The Impact of Corporate Entrepreneurship on Company Growth in a Hostile Business Environment



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7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7

The Impact of Corporate Entrepreneurship on Company Growth in a Hostile Business Environment


Mohamed Zain

College of Business and Economics

Qatar University, Doha, QATAR

Tel: (974) 485 1823




Abdelaziz Elbashir Hassan

BACH, Abu Dhabi, UAE




ABSTRACT
A relationship between corporate entrepreneurship (CE) and company performance in a hostile business environment of a developing country is examined in this research using suyvey data obtained from 55 Malaysian construction firms. Among others, this study found that: (1) CE strongly influenced company growth in a hostile business environment, and (2) CE exists at more than one level within a business organization. Given the growing importance of CE in today's businesses it is important for firms to be able to identify entrepreneurial practices carried out by their employees so that they can distinguish their entrepreneurially inclined employess from those who are not within their organizations.


INTRODUCTION

Considerable ancedotal evidence suggests that an entrepreneurial management style is common to successful companies. According to Drucker (1985) and Stevensen and Gumbert (1985), large firms like IBM, Sony, Hewlett-Packard and 3M have been able to sustain high levels of performance by behaving entrepreneurially. Also, in order for firms to achieve sustained innovation and long-term excellence in the product-market field organizations they should maintain a culture that supports and encourages performance improvement. This sort of culture can also be described as a culture that promotes corporate entrepreneurship (CE), i.e., a culture that encourages its employees to be creative and innovative that will enable them to realize and take advantage of opportunities when ever they arise. Nevertheless, the relationship of CE and its influences on company growth in a developing countery environment has not been investigated before.


CE is known universally as intrapreneurship (Chang, 1998). According to Pinchot (1985), the term refers to the development of internal markets and relatively small and independent units designed to create internal ventures and expand innovative staff services, technologies and methods within a large organization.
Selecting an appropriate basis for defining CE and understanding its process is a real challenge for researchers due to the absence of a universally accepted definition of corporate entrepreneurship. Based on the literature, the main elements of CE definitions are innovation, proactivity and risk taking at organization and individual levels (Table 1).

[Insert Table 1 here]



Therefore, after reviewing the various definitions of CE given in Table 1, for the purpose of this study CE is defined operationally as a process whereby corporate entrepreneurs of established business organizations undertake product and service innovations, act proactively and are willing to take risk through internal and external business ventures in order to enhance their company's performance (Miller and Friesen, 1982; Covin and Slevin, 1989; Brazeal, 1993; Morris, Avila and Allen, 1993; Zahra, 1993b; Zahra and Covin, 1995; Pearce and Carland, 1995). The literature, however, shows no consensus about the locus of corporate entrepreneurs within a business organization (Zahra, 1993b), i.e., whether it should be at all levels of the firm or at one autonomous business unit led by entrepreneurial worker, manager, or group of employees (Gibb, 1987; Kao, 1989, Zahra, 1993b). In this connection, intrapreneurship school focuses on entrepreneurial executives within a complex organization. The emergence of CE according to this school depends on two main variables: the existence of entrepreneurial climate inside a business organization and the presence of entrepreneurial abilities in its participants. One of the first models of CE is the domain model of CE developed by Guth and Ginsberg (1990) which was targetted at fitting CE into strategic management of firms. Another model developed by Covin and Slevin (1991), is a conceptual model of entrepreneurship where a firm's entrepreneurial behavior is built on three-level variables: organizational, entrepreneurial employees’ and environmental levels (Covin and Slevin, 1991). The model is a general theoretical framework that depicts the causes and consequences of organizational-level entrepreneurial behavior.
In 1993, Brazeal developed an organizational model of internally developed ventures which is built on two levels of variables and focuses on two categories of factors related to long term building and maintenance of CE: (1) motivating factors, i.e., the reward system and structural arrangements, and (2) broad-base individual characteristics that describe a corporate entrepreneur including attributes, values and behavioral orientations. Being the only model that has been tested empirically, its empirical findings are somewhat mixed. His findings suggest that separate reward and structural arrangement are not necessary or even desirable for both entrepreneurial and non-entrepreneurial managers. In another study, Hornsby, Naffzigar, Kuratko, and Montagno (1993) developed an interactive model of CE (Brazeal,1993; Covin and Slevin, 1991) which utilizes theories of the causes of behavior and focuses on the interactions between an individual’s personality and his environment due to certain precipitating events. Further, Zahra (1986) and Zahra and Covin (1995) conducted two studies that addressed this issue where they found a correlation between CE and performance for firms that emphasize CE as risk taking, product innovation and proactivity. Covin and Slevin (1986) conducted another study on entrepreneurial posture and firm performance relationship where they found found zero-order correlation of r = 0.39 (p < 0.001) between entrepreneurial posture and firm performance.
In relation to CE in the Asian business culture, Kim and McIntoch, (1997) found that Korean entrepreneurs possess high need for achievement, are group oriented, and are motivated by a recognition that brings honor, prestige and respect to their family, unlike the individualistic entrepreneurs of the Western culture. Also, autonomy, freedom and innovation are also practiced under management vigilance and control while benefits and rewards are lower compared to Western and Japanese firms. Furthermore, Hussin’s (1995, 1997) empirical study about Malay and Chinese entrepreneurs' personal values, found that Malay and Chinese entrepreneurs are characterized by high need for achievement, their abilities to create and utilize opportunities, risk taking, hard working, and being innovative. Additionally, in another empirical study on Asian entrepreneurs, Ray, Rainer, Arnulfo and Soke (1996) found that the entrepreneurs are individuals with opportunity knowing abilities, willing to take risk, hard working, dedicated and have good business skills.
Attahir (1995) found that the critical factors of success for South Pacific entrepreneurs are government support, access to resources and possession of managerial skills in addition to autonomy and smallness of the company size. In addition to these, management support for CE and their commitment to it are found to be the main features distinguishing Malaysian entrepreneurial firms from others (Attahir, 1995). The findings of Siti Maimon’s (1991) study about Peters and Waterman’s (1982) eight attributes of entrepreneurial firms confirmed the existence of these attributes in Malaysian firms. Autonomy and freedom, in addition to productivity through people, were found to be most prevalent among these companies. The empirical findings from Zain’s (1993, 1995, 1996) study of eight Malaysian manufacturing firms also show the existence of internal entrepreneurial climate in the firms that support innovation and creativity.
The common trend in the published research on CE is the predominance of data from manufacturing companies conducted in particularly in the US market (Zahra, Jennings and Kuratko, 1999) while companies from other business sectors received only a modest attention. Thus, the main purpose of this study is to examine corporate entrepreneurship (CE) and company growth relationship which is moderated by competitive and hostile business environment. This study departs from the previously mentioned approach by examining data from a different economic sector, that is, the construction sector of a developing country of Malaysia. The rivalry among the firms within the industry has been intense and therefore the industry's environment could be considered as hostile.
THEORETICAL FRAMEWORK AND HYPOTHESES

There are many theoretical and empirical studies which examine CE-performance relationships among firms. In contrast to most of the previous studies found in the literature which examined the relationships at the organization level (where CE is represented by only one variable), this study examined theses relationships in a different way. Specifically, this study enriched the knowledge by examining CE-company growth relationships at two organizational levels: company and employee levels. Moreover, this study adopted company growth as a dependent variable, which is broader and more comprehensive indictor of corporate performance (Zahra and Covin, 1995; Delmar, 1997). Corporate growth reflects a company’s response to entrepreneurial change over short, medium and long terms. Improvement in performance initially will be reflected in the company sales in the short run. In the medium-term the company will respond to the increase in demand by acquiring more assets to meet increasing demand for its products and services. The main CE elements or the independent variables of the theoretical framework of this study are: (1) innovation, which refers to company’s and individual’s ability inside a business organization to create new products and services, introducte new markets, processes, supply of new resources, and new industry organization (Schollhammmer, 1982; Miller and Friesen, 1982; (2) proactivity, which refers to an ability to act earlier than others in capturing new markets or introducing new products or tapping new resources; (3) autonomy, which refers to a perception of self-determination with respect to work procedures, goals and priorities (Ross 1986; 1987); (4) management support, i.e., the extent to which the management encourages and supports CE through policy orientation and provision of resources (Kuratko et al. 1990); (5) structure, which is identified as the workflow arrangement, communication across different managerial layers and authority relationship in an organization (Ross 1986; 1987); and (6) reward, which means the allocation of specific incentives to motivate individuals to engage in entrepreneurial and innovative behavior (Miller and Friesen, 1982). Thus, the proposed model of this research is as shown in Figure 1.


(Insert Figure 1 here)
Company growth represents the growth in the company’s assets, sales, and number of employees (Delmar, 1997). In theory, the increase in sales over time may reflect the ability of the company to capture an increase in the market demands, or it can be due to improvement in quality of products, processes or methods of production (Delmar, 1997). In the literature there is little conclusive evidence available to support the belief that there is strong relationship between CE and firm growth (Delmar, 1997). This may be attributed to the fact that most of CE studies examined CE at the company level alone, where as this study examined CE at company level as well as the individual level. Thus, our first hypothesis is formulated as follows:
H1: There is a relationship between CE and company growth.
The external environment is identified as the set of forces surrounding an organization that have potentials to affect the way it operates and access the scarce resources (Jones, 1998). This study adopts a construct that encompasses general and specific environmental factors, i.e., environmental hostility. Environmental hostility implies the environmental pressure caused by changes in the market place, the industry, the competition in product quality, price and consumer taste. The importance of the environment to an entrepreneurial firm’s performance has been documented extensively in the literature (Zahra, 1993b; Zahra and Covin, 1995; Covin and Slevin, 1989). What is missing in the literature is the moderating effect of environmental hostility on CE-firm growth and CE-job satisfaction relationships (Tsai, MacMillan and Low, 1991; Zahra, 1993b; Zahra and Covin, 1995; Covin and Slevin, 1989). This relationship is examined in our second hypotheses:
H2: There is a relationship between CE and company growth in a hostile business environment.
METHODOLOGY

The population of the study is the construction industry in Malaysia. In the past, only a few studies have been published using data from non-US companies (Zahra, Jennings and Kuratko, 1999). Moreover, the trend in the published research on CE is the predominance of data collected from the manufacturing sector 85% (Zahra, Jennings and Kuratko, 1999). The selection of the construction firms was based on the growing competition among construction companies in Malaysia where 86% (see Table 2) of the respondents of this research agreed that there is stiff competition in this business sector where their existence, survival and growth depend on their competitiveness, industriousness, and entrepreneurial orientation (Brazeal, 1993; Zahra, and Covin, 1995) in addition to the fact that the construction sector is one of the leading economic sectors of the Malaysian economy. Thus, the environment of the Malaysian construction section could be considered as hostile.

[Insert Table 2 here]

Primary data on CE elements as well as on environmental hostility were collected using questionnaires addressed to top or senior management of the firms. The selection of the respondents with position titles such as chief executive officer (CEO), general manager, senior executive and manager is attributed to the assumptions that (1) leaders have a prominent role in company growth in Asian companies (Petzall and Kim, 1996) and these executives may have some unique opportunities for innovation in their firm (Brazeal, 1993; 1996; Zahra and Covin, 1995); (2) they are the best to tell about the entrepreneurial orientation of their firm and its inter-workings; (3) top or senior level executives are more likely to complete the questionnaire (Brazeal, 1993; 1996). On the other hand, a one-level selection of subjects, i.e. the top or senior executive level is followed because it has a better control of personal variations arising from work exposure, experience, and education (Brazeal, 1993; 1996). Data on company growth were collected from the Kuala Lumpur Stock Exchange (KLSE) Market Handbooks. The SPSS software package was used to analyze CE and firm performance relationships. To test the identified hypotheses moderated multivariate regression analysis (MMRA) was utilized.


A total of 150 questionnaires were mailed to the KLSE companies in Malaysia where we asked them to reply within 15 days. The first response was very low, i.e., only five companies responded, after which a second set of questionnaires were mailed and were followed by phone calls and a letter to those who did not respond to the first mailing. In total, 55 companies replied out of which only 45 of them were useful, thus giving us a 30% response rate. This rate is statistically sufficient to give a reliable estimation of the population parameters (Hair, Anderson, Tatham, and Black, 1998; Cooper and Emory, 1995). This rate is similar to those reported in this field of research (Miller and Friesen, 1982; Zahara and Covin, 1995). The respondents came from most of the Malaysian States, of which 70% were from around the Federal Capital (Selangor and Kuala Lumpur) while the rest came from Sabah, Sarawak, Johor, Penang, Kedah, Perak, Melaka, and Terengganu.
The CE measure in the questionnaire is represented by eleven variables which explain different aspects of CE at two levels: seven variables at company level and four variables at employee level. The questionnaire also covers environmental hostility. Data pertaining to the dependent variable (company growth) were collected from financial reports of the selected companies listed in KLSE Market reports. A pilot study was first conducted to refine the measurement instrument after which the questionnaires were mailed to the subjects together with an explanation for conducting the research in order to enhance, clarify and facilitate the data collection process.
This study used parametric measurement scale because the samples were selected from a normally distributed population and the primary findings showed a linear relationship between the independent and dependent variables (Cooper and Emory, 1995). The dependent variable (company growth) was regressed with the independent variables (the CE index) within a hostile business environment. This is a cross-sectional study which attempts to explain the impact of CE on company growth at specific point in time. If the regression equations of the CE on company growth and CE relationship in a hostile business environment were found to be significant, this would support the relationship between CE and company growth. That is to say, this relationship was examined under the moderating factor of environmental hostility, implying that the CE-company growth relationship could explain the outcome of this relationship within a hostile business environment.
Measurement Instrument

We developed the CE measurement instrument based on previous scales developed by Khandwala (1977), Miller and Friesen's (1982) CE index, Ross’s (1987) Intrapreneurial Performance Quotient (IPQ) and Pinchot’s freedom factors. The CE measurement was modified to measure the CE at two levels (business and individual) inside a business organization by utilizing 52 items grouped into eleven variables. As for the dependent variable, Delmar’s (1997) instrument was adopted to measure company growth, which covers average annual growth rates of sales, assets and number of employees. The company growth measure is calculated as follows:


Assets growth = (This year’s assets - last year’s assets)/ Last years assets

Sales growth = (This year’s sale - last year’s sales)/ Last years sales

Employees' growth = (This yr's no. of employees – Last yr's no. of employees)/Last yr's no. of employees
The CE measure has been widely used in past research (Khandwala 1977; Miller and Friesen, 1982; Zahra, 1991; Md-Noor, 1991; Zahra and Covin, 1995) because of its reliability and validity. This measure follows six point Likert-type scale ranging from 1= highly disagree to 6= highly agree. Scores on the items were averaged to produce the overall CE index. A low score on the index shows low involvement in CE activities and vice versa. The respondents were asked to give their perception about the presence of CE in their companies and their contribition to it. They were also assured confidentiality of the data gathered. The CE index of this study, surpassed minimum internal consistency requirements as measured by alpha coefficient of 0.885.
Scale Reliability

Cronbach’s alpha scores were computed for each construct (CE, environmental hostility and company growth) to measure the internal consistency and to indicate how different items can realibly measure the construct. The values of the Cronbach’s alpha range from zero (no internal consistency) to one (perfect internal consistency). The scale is sufficiently reliable if Cronbach’s alpha is greater than 0.80 and is most likely reliable for values greater than 0.70 (Cronbach, 1951). In this research, the Cronbach’s alpha obtained was 0.96 for overall CE scale and the estimates for company growth and environmental hostility scales were 0.87 and 0.75, respectively. Research conducted by Zahra and Covin (1995) found the internal consistency level of CE to be 0.75. Thus, the scales used in this research could be considered as reliable.




ANALYSIS AND RESULTS

To test the hypotheses the analysis was conducted in two steps:


(1) Testing the effect of CE on company growth and the CE relationship with company growth which is moderated by environmental hostility. The regression model used for the analysis is as follows:
Comp. Growth = a+b1 conovate + b2 cotonomy +b3 coproact + b4 mgtsupport+ b5 corisk+b6 orgstruct + b7 reward+ b8 mynovate+ b9 myfreedom+ b10 myrisk + b11 myproact
The independent variable, CE, is on the right hand side of the equation and is represented by eleven independent variables. The intercept “a” is the level of company growth that is attributed to activities other than CE and bi is the coefficient or the slope of the independent variables.
(2) To test the effect of the moderating variable (the environmental hostility) on CE-performance relationship we added the interaction factor as follows:
Comp. Growth = a+b1 conovate + b2 cotonomy +b3 coproact + b4 mgtsupport+ b5 corisk+b6 orgstruct + b7 reward+ b8 mynovate+ b9 myfreedom+ b10 myrisk + b11 myproact + b12 EH+ b13 EH X CE
To test the hypotheses of this study we utilized sequential search approach and backward elimination. The adoption of the sequential regression analysis is due to the fact that most of the previous researches on CE test the relationship at the aggregate CE level, i.e., by taking the average of the three CE variables at organizational level (innovation, risk taking and proactive attitude). As mentioned earlier, this study examined CE-company growth relationship at the organizational and individual levels. Therefore, since CE is present at a relatively early stage of a firm's growth, there is a need to identify the factors that support the presence of CE which then influence performance. For each hypothesis, this approach allows us to first regress CE against company growth (H1), and then to regress it against company growth in a hostile business environment (H2).
Table 3 shows the results of the regression analysis that examined the relationship between CE and company growth. The finding indicates that the independent variables explain 72.4% of the variances in company growth. This indicates that the influence of CE on company growth is highly significant (p<0.001). Thus, the data provides strong support for the first H1, i.e., CE is significantly associated with company growth. Thus, the results of this study support the theoretical and empirical research findings on CE by Brazeal (1993), Zahra (1993a,b), Zahra and Gravis (2000), and Zahra and Covin (1995). The point of difference is that the CE variables in this study show higher explanatory power (72.4%) compared to theirs which showed R2 to be below 30% (Brazeal, 1993; Zahra, 1993a, 1993b; Zahra and Gravis, 2000; and Zahra and Covin, 1995). Furthermore, the regression coefficients for two independent variables of CE at the company level, i.e., being proactive (p<0.003) and being willing to take risk (p<0.001) are positively associated with company growth. The results indicate that the increase in management efforts at being proactive via the introduction of new products, new services, and new methods of production even if the outcome is uncertain, i.e., being willingness to take risk, might improve company growth. These findings are in line with previous studies that examine the relationship between CE and performance, where Zahra and Gravis (2000), Zahra (1993a, 1993b), and Zahra (1991) in their cross-sectional studies found positive relationships between the influence of CE on firm’s gross profit growth and sales growth. Also, in a longitudinal study, Zahra and Covin (1995) found positive relationship between CE and company profitability and sales growth.
[Insert Table 3 here]
Nevertheless, the regression coefficients for company's desire for autonomy (p<0.001), company structure (p<0.002) and employees’ desire for freedom (p<0.012) were negatively associated with company growth. Perhaps, this negative association could be due to the fact that, among the entrepreneurial firms, resources were depleted by too much expenditures on new designs and new products in the short run (cross-sectional) in order to meet the increasing desire for autonomy, freedom and entrepreneurial practices (Miller and Friesen, 1982). Furthermore, the coefficient of entrepreneurial employee’s desire for autonomy and flexibility displays a negative sign which indicates that those who are entrepreneurially inclined have greater desire for freedom which is consistent with previous findings (e.g., Koh, 1996).
The result of this study extended the literature further by showing that companies in a developing country environment could benefit from growth when pursuing CE. This finding is consistent with the studies conducted by Khandwalla (1984; 1985), Knight (1997) and Kuratko, Montagno, and Hornsby et. al (1990), and Hornsby et al. (1993) who found that the emergence of entrepreneurship inside business organizations requires a risk taking attitude and proactive managerial support. Khandwalla (1984; 1985) found that top management’s commitment to CE is associated with innovation and industriousness of the companies. Kuratko et al.’s (1990) factors analysis found that management support for entrepreneurial attitude, autonomy, reward and organization boundaries are the factors that contribute to CE. Also, Schollhammer (1982) suggests that CE is important for gaining financial advantage and rewards. In addition, Covin and Slevin’s (1993) argue that the adoption of CE would improve financial performance while Zahra and Covin’s (1995) longitudinal non-linear empirical study found that CE improves companies’ profitability over time.
Table 4 presents the results of the regression analysis which shows that the independent variables explain 80.3% of the variances in company growth within a hostile business environment. In other words, the influence of CE on company growth within a hostile business environment is significant at p< 0.001. As can be seen from Table 4, after the environmental hostility variable was added to the equation there is a significant change in the explanatory power or the F value and as such, the introduction of the interaction variable into the equation has produced a meaningful result. In other words, the introduction of this interaction effect changed the form of the relationship between the independent variables. As a result, the independent variables accounted for 80.3% of the variances in company growth within a hostile business environment compared to 72.4% before the moderating variable was introduced. Moreover, the level of significance of the relationship (the F value) improved from 8.9 to 10.62. Thus, the interaction variable is a true moderator since it changed the form of the relationship and the influence of the independent variables resulting in an improvement in the power of the multiple regression analysis (Aguinis, 2002; Sharma et. al., 1981). This means the data provided support for H2; i.e., CE is significantly associated with company growth in a hostile business environment.

[Insert Table 4 here]

From the regression coefficients for CE at the company level shown in Table 4, we can see that the variables proactive and risk-taking attitudes of the firms display significant positive relationships with company growth in a hostile business environment (at p<0.003 and p< 0.01, respectively). Interestingly, certain individual and organizational factors including a company's desire for autonomy (significant at p<0.001), an individual's desire for freedom (significant at p<0.007) and organizational structure (significant at p<0.001) turned out to be negatively related to company growth in a hostile business environment. Thus, in the short run, increasing the desire for organizational autonomy and individual freedom and changing the organization structure of the firms might have a negative impact on their performance (Abraham, 2000). The results indicate that the association between CE and company growth is contingent upon perceived competition, market change and environmental hostility, which is consistent with previous findings (Covin and Slevin, 1989; Zahra and Covin, 1995).
The main finding from H2 is the presence of strong, positive and significant relationship between CE [represented by company's proactive ability (p<0.003) and its tendency to take risk (p<0.01) in a hostile business environment] and corporate growth. This implies that an ability of a firm to be proactive and to be a risk-taker may improve its financial performance under competitive pressure and changing market environment.
THEORETICAL AND PRACTICAL IMPLICATIONS

A few theoretical implications could be drawn this this research. Firstly, the findings support the belief that companies that engage in CE activities can realize important financial benefits from their entrepreneurial practices. The negative association between CE variables and performance measure could perhaps be due to the fact that, among the entrepreneurial firms, their resources were depleted by too much expenditures on new designs and new product introductions in the short run, which is consistent with Miller and Friesen’s (1982) findings. On the other hand, Jaworski and Kohli (1993) found no moderating effect from higher market turbulence, higher competitive intensity, or higher technological turbulence while Slater and Narver (1994) found little support for the degree of competitor hostility as a moderator of the marketing orientation-performance relationship. Greenley (1995), on the other hand, reported that marketing orientation had a positive effect on performance. The presence of different results necessitates the need for more research to improve the theoretical development of the area. Secondly, the results show that even when the market environment is considered hostile, entrepreneurial efforts can enhance the growth and profitability of a firm. These findings should be tempered with caution because there is a risk that the financial payoff from excessive CE activities in this environment may decline. Finally, this study broadens the factors that influence organizational performance in an attempt to contribute and to organize the large body of academic literature on CE. The principal challenge to management researchers is to identify the entrepreneurial processes that lead to various forms of CE, and then to theoretically predict and empirically verify the forms of this phenomenon that produce the best results for firms in various business and industry contexts. Admittedly, this is a tough challenge.


A number of practical or managerial implications could also be derived from this study. Firstly, it appeared that CE is an important element for corporate growth. Therefore, managers of companies should seriously consider adopting CE as an effective tool for enhancing creation of a long-term favorable work environment which could improve their firms' performance. Secondly, given the growing importance of CE in today's businessess there is a practical value for managers in being able to identify entrepreneurial practices of their employees so that they can distinguish those who are entrepreneurially inclined from those who are not. Lastly, the management of business organizations who adopts entrepreneurial programs should provide an environment that facilitates and supports their employees to be innovative and creative. Otherwise, it will be very difficult for CE to occur.



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