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Entrepreneurial Orientation and the Business Performance of SMEs: A

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DOI: 10.1007/s11846-011-0062-9

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Rev Manag Sci (2012) 6:161–182
DOI 10.1007/s11846-011-0062-9

ORIGINAL PAPER

Entrepreneurial orientation and the business

performance of SMEs: a quantitative study
from the Netherlands

Sascha Kraus • J. P. Coen Rigtering • Mathew Hughes •

Vincent Hosman

Received: 22 December 2010 / Accepted: 23 March 2011 / Published online: 13 April 2011
 The Author(s) 2011. This article is published with open access at Springerlink.com

Abstract Entrepreneurial Orientation (EO) is often mentioned as an antecedent of

growth, competitive advantage and superior performance, and prior empirical
research has often shown a positive relationship between EO and performance
appears to exist. However, an important question that remains unanswered is what
effect EO might have on firm performance during periods of economic crisis, and
the severe environmental turbulence that accompany such crises. This research is a
first investigation towards the effects of EO on the performance of small and
medium sized firms during the current global economic crisis. In this study we use
the multidimensional model of EO and test a series of hypotheses pertaining to its
performance effects using survey data gathered from 164 Dutch SMEs. The present
research shows that proactive firm behavior positively contributes to SME perfor-
mance during the economic crisis. We further show that innovative SMEs do per-
form better in turbulent environments, but those innovative SMEs should minimize
the level of risk and should take action to avoid projects that are too risky.

Keywords Entrepreneurial orientation
Economic crisis
Environment

Proactiveness
Innovativeness
Risk-taking
Growth
SME performance

Netherlands

S. Kraus (&)
J. P. C. Rigtering
V. Hosman

Utrecht University School of Economics (USE), Chair of Entrepreneurship, Janskerkhof 12,
3512 BL Utrecht, Netherlands
e-mail: s.kraus@uu.nl

S. Kraus
University of Liechtenstein, Fürst-Franz-Josef-Strasse, 9490 Vaduz, Liechtenstein

M. Hughes
Nottingham University Business School, University of Nottingham, Jubilee Campus,
Wollaton Road, Nottingham NG8 1BB, UK

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162 S. Kraus et al.

JEL Classification L25
L26
M10

1 Introduction

Entrepreneurial activities are increasingly regarded as important to firms, but in

today’s complex global economy, entrepreneurship has become even more crucial
towards obtaining a sustainable competitive advantage (Wiklund and Shepherd
2003). Due to globalization, small and medium sized enterprises (SMEs) face
increasing pressure from competition from across the world. When compounded
with the changing sophistication of customers worldwide it becomes apparent that
SMEs face increasing difficulty in maintaining and improving business performance
in time, unless they can actively manage these pressures. SMEs are encouraged to
implement an entrepreneurial mindset to recognize the threats and opportunities in
the environment of the firm in order to make sure that the firm will continue to exist
in the future (Krueger 2000). In periods of economic and environmental turbulence,
it becomes even more apparent that firms face particularly high levels of market
instability and complex business uncertainty that obliges firms to act upon such
change (Grewal and Tansuhaj 2001; Lin and Carley 2001). A firm level response is
therefore needed (Chattopadhyay et al. 2001).
Environmental turbulence can have a significant impact on the viability of a firm
such that it is critical for managers to understand and effectively manage these
events, as well as for scholars to determine what elements might explain the
business performance difference between those firms rising and falling in complex
environmental conditions (Grewal and Tansuhaj 2001). In scholarly literature (e.g.,
Zahra 1991; Wiklund and Shepherd 2005; Rauch et al. 2009), politics (e.g.,
Balkenende 2007; Dalmeijer 2009) and popular science (e.g., Collins 2001), the
current school of thought posits that entrepreneurship is an antecedent of growth,
sustainable competitive advantage and excellence. This is particularly true for
enterprises operating in rapidly changing and competitive environments (e.g., Zahra
and Covin 1995; Chandler et al. 2000; Antoncic and Hisrich 2001) and ‘hostile’
environments (Covin and Slevin 1989).
The questions we propose herein are: (1) could entrepreneurship explain superior
business performance during a period of considerable market turbulence? And, (2)
how might any effects resulting from elements of a firm’s entrepreneurial
orientation change in light of market turbulence? The goal of this article then is
to investigate the influence of entrepreneurship on SME business performance when
such firms face acute market uncertainty and instability. To achieve this we
collected data during 2009, a year that was entrenched in the economic turbulence
brought on by the collapse of the global financial sector. We do not seek to address
the relative advantages of entrepreneurship in crisis and non-crisis times, rather, we
seek to more adequately examine the impact of entrepreneurship on the business
performance of SMEs when the skills associated with entrepreneurship (e.g., ability
to manage uncertainty; innovate to meet emerging opportunities and threats; tolerate
risk) would theoretically be called for.

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Entrepreneurial orientation and the business performance of SMEs 163

Surprisingly few studies have examined the firm capabilities and conditions
necessary for extreme environmental and market turbulence. Grewal and Tansuhaj
(2001) in their analysis of the Asian financial and economic crisis from the late
1990s found that firms that could achieve and maintain strategic flexibility (defined
as the organizational ability to respond promptly in a proactive and reactive manner
to market threats and opportunities) achieved superior business performance. On the
basis that an entrepreneurial orientation might synthesize such strategic flexibility,
we aim to contribute not just to our understanding of the consequences of
entrepreneurial orientation, but also into the historical conversation on firm
capabilities needed to manage situations of complex environmental and market
turbulence. Doing so will also help further our appreciation of the value of
entrepreneurial orientation to firms.

2 Theoretical framework

2.1 Entrepreneurship

The term entrepreneurship has been used for decades, yet to this day there is little
consensus about its definition (Williams et al. 2010). Many perspectives can be
found in the literature but the most common themes include: creation of wealth,
creation of enterprise, creation of innovation, creation of change, creation of
employment, creation of value, and creation of growth (Morris et al. 2008).
Considerable effort has recently been put into developing a uniform definition. For
example, Morris et al. (2008) performed a keyword analysis of the definitions of
entrepreneurship found in relevant literature and found 18 keywords used at least
five times. Subsequently, they defined entrepreneurship according to the definition
of Stevenson and Jarillo-Mossi (1986) that ‘‘entrepreneurship is a process of
creating value by bringing together a unique package of resources to exploit an
opportunity’’ (p. 10), because this definition captured all the core keywords of
entrepreneurship encountered in their research.
This definition does not limit the kind of organizations in which entrepreneurial
activities may appear. Indeed, entrepreneurial behaviour is not only possible in new
ventures, but also in firms regardless of their size and age (Kraus et al. 2011). The
entrepreneurial activities of existing and established firms have for example been
described as corporate entrepreneurship (Burgelman 1983; Zahra 1993), entrepre-
neurial orientation (Lumpkin and Dess 1996; Wiklund 1999), or intrapreneurship
(Antoncic and Hisrich 2001, 2004).
Within the present article, the entrepreneurial activities of an established firm
will be referred to as its ‘Entrepreneurial Orientation’ (EO). EO refers to the
decision-making styles, practices, processes and behaviours that lead to ‘entry’ into
new or established markets with new or existing goods or services (Lumpkin and
Dess 1996; Wiklund and Shepherd 2003; Walter et al. 2006). This definition of EO
is consistent with the view that EO leads to new market entry in either new or
existing markets, but also explicitly recognizes that this can be achieved with either
new or existing goods or services. In a manner of speaking then, a firm that is

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164 S. Kraus et al.

entrepreneurial oriented ventures into new or existing markets, with innovations that
are either based on new or existing products and services, in a manner that is
appreciative of the uncertainty and incurs risk in doing so.
The relationship between EO and business performance has been researched
intensively. The entrepreneurship research started in the United States of America
(USA) and until the year 2000 most studies are conducted in this country setting.
Later, researchers performed studies in, among other places, Sweden (Wiklund and
Shepherd 2003, 2005), Slovenia (Antoncic and Hisrich 2001, 2004; Antoncic 2006),
South Africa (Goosen et al. 2002), China (Chen et al. 2005), Greece (Dimitratos
et al. 2004), Finland (Jantunen et al. 2005), Germany (Walter et al. 2006), Vietnam
and Thailand (Swierczek and Ha 2003), Netherlands (Kemelgor 2002; Stam and
Elfring 2008), United Kingdom (Hughes and Morgan 2007) and Turkey (Kaya
2006). Among the legacy of studies that have taken place over the years, the
business performance consequences of EO have not always been clear.
Recently, Rauch et al. (2009) performed a meta-analysis of the relationship
between EO and business performance. Their study included 51 articles and showed
a significant positive relationship between EO and business performance. The
control variable for cultural differences between continents included by the authors
turned out to be statistically insignificant, meaning that the relationship between EO
and business performance is ‘‘of similar magnitude in different cultural contexts’’
(Rauch et al. 2009, p. 779). Of the 51 papers included, only four other studies
reported mixed or no significant findings. Slater and Narver (2000) did not find a
significant relation between entrepreneurial orientation and business performance at
all. Swierczek and Ha (2003) found only a partial positive relationship and Walter
et al. (2006) found that EO is not directly related with business performance. Covin
and Slevin (1989) found that there is a larger positive effect of entrepreneurship on
business performance in hostile environments, while there seems to be no significant
relation in benign environments. Also, other researchers have included environment
as a moderator or as a control variable in their models. Lumpkin and Dess (2001)
found environmental hostility to be a significant moderator in the relationship
between EO and firm profitability. Wiklund and Shepherd (2003) use environmental
munificence and heterogeneity as control variables within their research on
knowledge-based resources and EO. Within their research, environmental munif-
icence emerged as a significant control variable.
As our study, the research executed by Kemelgor (2002) and Stam and Elfring
(2008) is also performed in the Netherlands. Kemelgor (2002) performed a
comparative analysis of the differences in EO between Dutch companies and their
direct competitors from the USA. Their findings showed a positive relationship
between EO and all of the performance measures incorporated in their study
(number of new innovations, number of patents received and return on sales) for the
US firms. In the Netherlands, however, this relationship was only proven to be
significant for the number of patents received and return on sales. Furthermore, the
significance is lower (5% compared to 1%) and, more importantly, the relationship
is weaker. Kemelgor (2002) suggests two possible reasons for these differences.
The first is the differences in the culture towards entrepreneurship between the
Netherlands and the USA. A second reason, according to Kemelgor (2002), is the

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Entrepreneurial orientation and the business performance of SMEs 165

existence of a Work Council in Dutch companies, required by Dutch law, where

employees can discuss organizational operations. This was argued to lead to a
situation in which ‘‘participation [in the firm’s EO] is a social obligation rather than
a vehicle to truly impact business performance’’ (2002, p. 82).
In theory, for an entrepreneurial orientation to affect firm-wide behaviour and be
adopted as an organizational mindset, it is necessary for employees across the firm
to participate in the entrepreneurial actions captured within an EO on a voluntary
basis. Lumpkin and Dess (1996) for example commented on the extent to which
employees were involved in the use of entrepreneurial activity as supported (or
otherwise) by the culture and structure of the firm. In corporate entrepreneurship
research for example, Ireland et al. (2009) posited that buy-in into an entrepre-
neurial vision for the business depends on ‘‘[t]op-level managers [working] to create
organizational architectures in which entrepreneurial initiatives flourish without
their direct involvement’’ (p. 30). Ireland et al. (2009), similar to Lumpkin and Dess
(1996), suggest that the structure and culture of the firm should encourage ‘‘a
proclivity toward such qualities as decentralized decision making, low formality,
wide spans of control, expertise- (vs. position)-based power, process flexibility,
free-flowing information networks, and loose adherence to rules and policies…
[g]reater mechanization implies the opposite’’ (p. 31), as well as ‘‘being highly
committed to work and willing to accept responsibility for outcomes resulting from
it’’ (p. 31). Following Kemelgor’s (2002) logic, Dutch firm might be restricted form
putting in place such structural and cultural conditions owing to the nature of Work
Councils demarcating employees and management. Similar points can be drawn
from the work of Hornsby et al. (2002) in that employee involvement shapes their
understanding of top managers’ willingness to facilitate and support entrepreneurial
behaviour. When coupled with a voluntary acceptance of work discretion and
autonomy, the EO of the firm would be expected to be more effective.
Stam and Elfring (2008), on the other hand, performed a different kind of
analysis than Kemelgor (2002). They investigated whether and how the founding
team’s intra- and extra-industry networks influence the performance of new
ventures. From their research, it can be concluded there is a strong relationship
between EO, measured by its network, and performance, but that it is weakened in
firms with low social capital.
Wiklund and Shepherd (2005) concluded after reviewing previous research that
‘‘the differences [among study findings] reflect the fact that EO may sometime, but
not always, contribute to improved performance’’ (p. 2). The meta-analysis of
Rauch et al. (2009) nonetheless leads to an aggregate conclusion that an overall
significant relationship between EO and business performance exists. Still, what
these studies do suggest is that the value of EO might vary and so it is necessary for
researchers to better appreciate the context in which EO is used by firms (e.g., Stam
and Elfring 2008).

2.2 Dimensions of entrepreneurial orientation

According to Wiklund (1999), most researchers agree that EO is a combination of

three dimensions: innovativeness, proactiveness and risk-taking. Indeed, many

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166 S. Kraus et al.

studies (e.g., Covin and Slevin 1989; Naman and Slevin 1993; Zahra and Garvis
2000; Kemelgor 2002) follow this three dimensional model created by Miller
(1983). Research by Stetz et al. (2000), Kreiser et al. (2002) and Hughes and
Morgan (2007) have shown that the dimensions can vary independently from each
other and should also be allowed to vary (as proposed by Lumpkin and Dess 1996).
However, only a few researchers allow the dimensions described above to vary
within their model and create a truly multidimensional EO model. The discussion
lies in not whether the dimensions can differ from each other but is based on the
belief that an entrepreneurial firm should score on all three dimensions (Covin et al.
2006). This issue is an important one because Lumpkin and Dess (1996) posited that
not all of the dimensions of EO would directly or positively affect business
performance under different circumstances. Thus, to more fully appreciate the
influence of EO, assessing the relative impact of each dimension of EO separately is
arguably necessary.
Schumpeter (1942) was one of the first to point out the importance of innovation
in the entrepreneurial process. He called the disruptive innovation process ‘creative
destruction’, a process that occurs when wealth is created by the introduction of new
products or services that disrupt the current market and causes a shift in the use of
resources. Extrapolating this view further, the EO dimension of innovativeness is
about pursuing and giving support to novelty, creative processes and the
development of new ideas through experimentation (Lumpkin and Dess 1996).
The second dimension is proactiveness. Proactiveness refers to processes which
are aimed at ‘‘seeking new opportunities which may or may not be related to the
present line of operations, introduction of new products and brands ahead of
competition and strategically eliminating operations which are in the mature or
declining stages of the life cycle’’ (Venkatraman 1989, p. 949). Indeed proactive-
ness concerns the importance of initiative in the entrepreneurial process. A firm can
create a competitive advantage by anticipating changes in future demand (Lumpkin
and Dess 1996), or even shape the environment by not being a passive observer of
environmental pressures but an active participant in shaping their own environment
(Buss 1987).
The third dimension, risk-taking, is often used to describe the uncertainty that
follows from behaving entrepreneurially. Entrepreneurial behaviour involves
investing a significant proportion of resources to a project prone to failure. The
focus is on moderated and calculated risk-taking instead of extreme and
uncontrolled risk-taking (Morris et al. 2008) but the value of the risk-taking
dimension is that it orients the firm towards the absorption of uncertainty as opposed
to a paralyzing fear of it.
Lumpkin and Dess (1996) posited that the dimensions of EO can vary
independently and proposed that each dimension might not necessarily contribute
to business performance in each instance. Despite the caution advocated by
Lumpkin and Dess (1996), most studies have used a combined measure of risk
taking, innovativeness and proactiveness to capture EO. For example, in the meta-
analysis performed by Rauch et al. (2009), only 25% of the articles included in their
analysis use a multidimensional model in which the dimensions of EO can vary
from each other. The authors conclude that the dimensions are of equal value to the

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Entrepreneurial orientation and the business performance of SMEs 167

EO-performance relationship and therefore can be indexed into one variable. Other
studies like Yoo (2001) and Covin et al. (2006) confirm this, but some studies
suggest otherwise (e.g., Hughes and Morgan 2007; Swierczek and Ha 2003).
Swierczek and Ha (2003) for example found in a sample of firms from Vietnam and
Thailand, that the EO dimensions of proactiveness and innovativeness were
positively related to firm performance, while risk-taking was not. Hughes and
Morgan (2007) show similar results in the UK while investigating incubating firms.
In their sample, both risk taking and innovativeness is not significantly related to
customer performance.
In concurrence with the work of Covin et al. (2006), who argue that including the
subdimensions to the model could lead to new theories, a multidimensional model
with all three subdimensions described above will be tested. While the research
evidence on the effects of the subdimensions of EO are far less clear than those that
have assessed their combined effect as a single EO construct, the broad thrust of the
literature is that EO should be associated with improvements in the business
performance of firms in general (see e.g., Lumpkin and Dess 1996; Rauch et al.
2009). Indeed, over time a firm deploying an EO would be expected to develop a
suite of skills (e.g., ability to manage uncertainty; ability to innovate to meet
emerging opportunities and threats; ability to anticipate direction and nature of
market change; ability to tolerate risk) that shape a firm entrepreneurship capability
to further improve business performance. In line with results from earlier research
on EO overall, research including separated dimensions and the high correlations
between the dimensions, it is expected that all three dimensions are positively
related to SME business performance. Thus, we hypothesize the following:
Hypothesis 1A There is a direct positive relationship between the EO dimension
of innovativeness and SME business performance.
Hypothesis 1B There is a direct positive relationship between the EO dimension
of proactiveness and SME business performance.
Hypothesis 1C There is a direct positive relationship between the EO dimension
of risk-taking and SME business performance.

2.3 Environment

In their conceptual paper, Lumpkin and Dess (1996) argued that the characteristics
of the environment might have a strong effect on the strength and direction of the
relationship between entrepreneurial orientation and firm performance. Empirical
research has found support for this view, proposing that the relationship of EO and
firm performance is contingent upon the firm’s external environment (e.g., Covin
and Slevin 1989; Naman and Slevin 1993; Zahra 1993; Zahra and Covin 1995).
Uncertainty is one of the main characteristics of environmental and market
turbulence. Miller (1988) stated that the dimensions of dynamism and unpredict-
ability are ‘‘the key components of the overarching construct of uncertainty’’ (p. 291).
Therefore ‘unpredictability’ and ‘dynamism’ will be used and incorporated in an
overall scale typically called market turbulence (Miller and Friesen 1982). ‘Dynamic’

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environments are described as markets in which products have a short life cycle, the
level of industry innovation is high and customers’ demands as well as competitors’
actions are highly ‘unpredictable’ (Zahra 1993; Wiklund and Shepherd 2005).
Firms that invest in an EO could be expected to maintain and even improve
business performance under conditions of high market turbulence market conditions
because these firms tend to possess an ability to react to the constant shifts taking place
in the environment by exploring and exploiting new opportunities. Firms with out an
EO risk strategic paralysis when faced with change. The logic for this belief stems
from the argument that EO drives exploration within the firm and allows the
reconfiguration of resources and knowledge into better product-market solutions to
meet anticipated change (Atuahene-Gima and Ko 2001; Hughes et al. 2007; Hughes
and Morgan 2007). Firms that have not invested in building an EO may not be able to
profit from changing conditions since they are unable to reconfigure their resources
and knowledge. It is likely that the products of these firms move out of market demand
resulting in lower business performance (Wiklund and Shepherd 2005), or lose
competitiveness within the changing market (Atuahene-Gima and Ko 2001).
In the face of complex market turbulence, the skills associated with an EO, such
as the ability to manage uncertainty, the ability to innovate to meet emerging
opportunities and threats, the ability to anticipate direction and nature of market
change, the ability to tolerate risk, would likely lead the managers of an
entrepreneurially oriented firm to reframe and interpret events that result from
market turbulence as opportunities for further business model change, growth and
innovation, as opposed to threats that can only undermine the business. Indeed, Barr
and Glynn (2004) found that a greater propensity towards uncertainty avoidance,
which might be thought of as an antithesis to classic views of EO, has been
associated with greater interpretation of strategically relevant events as threats as
opposed to opportunities. Given that the skills engendered and embedded by an EO
would be expected to shape a firm entrepreneurship capability in time (see Wiklund
and Shepherd 2003, for treatment of EO as a firm rare resource or capability), such a
capability should enable a firm to better manage market turbulence such that the
firm ought to be able to capitalize when market turbulence is acute. As such,
business performance would be expected to improve.
A contingency theory perspective of this kind suggests that the direction and
strength of the EO-performance relationship might be influenced by market
turbulence (see Luthans and Stewart 1977; Miller 1981). We suggest that, besides
the direct effect on EO on business performance, innovativeness, risk-taking and
proactiveness will be positive related to the business performance of SMEs in
environments where the uncertainty caused by acute market turbulence is high. This
expectation is consistent with prior research that has associated EO with superior
business performance in hostile environments as opposed to benign environments.
For example, Covin and Slevin (1989) found that EO was not directly related to firm
performance but only the interaction term with environment; Miller (1988) found
that in an uncertain environment, innovation was positively related to business
performance; and Zahra’s (1993) empirical research found a strong positive
relationship between business performance and entrepreneurship in firms operating
in dynamic growth environments. We therefore postulate the following:

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Entrepreneurial orientation and the business performance of SMEs 169

Hypothesis 2A The relationship between innovativeness and SME business

performance is moderated by market turbulence. Firms with higher levels of
innovativeness perform better in environments with higher levels of turbulence.
Hypothesis 2B The relationship between proactiveness and SME business
performance is moderated by market turbulence. Firms with higher levels of
proactiveness perform better in environments with higher levels of turbulence.
Hypothesis 2C The relationship between risk-taking and SME business perfor-
mance is moderated by market turbulence. Firms with higher levels of risk-taking
perform better in environments with higher levels of turbulence.

3 Research method

3.1 Sample

Data was collected by means of an email survey from October 2009 until November
2009. Using a key informant approach (Kumar et al. 1993), the questionnaire was
sent to the Chief Executive Officers (CEOs) of approximately 6,000 SMEs listed in
a database of one of the biggest banks in the Netherlands. Due to new ‘anti-spam’
regulations in the Netherlands, no reminder was sent. Of those 6,000 SMEs, 201
responded and filled in the questionnaire, a response rate of nearly 3.5%. Within the
201 respondents 37 entrees where dropped because these firms did not meet the
criteria for SMEs set by the European Union (European Commission 2003), in casu
quo firms employing less than 10 employees or employing more than 250
employees. This resulted in 164 valid responses for use in the statistical analysis.
The majority of respondents (51.5%) are active in the service industry and 48.5%
operate in the manufacturing industry. The average age of the firm is 43.34 years,
with a standard deviation of almost 35 years. Most firms—70.7% of the sample—fit
in the category of ‘small’ firm, meaning 10–49 employees. Fewer firms—29.3% of
the sample—are ‘medium’ sized firms; employing 50–250 people. A short overview
of all sample statistics can be found in Table 1.
In line with the goal of this article to investigate the influence of entrepreneurship
on SME business performance when such firms face acute market uncertainty and
instability, or turbulence, the decision to collect data in 2009 can be considered an

Table 1 Overview sample statistics

Total number of returned questionnaires 201
Effective sample size 164
Percentage of firms employing 10–49 employees (small sized) 70.7%
Percentage of firms employing 50–250 employees (medium sized firms) 29.3%
Average firm age in years 43.34
Percentage of firms operating in the manufacturing industry 51.5%
Percentage of firms operating in the service industry 48.5%

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170 S. Kraus et al.

appropriate one. The year 2009 saw many markets exposed to economic turbulence
brought on by the earlier collapse of the global financial sector. This makes the 2009
time point appropriate to examine the impact of entrepreneurship on the business
performance of SMEs.

3.2 Measures

3.2.1 Entrepreneurial orientation

A considerable amount of research exists into EO and its measurement. While some
researchers have built their own measurement models, most studies have modified
or used the original scales developed by Khandwalla (1977) or Miller (1983).
Until 2000 most research on EO had been carried out in the USA. Therefore most
measurement models were developed for and tested only on US firms. Knight
(1997) carried out research to test the reliability and validity of the ENTRESCALE
abroad. This measurement scale is originally developed by Khandwalla (1977) and
later refined by Miller and Friesen (1982) and Covin and Slevin (1986, 1989). After
testing this measurement tool for entrepreneurial orientation on English and French
speaking managers, the ENTRESCALE was found to be applicable to measure the
level of entrepreneurship in firms abroad (Knight 1997). Kemelgor (2002) followed
the same approach as Knight (1997) to test the applicability of the entrepreneurial
orientation scale of Covin and Slevin (1986) in the Netherlands. His t test showed
no significant differences between the Dutch and English versions of the scale.
Within the present research the scale developed by Covin and Slevin (1989) is used
to measure the level of EO. The scale includes the three dimensions of EO discussed
before: innovativeness, risk-taking and proactiveness. All scales are 7-point Likert-
type scales in which respondents are obligated to choose between pairs of opposing
statements.

3.2.2 Environment

The measurement scale developed by Miller and Friesen (1982) is used to measure
the level of perceived market turbulence. This scale has been proven to be valid and
reliable (e.g., Covin and Slevin 1989; Naman and Slevin 1993). The turbulence
scale is a seven point Likert-type scale in which interviewees are obligated to
choose between pairs of opposing statements.

3.2.3 SME business performance

The choice of indicators to measure business performance may influence the results
of the relationship between EO and performance (Lumpkin and Dess 1996; Hughes
and Morgan 2007). In extant empirical works, many indicators tend to be used.
‘Performance’ is regularly measured in one or a combination of the following three
ways: perceived financial, perceived non-financial and archival financial (Rauch
et al. 2009).

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Entrepreneurial orientation and the business performance of SMEs 171

Considering that most firms did not have archival performance numbers over 2009
available at the time of this study (conducted in 2009 itself so as to capture firms’ EO at
that time), perceived performance indicators are used. While perceived measures of a
firm’s performance can be disadvantageous in that they rely on a CEO’s ability to
accurately rate the objective financial performance of their firm with a subjective
proxy of it, many studies have reported on the advantages of perceived performance
measures as well. For example, Bamford et al. (2000) note that ‘‘it is quite common for
entrepreneurs to refuse to divulge performance information to researchers, and,
therefore, the accuracy of such data is questionable’’ (p. 255). Other researchers have
focused on the accuracy and reliability of perceived performance measures. Wall et al.
(2004) found across three different samples that subjective and objective were strongly
positively associated demonstrating convergent validity in turn. Geringer and Hebert
(1991) in a study of international joint ventures found there is little difference between
subjective and objective measures of performance. Dess and Robinson (1984) found a
strong association between subjective and objective performance measures in
privately-held firms. Similar results in entrepreneurship research are reported by
Sarkar et al. (2001) as they show a high correlation between perceived measures of
performance and archival measures. These results are confirmed by the meta-analysis
of Rauch et al. (2009), where no difference in the EO-performance relationship with
perceived financial performance, perceived non-financial performance or archival
financial performance was found. Furthermore Govindarajan (1988) notes that the use
of multiple performance measure methods are permitted if there is reason to question
the validity of the single method or in cases where single-measure objective data are
not available (see also Dess and Robinson 1984). Thus, by using perceived
performance methods the reliability and the validity of the research should hold firm.
Wiklund (1999) suggested that a measurement scale for SME business
performance should have indicators for growth as well as for financial performance.
In this study, performance measures based upon Wiklund and Shepherd (2005) are
used. These scales are chosen because of their reliability and common use in the
literature. The authors used five indicators to capture business performance: sales
growth rate, employee growth, gross margin, profitability and cash flow. Within the
present research, a 5-point Likert-type scale (ranging from 1 ‘‘extremely bad
performance’’ to 5 ‘‘excellent performance’’) was used to rate the firm’s financial
performance on gross margin, profitability and cash flow. Unlike Wiklund and
Shepherd (2005), who measure the growth of the firm at two different points in time,
two growth measures are used in this study to directly assess the growth in both the
number of employees and the growth in turnover. Respondents were asked to rate
their firm’s business performance compared to his or her assignment or expectations
(measured on a 5-point Likert-type scale ranging from 1 ‘‘extremely bad
performance’’ to 5 ‘‘excellent performance’’).

3.2.4 Control variables

Firm age, firm size and industry were used as control variables in the model. These
control variables are commonly used in EO research (e.g., Zahra and Garvis 2000;
Antoncic and Hisrich 2004; Stam and Elfring 2008;) as they can affect the resource

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base of the firm as well as firm behavior. Respondents are asked for the founding
year of the firm to calculate firm age. Secondly, respondents were asked to indicate
the number of employees from a selection of less than 10 (micro), 10–49 (small),
50–250 (medium) and more than 250 (large). Large and micro firms were removed
from the analysis because they do not fit the EU definition of SMEs (10–250
employees), the target group for this study (European Commission 2003). The
inclusion of firm size therefore served as an additional way of reducing sampling
error. Thirdly the respondents were asked to state the industrial sector their firms
operated into account for industry variation.

4 Data analysis

4.1 Factor analysis

An exploratory factor analysis was performed to test the multidimensionality of the

EO concept and gauge construct validity. All independent composite constructs
using multiple items were included in this analysis. We used a principal component
analysis with Varimax rotation. The Kaiser Criterion (Kaiser 1960; eigenvalues [1)
has been used to determine the number of factors. The scale items, factor loadings
and fit statistics are reported in Table 2. Listwise deletion of all missing data led to
111 cases for use within the factor analyses. Since factor loadings are sensitive to
sample size, the criteria set out by Stevens (1992) are used to determine if the
different factor loading are significant. For a sample size of 100 cases or more,
Stevens (1992) reports that factor loadings of .522 or larger can be considered to be
significant. In order to assess the discriminant validity of the different items, a
general rule of thumb is used that cross-loading should be larger than .300. The
results of the factor analyses showed that all items have highly significant loadings
on their hypothesized latent variables, no significant loadings on other factors and
sufficient cross-loadings ([.310) All of the factors combined account for 64.00% of
the total variance in the dataset. Both the chi-square for the measurement model v2
(678.15; df = 91; p = \.001) and the Kaiser–Maeyer–Olkin measure of sampling
adequacy (KMO = .75) suggest that the model fits the data well (see Hutcheson and
Sofroniou 1999).

4.2 Reliability

The internal consistency or reliability of each measurement scale is estimated by a

Cronbach alpha test with listwise deletion of missing cases. Although most scales
are found reliable numerous times in previous research, a Cronbach alpha test is
performed on all scales using multiple items. A Cronbach alpha above .70 is
generally preferred (see Nunnally 1970). The present study shows that most scales
are internally consistent (see Table 3). However, the subscale EO proactiveness
showed an initial Cronbach alpha of .61, meaning a lower reliability and internal
consistency in the measurement scale than would be deemed preferable. This
problem was mainly due to item CE6 and so item CE6 was therefore removed from

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Entrepreneurial orientation and the business performance of SMEs 173

Table 2 Overall exploratory factor analysis model for all multi-item scales
Item k k k k

Entrepreneurial orientation innovativeness

CE1—Emphasis on exploitation or exploration .71
CE2—Number of new lines of products or services marketed .82
CE3—The impact of changes in product or services .80
Entrepreneurial orientation proactiveness
CE4—Reactive or proactive compared to competitors .31 .73
CE5—Reactive or proactive at introducing new products .39 .71
CE6—Competitive attitude .70
Entrepreneurial orientation risk-taking
CE7—Favorability of low risk or high risk projects .27 .69
CE8—Exploration intensity .28 .70
CE9—Reaction to decision-making situations involving uncertainty .89
Perceived market turbulence
ENV4—Frequency of changes in marketing practices .66 .35
ENV5—The rate at which products/services are getting obsolete .73 .36
ENV6—Predictability of actions of competitors .72
ENV7—Predictability of demand and taste of consumers .67 .33
ENV8—Rate of change in modes of production/service .77

Model fit statistics: v2 (df = 91) = 686, .15, p = \ .001, KMO = .75
Factor loadings smaller that .25 have been suppressed
All items were scored from 1 to 7

the measurement scale. This action raised the scale’s Cronbach Alpha to an
acceptable level of .69.

4.3 Statistical checks

Because all data within the present research are collected through the same
questionnaire and are self-reported, the observed relationships might be the result of
a common measurement source (Podsakoff and Organ 1986; Podsakoff et al. 2003).
This measurement error is also know as common method variance and can either
inflate or deflate observed relationships between constructs, thus leading to both
type one and type two errors. As a post hoc statistical test, a Harman one-factor test
is used to check whether common method variance is a potential threat to validity.
The existence of common method variance is discovered when a factor emerges that
accounts for the majority of the variance, or when a single common factor accounts
for the majority of the covariance amongst the variables (see also Podsakoff and
Organ 1986). All variables where entered into a factor analysis and the results of the
unrotated factor analysis was examined. The Harman one-factor test for common
method variance revealed the presence of three distinct factors with eigenvalues
greater than one. The three factors combined account for 61.68% of the total
variance. Moreover, the first (largest) factor explains only 29.40% of the covariance.

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These results suggest that common method variance is not a serious problem within
the present study.

5 Results

Table 3 gives an overview of all relationships between all constructs used within the
present research. It shows that the EO dimensions of innovativeness and risk-taking
are not significantly associated with the business performance measure. However,
proactiveness is significantly and positively associated with business performance
(p \ .05).
The perceived market turbulence construct is not significantly related with the
business performance measure but it is with the EO dimensions of innovativeness
(p \ .01) and risk-taking (p \ .01). This relationship is shown in prior research
(e.g., Covin and Slevin 1989). Surprisingly, proactiveness is not significantly
associated with perceived market turbulence. Of the control variables, the number of
employees is the only variable that is significantly associated with business
performance (p \ .05). Firm age and industry are not associated with SME business
performance in the correlation analysis.
A listwise hierarchical linear regression analysis (N = 111) is applied to test the
hypotheses. The control variables were added first, then the independent variables
and finally the interaction terms. Checks for multicollinearity were also performed.
The tolerance levels of the independent variables vary between .67 and .91, with an
average variance inflation factor (VIF) of 1.08 in model 1, 1.23 in model 2 and 1.34
in model 3; indicating no apparent multicollinearity. The regression analysis can be
found in Table 4.
Of the EO variables, only proactiveness has a significant direct positive
contribution (p \ .05) to SME business performance. This provides support for
hypothesis 1B. The remaining EO dimensions, innovativeness and risk-taking did

Table 3 Means, SD, correlations and reliability for quantitative variables

Variable N M SD 1 2 3 4 5 6 7 8

1. Firm age 162 43.34 34.90 (–)

2. No. of employees 164 2.37 .94 .28** (–)
3. Manufacturing industry 134 .49 .50 .17 .05 (–)
4. Perceived market 152 3.45 1.11 -.14 -.04 -.09 (.80)
turbulence
5. EO innovativeness 158 3.75 1.42 -.14 .06 .01 .34** (.79)
6. EO proactiveness 155 4.67 1.16 -.05 .16 -.06 .07 .41** (.69)
7. EO risk taking 163 3.19 1.02 -.22* .02 -.10 .35** .34** .23* (.75)
8. Performance 155 3.18 .67 -.04 .23* -.09 -.03 -.02 .23* .05 (.87)

N listwise = 111. In the diagonal axis the reliabilities (Cronbach’s alpha) are shown. For one-item measures
Cronbach’s alphas cannot be computed, these are labeled (–)
** p \ .01. * p \ .05

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Entrepreneurial orientation and the business performance of SMEs 175

Table 4 Hierarchical regression overall company performance: control variables, universal model and
contingency model
Control variables Universal model, control Contingency model
variables

b S.E. b S.E. b S.E.

Firm age -.10 .00 -.10 .00 -.14 .00

No. of employees .26** .07 .23* .07 .17 .06
Manufacturing -.08 .13 -.07 .13 -.02 .12
Perceived market turbulence -.01 .07 -.04 .06
EO innovativeness -.15 .05 -.14 .05
EO proactiveness .24* .06 .30** .06
EO risk taking .02 .07 .05 .07
Innovativeness * turbulence .34** .07
Proactiveness * turbulence .09 .07
Risk taking * turbulence -.31** .08
R2 .07 .12 .24
Adjusted R2 .05 .06 .16
D R2 .07* .05 .12**

Standardized regression coefficients are displayed in the table

* p B .05
** p B .01

not have a direct significant relationship with business performance at the time of
the study (2009), leading to the rejection of H1A and H1C.
The regression analysis including the interaction terms show that the interaction
terms of innovativeness with turbulence (p \ .01) are significantly positively related
to business performance. This supports hypothesis 2A. The interaction term of risk-
taking with turbulence is significant (p \ .01) too but, different than expected, the
relationship with SME business performance is negative. We therefore reject
hypothesis 2C. The data did not support hypothesis 2B. It is noticeable that the
direct relationship of proactiveness with SME business performance is still
significant. All the control variables (number of employees, firm age and industry)
are not significant in this model.
The regression analysis further shows that the control variables explain 7% of the
variance in SME business performance. After adding the EO variables and
perceived market turbulence, the model explains 12% of the variance in business
performance, an additional 5% (p = [.10). After adding the interaction terms, the
model explains 24% of the variance in performance, an additional 12% (p \ .01).

6 Discussion

The goal of this paper was to investigate the influence of EO on SME business
performance when such firms face acute market uncertainty and instability. To

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achieve this we collected data during 2009, a year in which many markets were
entrenched in turbulence. We sought to examine the impact of an EO on the
business performance of SMEs when the skills associated with an EO (e.g., ability
to manage uncertainty; innovate to meet emerging opportunities and threats;
anticipate the direction of markets; tolerate risk) would theoretically be called for.
Our research shows proactiveness is directly related to the performance of the Dutch
SMEs under investigation in this study and its effects on business performance is
not affected by market turbulence. Innovativeness and risk-taking did show a direct
significant relationship with business performance but only when accounting for
their interaction with market turbulence. Innovativeness’ interaction with market
turbulence (p \ .01) significantly and positively affected business performance
while the interaction term of risk-taking with turbulence was significantly but
negatively related to SME business performance.
An explanation for our findings might be found in the financial and economic
crisis present in 2009. In uncertain times, like the 2009 crisis, risk-taking, although
these are supposed to be calculated risks, may lead to more differentiated returns
than under normal economic or positive market circumstances. During the 2009
crisis consumer confidence and spending in the Netherlands dropped significantly
(CBS 2010). Often such trauma is responded to within firms by lower R&D
expenditures and delayed introduction of new products which would be sold at
premium prices. Our research shows that this strategy should not necessarily be
changed (as we had no grounds to support H1A since innovativeness was not
directly related to SME performance). But, the research also indicates the short-
sighted nature of this action because when high levels of uncertainty or market
turbulence are present, firms with higher levels of innovativeness perform better in
environments with higher levels of turbulence. In this instance then, the firm will
need to have a legacy of innovativeness to draw upon to benefit from turbulence as
opposed to building it from new at this time due to the lack of a direct relationship.
Becherer and Maurer (1999) focused on the effect of firms’ CEO’s proactive
behaviour and found that proactiveness was positively and significantly (b = .17,
p \ .01) related to change in sales (growth). No significant relationship was found
with change in profits. They suggested that ‘‘proactive leaders are growing the firm
as a strategic approach to the market place’’ (p. 34), however the lack of significance
with profits indicates that ‘‘the company needs more refined management’’ and that
‘‘concentrating on a bold, aggressive approach alone may not be sufficient to impact
the bottom line’’ (p. 34). However, our research shows that proactiveness was
directly related to our multidimensional measure of business performance and this
relationship was not influenced by market turbulence. In line with the results of
Hughes and Morgan (2007) from their study of UK firms, it would seem that
proactiveness is a cornerstone of the role EO plays in driving firm performance.
Other authors like Covin and Slevin (1989) found that EO was not directly
related to performance but only the interaction term with environment. Accordingly,
the level of EO should be linked to the environment the firm is operating in. A firm
in which the level of EO does not match the level of turbulence in the environment,
risks generating inferior business performance, particularly in relation to the risk-
taking dimension. It is apparent that the effects of EO are not clear cut in relation to

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firm performance or in conditions of increased or acute turbulence. Investments in

proactiveness and innovativeness would appear wise under these conditions coupled
with a carefully management of the firm’s risk taking activities given its negative
interaction effect on firm performance when combined with market turbulence. The
latter is likely to be due to flawed understanding of uncertainty in the market place
caused by increased levels of unpredictability and dynamism (Miller and Friesen
1982). This implies that risk taking needs to be grounded in market intelligent to
make better and more calculated risk decisions. With this in mind, a future
investigation might want to map the relationship between dimensions of EO and a
market orientation (studies have begun to do this but have only done so at the
unidimensional level, e.g., Atuahene-Gima and Ko 2001).
In conclusion, although this research did not find a direct positive effect of
innovation on performance, it does find that innovative SMEs do perform better in
turbulent environments. This is consistent with Miller (1988). In a turbulent market,
contrary to our hypothesis, the level of risk-taking is negatively related to SME
performance. Earlier in this paper, it is posited that risk-taking, although these are
supposed to be calculated risks, may lead to more differentiated returns. This might
be due to the acute nature of the 2009 crisis than under normal economic or positive
market circumstances. During the 2009 crisis, taking risks does appear to negatively
contribute to SME performance. Proactiveness on the other hand shows a consistent
and important contribution to firm performance regardless of market turbulence.

6.1 Practical implications for managers

The present study highlights the importance of refined strategic management

within SMEs. Like Hughes and Morgan (2007), we have to conclude that the
blind pursuit of the uniform implementation of EO dimensions is not an effective
way to create an advantage. Under turbulent market conditions, innovation seems
to be an important way of creating superior performance. However given the
negative moderation effects with risk-taking found in this study, we have to
conclude that innovation is a very delicate matter. Innovation or the introduction
of new products always entails certain levels of risk taking. Under complex
situations of market turbulence, innovation still pays off, but these innovative
projects should be less risky than under normal market circumstances. SMEs
therefore are advised to take calculated risk and should, if possible, delay the
introduction of highly risky new products, services or projects, since radical
innovation might not be as profitable as under normal market circumstances owing
to the negative interaction effect shown by risk-taking and market turbulence on
business performance.
Again in line with the findings of Hughes and Morgan (2007), we propose that
proactivity is the critical activity, not only for firms in the embryonic stage of firm
growth as these authors find, but also for SMEs more broadly as we find herein.
Firms profit by having a proactive strategy, regardless of the environment the firm
is operating in. Even though our sample has been taken during the 2009 economic
crisis, the relationship between EO proactivity and firm performance still holds
firm.

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6.2 Limitations

Several limitations constrain our findings. The first limitation lies in the sample.
Approximately 6,000 Dutch SMEs received an email of which only 201 responded.
Although this response rate is not rare for an online survey, it can influence the
research results. Due to the inability to send a reminder owing to legal restrictions in
doing so, we could not take measures to investigate the possible influences of non
response. Second, despite the persistent support found for the use of subjective
measures of business performance over 20 years of research (e.g., Dess and
Robinson 1984; Wall et al. 2004), it would have been preferable to have had a
combination of subjective and objective performance data to assess the broader
effects of an EO on firm performance. Objective data was unavailable at the time
and firms often do not wish to willingly disclosure objective financial data but
nonetheless, such a mix of measures would be preferable. Third it is uncertain how
the results found in this research can be generalized to other market situations. Our
thesis is that the value of EO might differ between situations of complex or acute
market turbulence than what might otherwise be argued as calm or ‘normal’ market
conditions. In fairness, rarely do studies deploy multiple samples at different points
in time to gauge such a dynamic. Rather, as is the case here, a measure is used to
gauge the perception of market turbulence and volatility facing the firm. In which
case, it might have been beneficial to have been able to compare the EO of firms
during ‘normal’ times and during crisis times so as to study the performance
consequences. We did not seek to address the relative advantages of an EO in crisis
and non-crisis times herein; rather, we sought to more adequately examine the
impact of EO on the business performance of SMEs when the skills associated with
entrepreneurship would theoretically be needed. Still, this presents an interesting
opportunity for future longitudinal or repeat observation studies. Fourth, similar to
almost all research towards the EO-performance relationship, the entrepreneurial
orientation scales and the environment scales are perceived measures. During a
crisis it might be hard(er) to estimate both. Furthermore there are no studies into this
topic as yet. This impedes the ability to fully compare results. A further limitation,
and one that tends to afflict most studies of SMEs, is survivor bias. The email survey
was only sent to existing companies, but many businesses failed in their first few
years and some later in their existence, more so during the study period. We also do
not have data for which firms in our sample went on to survive or fail. Indeed,
Wiklund and Shepherd (2005) mention the fact that the higher levels of risk that
usually comes with entrepreneurial orientation can lead to higher chances of failure.
For these reasons the generalizability of the findings presented in this report are
somewhat further constrained.

6.3 Recommendations for further research

Further research is needed into how firms can build and use relevant organizational
capabilities that enable to manage financial and economic crises. Although
perceived performance measures are used frequently, the use of archival informa-
tion in future might be beneficial, given the difficulties in estimating financial results

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Entrepreneurial orientation and the business performance of SMEs 179

during a crisis situation. The fact that the entrepreneurial orientation dimensions
vary from each other is not surprising since this is stated empirically earlier (e.g., by
Stetz et al. 2000; Kreiser et al. 2002; Hughes and Morgan 2007). But as stated
earlier a discussion about whether researchers should treat entrepreneurial
orientation as a unidimensional (Miller 1983) or a multi-dimensional construct
(Lumpkin and Dess 1996) is still taking place. Although it is mainly theoretical, the
results of this research confirm the findings of Covin et al. (2006), who noted that
allowing the dimensions to vary enable new and interesting findings to appear.
Therefore, it is recommended to use the multidimensional model in further research.
At the minimum, the variances in our results suggest that investing in each aspect of
EO during a financial and economic crisis, or more generally periods of complex
market turbulence, would not appear to be sensible. But its dimensions may have
different effects on other aspects of business activity. This possibility offers an
intriguing line of future research.

Open Access This article is distributed under the terms of the Creative Commons Attribution
Noncommercial License which permits any noncommercial use, distribution, and reproduction in any
medium, provided the original author(s) and source are credited.

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