and Pearce, 2001). The primary focus of small business operators is on short-
term operational actions, rather than long-term strategic issues, and their
decision-making is generally reactive and intuitive as opposed to proactive and
deliberate(Gaskill, van Auken and Manning, 1993; Brouthers, Andriessen and
Nicolaes, 1998; Mazzarol, 2004). The ways in which small firms tend to respond
to change exemplifies this. Firstly, they tend to look inwards rather than
outwards at the external environment and ignore change, or do not see that
there is change. Secondly, some continue to rely on efficiency-based measures
as their ‘strategic plan’ for the future, rather than real strategic planning. Thirdly,
some believe that, as they are part of a localised supply chain, they are immune
to any external influences; which they are not. For those small business
operators that do plan, planning is commonly ad hoc rather than formal and
therefore provides little basis upon which performance can be measured
(Kelmar and Noy, 1990).
According to Mazzarol (2004), SME owners and managers have been accused
by scholars of being strategically myopic and lacking in long-term vision as to
the strategic direction of their companies. The concern is that, by not focusing
on strategic planning, SMEs may not reach their full performance and growth
potential, and their survival could be placed at risk (Berry, 1998). The main
influences on strategic planning are arguably, organisational culture and
leadership.
Culture is defined as ‘the way things are done in business’ illustrating a
company’s philosophy or characteristics that distinguish one organisation from
another (Hofstede, 1984:328). Organisational culture is often seen as a conduit
through which top management can encourage the development and
implementation of corporate strategy (O'Regan and Ghobadian, 2005).
Conversely, culture can be a major obstacle in the implementation of new ideas,
processes and systems. Depending on the culture of the firm and its propensity
to innovate, employees may be discouraged to be innovative and come up with
new products and process.
41
2.6 Strategic Entrepreneurship
Strategic entrepreneurship has emerged through a combination of strategic
management literature and entrepreneurship literature (Simmons, 2010). It
incorporates aspects from both fields to combine entrepreneurial actions with
strategic perspective (Ireland, Hitt and Sirmon, 2003; Simmons, 2010).
According to Ireland et al. (2003), strategic entrepreneurship is the action of
simultaneously engaging in the search for opportunities and competitive
advantage for devising and implementing entrepreneurial strategies that create
wealth. Therefore, strategic entrepreneurship involves opportunity-seeking and
advantage-seeking behaviours that result in superior firm performance (Ireland
et al., 2003). Strategic entrepreneurship is a new concept in entrepreneurship
literature, however, it is an important one, in that effective strategic
entrepreneurship practices result in a firm being able to form a balance between
opportunity-seeking and advantage-seeking behaviours (Ireland et al., 2003).
Due to the extremely competitive business environment, the integration of
entrepreneurship (entrepreneurial orientation) and strategic management
(strategic orientation) has been increasingly explored by numerous researchers
based on the concept of strategic entrepreneurship (Ireland et al., 2003).
Scholars have debated whether strategic entrepreneurship is a framework,
model, theory, paradigm, concept or a simple point of reference (Schindehutte
and Morris, 2009). During the course of this process, four distinctive dimensions
of strategic entrepreneurship have been identified: entrepreneurial mindset;
entrepreneurial culture; entrepreneurial leadership; and applying creativity and
developing innovation (Ireland and Webb, 2007).
Entrepreneurial mindset is both an individualistic and collective phenomenon in
that it is important for individual entrepreneurs and for managers and
employees in established firms to think and act entrepreneurially (Covin and
Slevin, 2002). Entrepreneurial mindset is a way of thinking about business that
focuses on, and captures the benefits of, uncertainty (McGrath and MacMillan,
2000). Organisations that are capable of successfully dealing with uncertainty
42
tend to outperform those that are unable to do so (Brorstrom, 2002). Based on
academic literature, it is believed that effective strategic entrepreneurship helps
a firm position itself in such a way that it is capable of successfully responding
to the types of significant environmental changes that affect many firms in the
current competitive business arena (Ireland and Webb, 2007).
Entrepreneurial culture is a system of shared values and beliefs that shape a
firm’s structural arrangements and its members’ actions to produce behavioural
norms (Dess and Picken, 1999). A firm’s culture affects its employees’
expectations of one another as well as their expectations of interactions with
external stakeholders.
Entrepreneurial leadership is the ability to influence others to manage resources
strategically in order to identify and display both opportunity-seeking and
advantage-seeking behaviours (Covin and Slevin, 2002). Covin & Slevin (2002)
argue that entrepreneurial leadership is characterised by six essential elements:
supporting an entrepreneurial capability, protecting innovations threatening the
current business model, making sense of opportunities, questioning the
dominant logic, revisting the deceptively simple questions and linking
entrepreneurship and strategic management.
Further contructs of strategic entrepreneurship are the application of creativity
and the development of innovation. First movers in innovation impact
significantly on competitors’ market power and enjoy, potentially transient,
monopoly advantages and abnormal profits because of the slower actions of
competitors (Thesmar and Thoenig, 2000). According to Hitt et al., (2001),
innovations resulting from new combinations of production factors are critical to
a firm’s wealth-creating efforts. Innovation is linked to successful performance
of organisations in both the industrial and service sectors as well as to the
greater economy as a whole (Kluge, Meffert and Stein, 2000). Effective
innovations create new value for customers (Mizik and Jacobson, 2003) , and
therefore the organisation performs well.
43
Creativity is also an essential element for increased performance. Barney &
Arikan (2001) argue that creativity is increasingly important, especially for
companies operating in markets with multiple opportunities to differentiate
goods and services. Creativity is a continuous process rather than the outcome
of a single act, is the basis of innovation and is encouraged when the resources
supporting it are managed strategically (Barney and Arikan, 2001).
2.7 External Environment
The understanding of environments, in the context of environmental studies,
generally draws upon three dimensions; munificence, complexity and dynamism
(Freel, 2005). Munificence indicates a firm’s dependence upon environmental
resources, while complexity and dynamism reflect the degree of uncertainty the
firm faces. According to Milliken (1987), there are three types of environmental
uncertainty in which a company could operate:
• Effect uncertainty is the inability to predict the nature of the effects of a
future state of the environment on the organisation.
• Response uncertainty is the inability to predict the likely consequences of
a response choice.
• State uncertainty is the situation that occurs when managers do not feel
confident that they understand the significant events in an environment
or feel unable to accurately assign probabilities to the likelihood that a
particular change or event will occur.
It is generally accepted that a manager’s perception of the environment is more
important than the actual state of the environment (Duncan, 1972; Miller, 1988).
If managers perceive an environment to be uncertain they are likely to make
decisions that are designed to deal with uncertain environments. According to
Freel (2005), environments are neither certain nor uncertain in themselves but
perception makes them so. Perceptions of environmental uncertainty occur
when executives fail to predict the future changes in the mechanisms of the
44
environment or possess an incomplete understanding of the relationship
between components of the environment (Buchko, 1994). Furthermore,
uncertainty is considered to be a function of dynamism and complexity; the
more complex and shifting the environment, the higher the level of
environmental uncertainty (Damanpour, 1996).
A study by Russell & Russell (1992), shows that one of the few sets of
consistent findings in innovation literature is that innovation is positively
correlated with environmental uncertainty. The explanations for the findings are
that:
• A high degree of innovation leads to perceptions of increased uncertainty
among managers, that is, innovation causes environmental uncertainty.
By contrast, the alternative reasoning suggests that high levels of
uncertainty generate more innovation through greater scope for
opportunity-seeking and adaptive behaviour (Russell and Russell, 1992).
• Environmental uncertainty requires firms to change and adapt.
Dynamic environments are associated with high unpredictability levels in terms
of customers and competitors that trade within them and high rates of change in
market trends and industry innovation (Dess and Beard, 1984). In dynamic
environments within which levels of demand change rapidly, opportunities
become abundant and performance should be highest for those firms that have
an orientation to actively pursue new opportunities. In other words, it is
expected that the alignment of entrepreneurial orientation and a dynamic
environment would have a positive effect on performance (Wicklund and
Shepherd, 2005). Firms that are not flexible enough to adapt to a dynamic
environment are less likely to benefit from the environment in which they
operate, because market demand might shift from a firm’s existing products.
This will inevitably negatively impact performance if it does not have new
products that align with the changes and movements in the environment.
45
A study by Zahra (1993), found that a strong positive relationship exists
between entrepreneurship and performance among firms in dynamic
environments, whereas there was a predominantly negative relationship
between the two factors in firms that operated in static and impoverished
environments. These findings correlate with the findings of a study by Miller
(1988), in that innovative strategies in dynamic environments were associated
with higher performance.
2.8 Firm Performance
Accurate and appropriate measurement of performance is a critical element in
entrepreneurship research (Murphy, Trailer and Hill, 1996). According to
Laitinen (2002), a well-organised system of performance measurement may be
the single most powerful mechanism at management’s disposal to enhance the
probability of successful strategy implementation. In many of the studies in the
field of strategic entrepreneurship, firm performance is defined as a dependent
variable and the entrepreneurship activity of the firm is considered an
independent variable. There is strong agreement among the researchers that
the results of successful entrepreneurial activities positively correlate with the
improvement of a company’s performance (Zahra, 1991; Zahra and Covin,
1995; Wicklund and Shepherd, 2005).
Measuring absolute firm performance is very difficult, because the concept is
complex and multi-dimensional. Researchers suggest that multiple performance
indicators should be used to measure this complex construct (Lumpkin and
Dess, 1996). The predictable approach to firm’s performance has been to
consider financial performance (Slater, Olson and Venkateshwar, 1997).
Another approach to organisational performance is to use measurement against
purpose, using perceptual measures of company performance (Steiner, 1979).
A similar approach to assessing the level of satisfaction arising from specific
factors and actions was adopted by other researchers such as Luo & Park
(2001). The literature suggests that responses on performance approach are
46
reliable (Nayyar, 1992; Tan and Litschert, 1994) as compared to independent
data from the organisation.
Much of the research on performance measurement has come from the areas
of organisational theory and strategic management. As discussed previously,
organisational performance can be measured using financial measures, non-
financial measures or a combination of both. The financial measures include
profit before tax and turnover while the non-financial measures focus on issues
pertaining to customer satisfaction, customer referral rates, delivery time,
waiting time and employee turnover (Haber and Reichel, 2005). The
performance measures used in this report are a combination of financial and
non-financial measures.
Several researchers have suggested that subjective performance measurement
may be appropriate given the restrictions imposed by objective measures (Dess
and Robinson, 1984; Gupta and Govindarajan, 1984c). Objective measures
works mostly with more developed companies and do not fully accommodate
SMEs.
2.8.1 Entrepreneurial Orientation and Firm Performance
The relationship between entrepreneurial orientation and firm performance has
been at the forefront of entrepreneurship literature for many years. Numerous
scholars have theorised about the positive relationship that exists between
entrepreneurial orientation and profitability and/or growth of the firm (Covin and
Slevin, 1991; Lumpkin and Dess, 1996). However, the studies have differed in
their approaches to measuring entrepreneurial orientation, with some using a
multi-dimensional approach and others using a uni-dimensional approach.
When entrepreneurial orientation was examined as a uni-dimensional construct,
many researchers obtained results that supported the existence of a positive
relationship between entrepreneurial orientation and firm performance (Zahra
and Covin, 1995). Zahra & Covin (1995) found a significant positive relationship
47
between entrepreneurial orientation and performance and claimed that the
relationship is increased over time. A separate study by Becherer and Maurer
(1997) confirmed a positive relationship between entrepreneurial orientation and
firm performance. A study by Wiklund (1999), which took a longitudinal
approach by examining 132 Swedish firms over a two-year period to assess the
relationship between entrepreneurial orientation and firm performance. The
findings of this study confirmed a positive relationship between these two
factors, and concurred with Zahra & Covin (1995) in that this relationship is
enhanced over time.
Other studies have revealed insignificant, and sometimes negative,
relationships between entrepreneurial orientation and firm performance (Covin,
Slevin and Schultz, 1994; Kaya and Syrek, 2005). However, empirical results
obtained by analysing the relationship between these variables continue to
correlate with the wide majority of research supporting the relationship as a
positive one. It has become increasingly evident that an entrepreneurial
orientation and performance relationship will likely result in a positive
relationship between the two variables.
2.8.2 Innovativeness and Firm Performance
A multi-dimensional approach to the entrepreneurial orientation construct
requires the individual assessment of the relationship between each unique
dimension of entrepreneurial orientation and firm performance. The first of the
three dimensions to be examined is that of firm innovativeness. Many scholars
have offered suggestions for the measurement of firm level entrepreneurship,
most of which include the innovative nature of an organisation as a key
component. Some researchers have suggested the use of product innovation
as a sole predictor of firm-level entrepreneurship (Jennings and Lumpkin,
1989).
In his study, Schumpeter (1934) claims that innovative thinking within a firm can
result in two types of innovation, namely a slight improvement to existing
48
products to increase efficiency or productivity, and the development of new
products or processes resulting in new market creation. These two types of
innovation are known as incremental and radical respectively. The presence of
innovation and the resulting advantages highlight how important it is to a
company’s success.
The idea of innovation as the sole predictor of entrepreneurship has been
generally dismissed; however, the importance of innovation as a contributing
variable to an overall measure of firm level entrepreneurship is indisputable.
The findings of an empirical study by Zahra & Bogner (2000) supports the
positive relationship between innovation and performance.
2.8.3 Proactiveness and Firm Performance
Empirical evidence has shown the impact of proactiveness on firm performance.
A study by Becherer & Maurer (1999) found a significant positive relationship
between proactiveness and a firm’s change in sales levels. Becherer and
Maurer’s (1999) study surveyed the managers of 215 small firms and the results
provided evidence to support the importance of proactiveness in an
organisation. The results of many other studies have also found a strong
positive correlation between proactiveness and firm performance (Lumpkin and
Dess, 2001; Krauss, Frese, Friedrich and Unger, 2005).
2.8.4 Risk-taking and Firm Performance
The relationship between a firm’s level of risk-taking and performance has been
a topic of interest in the field of entrepreneurship for almost two decades.
Lumpkin & Dess (1996) suggest that entrepreneurial firms often make large
investments in resources with the aim of capitalising on available opportunities
in the market, resulting in higher returns. Firms willing to take risks by
committing resources can benefit by receiving significant financial gains.
49
As clarified previously, an entrepreneurial firm is one that engages in product-
market innovation, undertakes risky ventures and is the first to come up with
proactive innovations (Miller, 1983). Focusing on the risk portion of the definition
of entrepreneurial firms by Miller (1983), entrepreneurial firms are expected to
take risks while non-entrepreneurial firms are expected to be risk averse. The
above statement implies that entrepreneurial behaviour, when measured by the
risk-taking variable, maximised at a moderate level of risk, results in a curvi-
linear relationship between the variables (Miller, 1983). Following this logic by
Miller (1983), a non-linear relationship between risk-taking and
entrepreneurship can be expected.
The results of a study by Begley & Boyd (1987) supported the existence of a
curvi-linear relationship between risk-taking and performance, in that firm
performance was maximised at a moderate level of risk-taking. These findings
suggest that an overall analysis of the individual dimension of risk-taking in
relation to firm performance will reveal a non-linear relationship.
CHAPTER 3: RESEARCH METHODOLOGY
Based on the problem statement and hypothesis outlined in Chapter 1, this
chapter will cover the research design and research methodology used to test
the hypothesis. Firstly, the research methodology and research design are
discussed. Secondly, the sample population is identified and described. Thirdly,
the research instrument, procedure for data collection, data analysis, data
interpretation and the limitations of the study are discussed. Lastly, the tests for
hypothesis are presented.
50
3.1 Research Methodology
The data was collected from 133 firms across South Africa. Most of these firms
are based in the provinces of Mpumalanga, Gauteng, The Free State, Kwazulu-
Natal and The North West. Closed-ended, quantitative data was collected that
related to each organisation as a whole and also personal characteristics of the
respondents. Responses and information were collected from the firms’
representatives using an online survey method. The respondents were
requested to complete a prepared questionnaire, an example of which can be
found in APPENDIX 1 and administered through an online survey website
called Survey Monkey.
The qualitative method used for the purposes of this study allows the
researcher to gain insight into the nature of the relationship between strategic
entrepreneurship and firm performance and to test the validity of the literature.
The sample was selected and administered on a convenience basis.
3.2 Research Design
The study “Strategic Entrepreneurship and SMEs Performance in South Africa”
attempts to prove the relationship between strategic entrepreneurship and SME
performance. This study is classified as an exploratory study. Exploratory
research is often utilised to yield information that may reveal problems which
are not yet clearly defined or for which the real scope is still unclear. The
researcher makes use of new data collected through an online survey in an
attempt to add to the existing knowledge on strategic entrepreneurship and firm
performance in South Africa.
51
3.3 Population and Sample
3.3.1 Population
The target population is small and medium enterprises in various provinces in
South Africa, across all sectors of the economy. The criteria that these targeted
companies had to meet for this study was that they had to fit into the definition
of an SME as per the National Small Business Act of South Africa of 1996, as
amended in 2003. This implies that they were selected based on number of
employees and annual sales income.
Selection based on sales posed challenges because some of the companies’
revenues could not be confirmed. Most of SMEs are not comfortable with
divulging their sales and profit figures, and as they are not public companies
they are not required to. The questionnaire was designed to identify the SMEs
classification and those that did not fall within the required classification were
removed from the sample before analysis.
3.4 The Research Instrument
A number of scales are used to assess the various constructs. Measures from
prior studies on strategic entrepreneurship and firm performance are used and
all scales used are supported by literature. The table below identifies the scales
used and provides evidence of the literature support for their reliability and
validity.
52
Table 3.1: Literature support for scales
Instrument Literature Support
Entrepreneurial orientation scale Kwandalla (1977); Miller (1983);
Covin & Slevin (1989)
Planning flexibility scale Barringer & Bluedorn (1999);
Entrialgo, Fernandez & Vazquez
(2000)
External environment scale Kwandalla (1977); Zahra (1991);
Naman & Slevin (1983); Wicklund &
Shepherd (2005)
Performance scale Gupta & Govindarajan (1984);
Naman & Slevin (1983); Covin,
Slevin & Schultz (1997); O’Regan &
Ghobadian (2004)
3.4.1 Sample
The sample was based on convenience and snowball methods (Leedy and
Ormond, 2001). Firms on the Anglo Zimele SMEs database and SME owners
known to the researcher as well as Entrepreneurship Magazine database were
approached. 206 firms were identified and questionnaires sent to the
representatives. A total of 133 representatives responded to the survey, and
these constituted the sample. The sample contains firms based in five provinces
in South Africa, namely The Free State, Gauteng, Mpumalanga, The North
West and Kwazulu Natal.
53
The questionnaire contained closed-ended questions, which allowed the
respondents to choose from specified answers. Closed-ended questions were
selected because the researcher wanted to be more specific in the information
gathered and require less time from the respondents to complete the
questionnaire. Likert-type Scale questions were included in the questionnaire.
3.4.2 Entrepreneurial Orientation Scale
The entrepreneurial orientation used in this study is based on the original work
of (Khandwalla, 1977), which was subsequently modified by (Covin and Slevin,
1989). In this study, the scale is a reduced seven-point Likert-type scale that is
used to measure the three dimensions of entrepreneurial orientation
(innovativeness, risk-taking and proactiveness). The combination of the levels
innovativeness, risk-taking and proactiveness has been concluded by research
to measure an organisation’s entrepreneurial orientation (Aloulou and Fayolle,
2005; Wiklund and Shepherd, 2005). This combination has shown high levels of
validity and reliability in numerous studies, as discussed previously.
The first three items of the nine-item entrepreneurial orientation scale will be
used to measure risk-taking, the fourth and fifth items will assess
innovativeness and the remaining four items will assess proactiveness. The
respondents are asked to indicate their responses to each question on a seven-
point Likert-type scale (1 = strongly agree, 7 = strongly disagree and 4 =
neutral). The ratings of these responses will be averaged to generate an
entrepreneurial index, with the result that the higher the index, the more
entrepreneurial the firm.
3.4.3 Planning Flexibility Scale
Planning flexibility refers to the extent to which the organisation has the ability to
change and respond quickly to changes in external and internal environmental
dynamics. Planning is measured using a nine-item scale that identifies the
54
degree of planning flexibility. The items used in this scale are taken from an
instrument developed by (Barringer and Bluedorn, 1999). For assessment,
respondents are asked to indicate on a seven-point Likert-type scale (1 = very
difficult and 7 = not at all difficult) the degree of difficulty they believe exists for
their firm to change its strategic plans in response to environmental change.
The ratings of these items will be averaged to assess the degree of planning
flexibility in the firm, with the result that the higher the score, the more flexible
the strategic planning process. The coefficient alpha for the planning flexibility
scale is 0.8 (Entrialgo, Fernandez and Vazquez, 2000).
3.4.4 External Environment Scale
External environment refers to the uncertainty and prevailing dynamics that
changes in the external environment have on the firm. The characteristics used
to describe the environment include turbulence, hostility and dynamism
(Wicklund and Shepherd, 2005). Higher levels of turbulence, hostility and
dynamism create greater levels of uncertainty and unpredictability in the
organisation. This study uses the turbulence scale of the environmental
uncertainty scale developed by (Naman and Slevin, 1993). The scale uses a
seven-point Likert-type scale (1 = strongly disagree and 7 = strongly agree).
The mean score, averaged across the items, assesses the degree of
uncertainty facing the firm. With the result that the higher the score, the higher
the degree of uncertainty.
3.4.5 Firm Performance Scale
The performance scale used in this report is motivated by the findings of Naman
and Slevin (1993) and assumes that SMEs owners and managers are often not
willing to disclose the performance of their firm. Seven-point Likert-scales are
used to assess the importance of, and satisfaction with, an organisation’s
performance. The research shows that managers’ perceptions of the
55
performance of their firm are highly consistent with how the firm actually
performs, as indicated by objective measures (Dess and Robinson, 1984).
The performance measure used in this study was originally developed (Gupta
and Govindarajan, 1984b). The first section of the performance scale asks the
respondents to indicate on a five-point Likert-type scale (1 = of little importance
and 5 = extremely important) the degree of importance to their firm of the stated
items. The factors assessed are sales growth rate, market share, operating
profit, profit to sales ratio, market development and new product development.
The second section of the performance scale uses the same factors as the first
but measures the satisfaction of respondents rather than degree of importance.
3.4.6 Demographics
The survey instrument includes a number of demographic questions, which are
included for descriptive and control purposes. These questions address the
following: age of a firm, gender of respondents, education level of respondents,
classification of industry, net sales and past description of firm performance.
The age of a firm will be determined by the number of years since the
establishment of that firm. According to Durand & Courderoy (2001), older firms
are more likely to compete in mature industries and might be slower in reacting
to change, which could result in a negative impact on their performance.
Younger firms pursue radical innovations more often than older firms (Rosen,
1991). It is further noted that a firm’s age influences its entrepreneurial
activities, and that older organisations are expected to be less entrepreneurial in
their operations and more conservative in their market orientation (Zahra,
1991). Based on literature that assesses the relationship between the age of a
firm and performance, a firm’s age will be used as a control variable in this
study.
The second control variable used in this study is the classification of the
industry in which the firms operate. The type of industry in which a firm
competes has been shown to exert an influence on the entrepreneurial process
56
(Kreiser, Marino and Weaver, 2002). According Wicklund & Shepherd (2005),
firms in different industries may demonstrate different environmental and
organisational characteristics which may, in turn, influence performance.
The third control variable used is this research is the size of the firm. According
to Zahra (1993), there is a significant relationship between the size of a firm and
innovation. Literature shows that smaller firms may exhibit different
organisational characteristics compared to their larger counterparts and that the
difference in size may influence performance (Robinson, 1982). Difference in
company size also influences entrepreneurial orientation and organisational
processes (Covin and Slevin, 1989; Zahra, 1991). Big firms are more
entrepreneurially orientated than small firms and this is attributable to
availability of funding.
3.6 Procedure for Data Collection
The data was gathered by means of an online survey tool; Survey Monkey. A
convenience sample of SMEs on Anglo Zimele’s database and entrepreneurs
known to the researcher as well as Entrepreneurship Magazine database were
selected. An electronic survey link was emailed to the owners, managers or
representatives of the selected firms with a cover letter, and the respondents
were requested to complete and return the questionnaire within a timeframe of
10 days. A reminder email was sent to all potential respondents who had not
replied by the 10
th
day, and all others who had not replied by the 15
th
day were
called and asked to respond. It was expected that it would not take respondents
longer than 12 minutes to complete the questionnaire.
3.7 Limitations of the Study
The most significant limitation in terms of this research was the inability to
generate a random sample. This was due to the difficulty faced in obtaining
information on SMEs across all provinces within South Africa. As a result, a
57
convenient snowball sampling was used to generate the sample. The results
from the use of such inferential statistics from a non-random sample are valid,
as long as it is understood and accepted that they cannot be extended to the
rest of the population.
The main research limitation of this study is that it does not cover all nine
provinces of South Africa. The Anglo Zimele and Entrepreneurship Magazine
databases used to obtain the list of SMEs do not have details of the small
businesses that operate in rural areas.
3.8 Validity and Reliability
The validity and reliability of a portion of research provide the basis upon which
a decision can be made on whether it can be considered knowledge (Rowley,
2002). This is vital, because if the requirements for the constructs are satisfied,
the research can be incorporated into the body of existing knowledge in a
specific field.
3.8.1 External Validity
External validity is the extent to which the findings of a study can be generalised
to other populations (Struwig and Stead, 2001). In this research, the sample
consists of company representatives, mostly entrepreneurs from various sectors
across South Africa. The sample size consists of 133 representatives from
various sectors. The sample is a partial representative of the population.
3.8.2 Internal Validity
Internal validity is the extent to which it can accurately be stated that the
independent variable produced an observed effect (Rowley, 2002). In this study,
the researcher ensures that the statements in the questionnaire have a logical
link to the issue under study in order to strengthen the validity of the responses
(Kumar, 1999).
58
3.9 Reliability
Reliability is the extent to which a study could be repeated and yield similar
results (Rowley, 2002). This can be achieved by ensuring that data is collected
in a consistent and transparent manner. In this study, Survey Monkey was used
to collect data in a consistent manner and saved in an electronic format as
evidence. Therefore, this study can be repeated with the expectation of similar
results.
CHAPTER 4: PRESENTATION OF RESULTS
4.1 Introduction
This chapter is concerned solely with presenting the results of the analysis.
Tables and figures are used for ease of reading and interpretation of results.
This chapter begins by presenting the demographic profile of the companies
used in the research. Thereafter, the analyses of independent variables are
presented using descriptive statistics measures such as means, medians,
reliability analysis and Cronbach’s coefficient.
Frequency measures were used for demographic variables and ordinal
variables in examining the firm’s performance. Performance was measured by a
Likert-type scale in order to analyse its relationship with entrepreneurial
orientation measures and planning flexibility. Performance was assessed using
the respondents’ views on importance of, and satisfaction with, performance.
The importance of performance to the firm was measured using a five-point
Likert-type scale, with 1 indicating ‘of little performance’ and 5 indicating ‘of
extreme importance’. In relation to performance satisfaction, a five- point Likert-
type scale was also used with 1 indicating ‘highly dissatisfied’ and 5 indicating
‘extremely satisfied.’
59
The last part of this chapter focuses on the testing of the hypothesis using the
following procedure:
The three variables of entrepreneurial orientation were entered into a regression
model simultaneously to determine significance of the combined entrepreneurial
orientation variables. Thereafter, a forward stepwise regression was carried out
on the individual entrepreneurial orientation variable to determine the
significance of each variable independently. The significance of planning
flexibility was also tested using regression analysis. Finally, the moderating
effects of the external environment on entrepreneurial orientation variables and
planning flexibility were tested. Scatterplots were used to test for moderation.
4.2 Demographic Profile of Respondents
Respondent demographics were measured by asking the respondents their
classification of the industry in which they work, how many years the company
had been in business, the number of employees in the company, annual net
sales, their position within the company, their gender and their formal education
level.
4.2.1 Gender
Out of the 133 respondents, Figure 4.1 below demonstrates the gender
distribution of the sample. Males constitute a larger percentage (57%) than
females (38%) and 5% of the respondents did not specify their gender.
60
Figure 4.1: The gender distribution of the respondents
4.2.2 Firm Age
Figure 4.2 shows the distribution of the number of years firms have been in
business. Most of the firms have been in business for two to five years (68%),
followed by firms who have been operating for six to 10 years. This finding
(majority of firms being two to five years old) may be linked to the support
measures that the SA government has put in place to support SMEs. It is also
expected that after 5 years most firms will either not qualify under SMEs
definition (More employees/income) or have failed. Only 2% of respondents
firms have been operation for more than 16 years, which correlates with the
literature reviewed previously, that states most SMEs have been in operation for
fewer than five years. Figure 4.2 also reflects that 3% of the respondents did not
state the number of years their firms have been in business.
57%
38%
5%
Gender distribution of respondents
Male
Female
Not Specified
61
Figure 4.2: Years in business of the respondents firms
4.2.3 Business Sector
23% of respondents indicated that their firms operate within the services sector.
12% of the respondents indicated that they operate in the distribution and
construction industries. The agricultural sector is the least represented in this
study at only 3%. Sixteen respondents (12%) indicated that they operate within
sectors not classified in this research, and only one respondent did not specify
the industry in which his or her firm operates. Table 4.1 below shows the
distribution of firms per sector.
7%
68%
17%
4%
2%
3%
Years in business of respondents
0 - 1'
2 - 5'
6 - 10'
11 - 15'
16 +
Not classified
62
Table 4.1: Business sectors within which respondents operate
Sector Count Percentage
Service 31 23%
Distribution 16 12%
Construction 16 12%
Retail 15 11%
Wholesale Trade 13 10%
Manufacturing 12 9%
Mining Trade 9 7%
Agriculture 4 3%
Other 16 12%
Missing 1 1%
4.2.4 Number of Employees
One of the classifications of SMEs is based upon the number of employees a
firm employs. Figure 4.3 demonstrates the distribution of number of employees
the firms surveyed employ. From the surveyed sample, 51% of the respondents’
companies employ one to 25 employees. 44% of the respondents’ companies
employ 26 to 50 employees. Only 5% of the respondents’ companies employ
51- 100 employees and 1% of the respondents did not reveal how many people
their companies employ.
63
Figure 4.3: Number of employees
4.2.5 Net Annual Income
The results of the study further demonstrate that 25% of the respondents’
organisations have net sales of less than R500,000.00 per annum. Nearly half
(44%) of the respondents’ companies have net sales of between R500,001.00
and R1,999,999.00 per annum. Few respondents’ companies show net sales of
more than R2,000,000.00 per annum with 17% of respondents stating their
companies achieved net sales of between R2,000,000.00 and R4,999,000.00.
3% of respondents’ organisations show a net sales of between R5,000,000.00
and R9,999,999.00 and 5% of the respondents stating net sales of more than
R10 million. 2% of the respondents did not indicate their companies’ annual net
sales.
4.2.6 Description of Industry and Firm
59% of the respondents indicated that the industries within which they operate
have remained stable over the preceding three years, while 33% of the
respondents demonstrated that their specific industries are growing and 6%
indicated that the industries in which they operate are declining. These results
are contrary to what the respondents answered when asked about firm growth
51%
44%
5% 1%
Number of employees
1-25
26 – 50
51 – 100
Not specified
64
over the last three years; out of the 133 responses received, 43% of the
respondents indicated that their firms are growing, 45% of the respondents
demonstrate that their firms are stable and 10% show that their firms have
declined over the preceding three years.
4.2.7 Educational Level of Respondents
Table 4.2 reflects the educational level of the respondents. 13 (10%) of the
respondents did not finish high school and 35 (26%) respondents have a Grade
12 qualification. 52 (39%) of the respondents have completed either college or
Technikon studies. 22 (17%) respondents indicated that they have obtained a
Bachelor’s degree, while eight respondents (6%) have achieved a Master’s
degree and only one respondent (1%) has a Doctorate degree.
Table 4.2: Education level
Education level Count Percentage
Less than High School 13 10%
High School 35 26%
College/Diploma 52 39%
Bachelor's Degree 22 17%
Master’s Degree 8 6%
Doctoral Degree 1 1%
Missing 2 1%
4.3 Data Analysis
4.3.1 Reliability Analysis
For a better understanding and interpretation of how each of the entrepreneurial
orientation constructs (innovativeness, risk-taking and proactiveness) influence
performance, the research treats these factors independently of each other.
65
Reliability analyses were conducted on the scales of all survey items used in
this research and Table 4.3 contains simple correlations of these scale means.
Based on previous research (Hair, Anderson, Tatham and Black, 1995), a
threshold value coefficient alpha score above 0.70 is considered acceptable to
confirm the reliability of experimental research.
The Cronbach coefficient alpha used showed satisfactory internal consistency
reliabilities for each of the constructs: Innovativeness - 0.89, Risk-taking - 0.79
and Proactiveness - 0.79. In the study by Gupta and Govindarajan (1984a), the
inter-item reliability is 0.88 for performance compared to 0.89 in this study. The
environmental uncertainty scale had a mean value of 48.60, standard deviation
of 13.53 and alpha reliability of 0.94. A study by Barringer and Bluedorn (1999)
reported an inter-item reliability of 0.80 for planning flexibility. In this study,
alpha reliability for planning flexibility is 0.94.
In assessing the correlation matrix, some variables are identified as being
correlated, but no evidence of multi-co-linearity exists. When reliability is
examined using Cronbach’s alpha, all variables exceed the 0.70 threshold
criteria. Based on prior research by Hair et al.(1995), this study is deemed to
be reliable.
Table 4.3: Cronbach’s Coefficient
Variables Cronbach alpha
Average inter-
item correlation
Innovativeness 0.89 0.59
Proactiveness 0.87 0.68
Risk taking 0.79 0.65
Planning flexibility 0.94 0.68
External Environmental
uncertainty 0.94 0.59
Performance 0.89 0.59
66
4.3 Results Pertaining to Hypothesis 1
H1: There is a positive relationship between the entrepreneurial orientation of a
firm and its performance.
The first hypothesis was tested by assessing the significance of the regression
of firm performance on the three dimensions of entrepreneurial orientation:
innovativeness, risk taking and proactiveness.
When all three predictors of entrepreneurial orientation are entered into a
regression model simultaneously, none of these predictors is significant,
although the overall model is significant (Adjusted R²= 0.132; F(3,118)=7.271;
p