7.2: Entrepreneurial Orientation
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A famous Nike slogan encourages people to “just do it!” For people and organizations that have developed an entrepreneurial orientation (EO), “just do it!” is a way of life. While often associated with starting new ventures, an EO can be very valuable to established organizations as well. Below we describe each of the three characteristics associated with an EO: innovativeness, proactiveness, and risk-taking.
An additional two characteristics were later added—competitive aggressiveness and autonomy. However, these two dimensions of EO have been subject to much debate and are omitted for the purposes of this text.
|Innovativeness||The tendency to pursue novel ideas, creative processes, and experimentation.||3M has built its business around its mission statement: to solve unsolved problems innovatively. 3M employs over 7,000 researchers and more than 118,000 patents as of 2019, adding more than 4,000 patents annually. 3M’s innovativeness has led it to develop thousands of products (such as Post-it notes and Scotch tape) that are sold in almost 200 countries.|
|Proactiveness||The tendency to anticipate and act on future opportunities rather than rely solely on existing products and services.||Proactive Communications Inc. lives up to its name by focusing on emerging and unusual opportunities. The firm embraces contracts in war zones and natural disaster areas that are often avoided by other telecommunications firms.|
|Risk Taking||The tendency to take bold actions rather than being cautious.||Richard Brandson’s launching of Virgin Galactic—a company that plans to offer suborbital space flights to commercial passengers—reflects his love of high-risk, high-reward ventures.|
The Value of Thinking and Acting Entrepreneurially
When asked to think of an entrepreneur, people typically offer examples such as Elon Musk, Oprah Winfrey, Jeff Bezos, Kylie Jenner, and Mark Zuckerberg —individuals who have started their own successful businesses from the bottom up that generated a lasting impact on society. But entrepreneurial thinking and doing are not limited to those who begin in their garage with a new idea, financed by family members or personal savings. Some people in large organizations are filled with passion for a new idea, spend their time championing a new product or service, work with key players in the organization to build a constituency, and then find ways to acquire the needed resources to bring the idea to fruition.
Entrepreneurship within an organization is called intrapreneurship. Companies often grow by offering new services or launching new products. Rather than acquire another company that provides that product or service, they develop it themselves. This is a method of strategy implementation called internal development. To maximize opportunities for intrapreneurship, companies need employees with a high entrepreneurial orientation.
Thinking and behaving entrepreneurially can help a person’s career as well. Some enterprising individuals successfully navigate through the environments of their respective organizations and maximize their own career prospects by identifying and seizing new opportunities (Table 7.1) (Certo et al., 2009).
The relationship between entrepreneurial orientation and organizational performance [01:02]
The video for this lesson discusses the relationship between entrepreneurial orientation and organizational performance.
You can view this video here: https://youtu.be/Iru7IBqc3Vk.
In the 1730s, Richard Cantillon used the French term entrepreneur, or literally “undertaker,” referring to those who undertake self-employment while also accepting an uncertain return. In subsequent years, entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at Facebook). The common elements of these conceptions of entrepreneurs are that they do something new and that some individuals can make something out of opportunities that others cannot.
Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the hopes of doing something new and exploiting opportunities that other organizations cannot exploit. EO refers to the processes, practices, and decision-making styles of organizations that act entrepreneurially (Lumpkin & Dess, 1996). Any organization’s level of EO can be understood by examining how it stacks up relative to three dimensions: (1) innovativeness, (2) proactiveness, (3) and risk taking. These dimensions are also relevant to individuals.
Entrepreneurial orientation (EO) is measured at both the organizational and the individual levels. The characteristics of an entrepreneurial company noted in Table 7.1 also apply to individuals. Those individuals who are less risk averse, innovative thinkers, and competitive tend to have a higher EO and greater success at starting a business. Online EO assessment tools exist for those wishing to determine their EO. It is important to note that EO is not only related to high tech start-ups. Starting a lawn care business or a beauty shop are very valid and necessary entrepreneurial ventures, and will have a better chance of success if an entrepreneur possesses a higher EO.
Innovativeness is the tendency to pursue creativity and experimentation. Some innovations build on existing skills to create incremental improvements, while more radical innovations require brand-new skills and may make existing skills obsolete. Either way, innovativeness is aimed at developing new products, services, and processes. Those organizations that are successful in their innovation efforts tend to enjoy stronger performance than those that do not.
Known for efficient service, FedEx has introduced its Smart Package, which allows both shippers and recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs. How do firms generate these types of new ideas that meet customers’ complex needs? Perennial innovators 3M and Google have found a few possible answers. 3M sends nine thousand of its technical personnel in thirty-four countries into customers’ workplaces to experience firsthand the kinds of problems customers encounter each day. Google’s two most popular features of its Gmail, thread sorting and unlimited e-mail archiving, were first suggested by an engineer who was fed up with his own e-mail woes. Both 3M and Google allow employees to use a portion of their work time on projects of their own choosing with the goal of creating new innovations for the company. This latter example illustrates how multiple EO dimensions—in this case, autonomy and innovativeness—can reinforce one another.
Proactiveness is the tendency to anticipate and act on future needs rather than reacting to events after they unfold. A proactive organization is one that adopts an opportunity-seeking perspective. Such organizations act in advance of shifting market demand and are often either the first to enter new markets or “fast followers” that improve on the initial efforts of first movers.
Consider Proactive Communications, an aptly named small firm in Killeen, Texas. From its beginnings in 2001, this firm has provided communications in hostile environments, such as Iraq and areas impacted by Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep outdoors—activities often avoided by other telecommunications firms. By embracing opportunities that others fear, Proactive’s executives have carved out a lucrative niche in a world that is technologically, environmentally, and politically turbulent (Choi, 2008).
Risk taking refers to the tendency to engage in bold rather than cautious actions. Starbucks, for example, made a risky move when it introduced a new instant coffee called VIA Ready Brew. Instant coffee has long been viewed by many coffee drinkers as a bland drink, but Starbucks decided that the opportunity to distribute its product in a different format was worth the risk of associating its brand name with instant coffee.
Although a common belief about entrepreneurs is that they are chronic risk takers, research suggests that entrepreneurs do not perceive their actions as risky; most take action only after using planning and forecasting to reduce uncertainty (Simon et al., 2000). However, uncertainty seldom can be fully eliminated. A few years ago, Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in Russia’s Far East. At the time, van der Veer conceded that it was too early to know whether the move would be successful (Certo et al., 2008). Just six months later, however, customers in Japan, Korea, and the United States had purchased all the natural gas expected to be produced there for the next twenty years. If political instabilities in Russia and challenges in pipeline construction do not dampen returns, Shell stands to post a hefty profit from its 27.5% stake in the venture.
Building an Entrepreneurial Orientation
Steps can be taken by executives to develop a stronger entrepreneurial orientation throughout an organization and by individuals to become more entrepreneurial themselves. For executives, it is important to design organizational systems and policies to reflect the three dimensions of EO. As an example, how an organization’s compensation systems encourage or discourage these dimensions should be considered. Is taking sensible risks rewarded through raises and bonuses, regardless of whether the risks pay off, for example, or does the compensation system penalize risk taking? Other organizational characteristics such as corporate debt level may influence EO. Do corporate debt levels help or impede innovativeness? Is debt structured in such a way as to encourage risk taking? These are key questions for executives to consider.
Examination of some performance measures can assist executives in assessing EO within their organizations. To understand how the organization develops and reinforces autonomy, for example, top executives can administer employee satisfaction surveys and monitor employee turnover rates. Organizations that effectively develop autonomy should foster a work environment with high levels of employee satisfaction and low levels of turnover. Innovativeness can be gauged by considering how many new products or services the organization has developed in the last year and how many patents the firm has obtained.
Similarly, individuals should consider whether their attitudes and behaviors are consistent with the three dimensions of EO. Is an employee making decisions that focus on competitors? Does the employee provide executives with new ideas for products or processes that might create value for the organization? Is the employee making proactive as opposed to reactive decisions? Each of these questions will aid employees in understanding how they can help to support EO within their organizations.
Entrepreneurial Orientation [02:39]
The video for this lesson explains the importance of entrepreneurial orientation.
You can view this video here: https://youtu.be/L6MqD5Hhs2U.
- Building an entrepreneurial orientation can be valuable to organizations and individuals alike in identifying and seizing new opportunities. Entrepreneurial orientation consists of three dimensions: (1) innovativeness, (2) proactiveness, and (3) risk taking.
- Can you name three firms that have suffered because of lack of an entrepreneurial orientation?
- Identify examples of each dimension of entrepreneurial orientation other than the examples offered in this section.
- How does developing an entrepreneurial orientation have implications for your future career choices?
- How could you apply the dimensions of entrepreneurial orientation to a job search?
Certo, S. T., Connelly, B., & Tihanyi, L. (2008). Managers and their not-so-rational decisions. Business Horizons, 51(2), 113–119.
Certo, S. T., Moss, T. W., & Short, J. C. (2009). Entrepreneurial orientation: An applied perspective. Business Horizons, 52, 319–324.
Choi, A. S. (2008, April 16). PCI builds telecommunications in Iraq. Bloomberg Businessweek. https://www.bloomberg.com/news/articles/2008-04-15/pci-builds-telecommunications-in-iraq.
Lumpkin, G. T., & Dess, G. G. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review, 21, 135–172.
Simon, M., Houghton, S. M., & Aquino, K. (2000). Cognitive biases, risk perception, and venture formation: How individuals decide to start companies. Journal of Business Venturing, 14, 113–134.
Figure 7.1: Ilan Costica. Michael Dell speaking at Oracle OpenWorld, San Francisco. CC BY-SA 3.0. Retrieved from en.Wikipedia.org/wiki/File:Michael_Dell_at_Oracle_OpenWorld.JPG.
Figure 7.2: Lam, Willis. “September 6th is National Coffee Ice Cream Day.” CC-BY SA 2.0. Retrieved from commons.wikimedia.org/wiki/File:Ben_and_Jerry%27s_2_Coffee_3_Buzz_Ice_Cream_(30650663798).jpg.
The Oxford Review. (2018, December 16). The relationship between entrepreneurial orientation and organisational performance [Video]. YouTube. https://youtu.be/Iru7IBqc3Vk.
Tarlan Golkar. (2020, April 28). Entrepreneurial orientation [Video]. YouTube. https://youtu.be/L6MqD5Hhs2U.